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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                     |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                             |
| **OR**     |
| ** ** | ** **                                                                                                                                             |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31,  2009** |
| ** ** | ** **                                                                                                                                             |
| **OR**     |
| ** ** | ** **                                                                                                                                             |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                |
| ** ** | ** **                                                                                                                                             |
| **OR**     |
| ** ** | ** **                                                                                                                                             |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                             |

 

Dateof event requiring this shell company report: N/A

 

**For the transition period from                      to                        **

 

Commissionfile number: 1-32229

 
| **Desarrolladora Homex, S.A.B. de C.V.**                                                                                                                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                                   |
|                                                                                                                                                                     |
| **Homex Development Corp.**                                                                                                                                              |
| (Translation of Registrant’s name into English)                                                                                                                     |
|                                                                                                                                                                     |
| **United Mexican States**                                                                                                                                                |
| (Jurisdiction of incorporation or organization)                                                                                                                          |
|                                                                                                                                                                     |
| **Boulevard Alfonso Zaragoza M. 2204 Norte**

**80020 Culiacán, Sinaloa, Mexico**

**Telephone: (52667) 758-5800**                                                  |
| (Address of principal executive offices)                                                                                                                                 |
|                                                                                                                                                                     |
| **Vania Fueyo Zarain**

**Boulevard Alfonso Zaragoza M. 2204 Norte**

**80020 Culiacán, Sinaloa, Mexico**

**Telephone: (52667) 758-5800**

**vfueyo@homex.com.mx** |
| (Name, Telephone, E-mail and/or Facsimile number and Address of  Company Contact Person)                                                                                 |

 

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

 

| Title of each  class                                                                  |   | Name of each  exchange on which registered |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|
| Common Shares, without par value                                                      |   | New York Stock Exchange                    |
|                                                                                  |   |                                       |
| American Depositary Shares, each representing six common shares,  without par value * |   | New York Stock Exchange                    |

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act: None

 

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Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act:

 
| **7.50% Senior Guaranteed Exchange Notes due  September 28, 2015** |
|--------------------------------------------------------------------|
| (Title of Class)                                                   |

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report:
|   | 335,681,683  common shares, without par value |
|--------|-----------------------------------------------|

 

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

x Yes   o No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934:

o Yes   x No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:

x Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

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

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP o |   | IFRS o |   | Other x |
|-------------|--------|--------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow:

o Item 17   x Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes   x No

 

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

 

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| **PART I**   |                                                                          |   |   |
|-------------------|-------------------------------------------------------------------------------|--------|--------|
| ITEM 1.           | IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        |   | 5      |
| ITEM 2.           | OFFER  STATISTICS AND EXPECTED TIMETABLE                                      |   | 5      |
| ITEM  3.          | KEY INFORMATION                                                               |   | 6      |
| ITEM 4.           | INFORMATION ON  THE COMPANY                                                   |   | 20     |
| ITEM 4A.          | UNRESOLVED  STAFF COMMENTS                                                    |   | 40     |
| ITEM 5.           | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 |   | 40     |
| ITEM 6.           | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |   | 63     |
| ITEM 7.           | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |   | 68     |
| ITEM 8.           | FINANCIAL  INFORMATION                                                        |   | 70     |
| ITEM  9.          | THE OFFER AND  LISTING                                                        |   | 71     |
| ITEM 10.          | ADDITIONAL  INFORMATION                                                       |   | 75     |
| ITEM 11.          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |   | 89     |
| ITEM 12.          | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       |   | 90     |
|              |                                                                          |   |   |
| **PART II**  |                                                                          |   |   |
| ITEM 13.          | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              |   | 91     |
| ITEM 14.          | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |   | 91     |
| ITEM 15.          | CONTROLS AND  PROCEDURES                                                      |   | 91     |
| ITEM 16.          | (RESERVED)                                                                    |   | 93     |
| ITEM 16A.         | AUDIT  COMMITTEE FINANCIAL EXPERT                                             |   | 93     |
| ITEM  16B.        | CODE OF ETHICS                                                                |   | 93     |
| ITEM 16C.         | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       |   | 93     |
| ITEM 16D.         | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |   | 94     |
| ITEM 16E.         | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |   | 94     |
| ITEM 16F.         | CHANGE IN  REGISTRANT’S CERTIFYING ACCOUNTANT                            |   | 94     |
| ITEM 16G.         | CORPORATE GOVERNANCE                                                          |   | 95     |
|              |                                                                          |   |   |
| **PART III** |                                                                          |   |   |
| ITEM 17.          | FINANCIAL STATEMENTS                                                          |   | 96     |
| ITEM 18.          | FINANCIAL  STATEMENTS                                                         |   | 96     |
| ITEM  19.         | EXHIBITS                                                                      |   | 97     |

 

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**PRESENTATION OF FINANCIAL INFORMATION**

 

Throughout this annualreport, unless the context otherwise requires, the terms “we,” “us,” “our,” “theCompany” and “Homex” refer to Desarrolladora Homex, S.A.B. de C.V. and itssubsidiaries.

 

**FinancialInformation**

 

This annual report includesour audited consolidated financial statements as of December 31, 2008 and2009 and for each of the three years ended December 31, 2007, 2008 and2009. Our consolidated financial statements and other financial informationincluded in this annual report, unless otherwise specified, are stated inMexican pesos.

 

We prepare our financialstatements in pesos and in accordance with Mexican Financial ReportingStandards (*Normas de Información Financiera*),referred to as MFRS, as issued by the Mexican Board for Research andDevelopment of Financial Reporting Standards (*ConsejoMexicano para la Investigación y Desarrollo de Normas de Información Financiera*)which differ in certain significant respects from accounting principlesgenerally accepted in the United States, referred to as US GAAP. See Notes 28and 29 to our audited consolidated financial statements for informationrelating to the nature and effect of such differences and for a quantitativereconciliation of our total net income and total equity according to MFRS toconsolidated net income, and consolidated equity according to US GAAP.

 

EffectiveJanuary 1, 2008 the Company adopted MFRS B-10, *Effects ofInflation*. Based on this Standard, the Company did not recognize theeffects of inflation in its financial statements for the years ended December 31,2008 and 2009. However, financial statements for prior periods are expressed inpesos of constant purchasing power as of December 31, 2007. The effects oftransactions that occurred after that date are expressed in nominal pesos.

 

According to the provisions of MFRS B-10, aninflationary environment is present when cumulative inflation for the threepreceding years is 26% or more, in which case, the effects of inflation must berecognized in the financial statements. Based on this standard, the economicenvironment in Mexico in 2009 and 2008 is considered non-inflationary becauseinflation over 2007, 2008 and 2009 was less than 26%. Accordingly, the Company’sfinancial information for 2009 and 2008 was prepared without recognizing theeffects of inflation. Interpretation 9 of MFRS B-10 requires that financialstatements presented for comparative purposes for periods prior to 2008 beexpressed in Mexican pesos of constant purchasing power as of December 31,2007. Accordingly, the financialstatements as of December 31, 2009 and 2008 have been presented based onnominal pesos without including the effects of inflation, while financialstatements from December 31, 2007, as presented for comparative purposes,are expressed in pesos of constant purchasing power as of December 31,2007. The factor used to restate the prior year balances was 1.037590, which isbased on the National Consumer Price Index or NCPI.

 

Pursuant to MFRS, werecognize revenues from the sale of homes based on the percentage-of-completionmethod of accounting, which requires us to recognize revenues as we incur thecost of construction. In this annual report, we use “sell” and refer to homes “sold”in connection with homes where:

 

·                    the homebuyerhas submitted all required documents in order to obtain financing from themortgage lender;

 

·                    the Companyestablished that the homebuyer will obtain the required financing from themortgage lender;

 

·                    the homebuyerhas signed a purchase application for the processing and granting of a loan tobuy a property to be used as housing; and

 

·                    the homebuyerhas made a down payment, where down payments are required.

 

We use “deliver” and refer to homes “delivered” inconnection with homes for which title has passed to the homebuyer and for whichwe have received the sale proceeds.

 

In December 2008, Interpretation of MexicanFinancial Reporting Standards (IMFRS) 14 was issued by the CINIF to complementBulletin D-7, *Construction Agreements andManufacturing of Certain Capital Assets*. This Interpretation isapplicable to the recognition of revenues, costs and expenses for all entitiesthat undertake the construction of capital assets directly or through subcontractors.

 

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Due to the application of this Interpretation,effective January 1, 2010, the Company stopped recognizing its revenues,costs and expenses based on the percentage-of-completion method. At that date,the Company began to recognize its revenues, costs and expenses based onmethods mentioned in this Interpretation. Revenue and cost recognition now moreclosely approximate what is often referred to as a “completed contract method”pursuant to which revenues, costs and expenses should be recognized when all ofthe following conditions are fulfilled:

 

·                  the entity has transferred control to thehomebuyer, meaning the significant risks and benefits related to the propertyor ownership of the asset accrue to the homebuyer;

·                  the entity does not retain any continuedparticipation in the actual management of the sold assets in the mannergenerally associated with such property, nor does the entity retain effectivecontrol of the sold assets;

·                  the revenues can be estimated reliably;

·                  it is likely that the entity receives theeconomic benefits associated with the transaction; and

·                  the costs and expenses incurred or to beincurred in connection with the transaction can be estimated reliably.

 

This Interpretation was adopted as of January 1,2010, with retrospective application to prior accounting periods at such timeas the Company presents its 2010 consolidated financial statements. We estimatethat the application of IMFRS 14 to the consolidated financial statements wouldhave had the following effects with respect to the year ended December 31,2009:

 

·                  sales would have decreased 11.1% fromPs.19,425.2 million to Ps.17,277.7 million;

 

·                  operating income would have decreased17.4% from Ps.3,170.0 million to Ps.2,618.3 million;

 

·                  net income would have decreased 20.9%from Ps.1,829.9 million to Ps.1,446.9 million; and

 

·                  total equity as of December 31, 2009would have decreased 15.8% from Ps.12,988.0 million to Ps.10,935.7 million.

 

In addition, the application of IMFRS 14 to theconsolidated financial statements would have had the following effects as of December 31,2009: (i) a decrease in accounts receivable for the developments inprogress, (ii) an increase in inventories consisting of housing underconstruction, (iii) a decrease in deferred income taxes for net incomeattributable to housing not yet titled, (iv) an increase in prepaidexpenses and other current assets for the sales commissions paid in advance and(v) a decrease in equity as indicated above.

 

Effective January 1,2012, we will be required under applicable regulations of the Mexican SecuritiesCommission  (Comisión Nacional Bancaria yde Valores, or CNBV) to report under International Financial ReportingStandards (“IFRS”) in place of MFRS, which may have additional effects on ourconsolidated financial position and results of operations.

 

***Currency Information***

 

Unless otherwise specified,references to “US$,” “U.S. dollars” and “dollars” are to the lawful currency ofthe United States. References to Brazilian “Reals” or “BR$” are to the lawfulcurrency of Brazil. References to “Ps.” and “pesos” are to the lawful currencyof Mexico. References to “UDI” and “UDIs” are to Unidades de Inversión, unitsof account whose value in pesos is indexed to inflation on a daily basis byBanco de México (Mexico’s central bank) and published periodically.

 

This annual report containstranslations of various peso amounts into U.S. dollars at specified ratessolely for the convenience of the reader. You should not understand thesetranslations as representations that the peso amounts actually represent these U.S.dollar amounts or could be converted into U.S. dollars at the rate indicated.Unless otherwise indicated, we have translated U.S. dollar amounts in thisannual report at the exchange rate of Ps.13.0437 to US$1.00, which was thebuying rate published by Banco de México, expressed in pesos per U.S. dollar,on December 31, 2009. On June 29, 2010, such noon buying rate was Ps.12.8525to US$1.00.

 

Unless otherwise indicated,references to UDIs are to UDIs at Banco de México’s UDI conversion rate ofPs.4.340166 per UDI on December 31, 2009. On June 29, 2010, the UDIconversion rate was Ps.4.413333 per UDI.

 

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**Industryand Market Data**

 

Market data and otherstatistical information used throughout this annual report are based onindependent industry publications, government publications, reports by marketresearch firms or other published independent sources. Some data are also basedon our estimates, which are derived from our review of internal surveys, aswell as independent sources. Although we believe these sources are reliable, wehave not independently verified the information and cannot guarantee itsaccuracy or completeness.

 

**MARKET SHARE AND OTHER INFORMATION**

 

***Other Information Presented***

 

The standard measure of areain the real estate market in Mexico is the square meter (m(2)). Unlessotherwise specified, all units of area shown in this annual report areexpressed in terms of m(2), acres or hectares. One square meter is equal toapproximately 10.764 square feet. Approximately 4,047 m(2) (or 43,562square feet) are equal to one acre and one hectare is equal to 10,000m(2) (or approximately 2.5 acres).

 

**FORWARD-LOOKING STATEMENTS**

 

This annual report and thedocuments incorporated by reference into this annual report containforward-looking statements. We may from time to time make forward-lookingstatements in our periodic reports to the U.S. Securities and Exchange Commission,or SEC, on Form 6-K, in our annual report to shareholders, inprospectuses, press releases and other written materials and in oral statementsmade by our officers, directors or employees to analysts, institutionalinvestors, representatives of the media and others. Words such as “believe,” “anticipate,”“plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,”“guideline,” “should” and similar expressions are intended to identifyforward-looking statements, but are not the exclusive means of identifyingthese statements. Examples of these forward-looking statements include:

 

·                  projections of revenues, netincome (loss), earnings per share, capital expenditures, dividends, capitalstructure or other financial items or ratios;

 

·                  statements of our plans,objectives or goals, including those relating to anticipated, competition,regulation, government housing policy and rates;

 

·                  statements about our futureeconomic performance or that of Mexico; and

 

·                  statements of assumptionsunderlying these statements.

 

You should not place unduereliance on forward-looking statements, which are based on currentexpectations. Forward-looking statements are not guarantees of performance.They involve risks, uncertainties and assumptions. Our future results maydiffer materially from those expressed in forward-looking statements. Many ofthe factors that will determine these results and values are beyond our abilityto control or predict. All forward-looking statements and risk factors includedin this annual report are made as of the date on the front cover of this annualreport, based on information available to us as of such date, and we assume noobligation to update any forward-looking statement or risk factor.

 

**PART I**

 

**ITEM 1.****                         ****Identity of Directors, Senior Management and Advisors.**

 

Not applicable.

 

**ITEM 2.****                         ****Offer Statistics and Expected Timetable.**

 

Not applicable.

 

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**ITEM 3.****                         ****Key Information.**

 

**SELECTED FINANCIAL DATA**

 

The following tables presentour selected consolidated financial information as of and for the periodsindicated. Information as of December 31, 2008 and 2009 and for each ofthe three years ended December 31, 2007, 2008 and 2009 is derived from andshould be read together with our audited consolidated financial statementsprovided in this annual report beginning on page F-1. Our consolidatedfinancial statements and other financial information included in this annualreport, unless otherwise specified, are stated in pesos.

 

The information in thefollowing tables should also be read together with “Item 5. Operating andFinancial Review and Prospects.”

 

Our consolidated financialstatements are prepared in accordance with MFRS, which differ in certainsignificant respects from US GAAP.  Notes28 and 29 to our audited consolidated financial statements provide informationrelating to the nature and effect of such differences as they relate to us, andprovide a reconciliation to US GAAP of consolidated net income andconsolidated  equity.

 

Pursuant to MFRS, we use thepercentage-of-completion method of accounting for revenues and costs, whichdiffers in certain significant respects from accounting principles generallyaccepted in the United States, referred to as US GAAP. For moreinformation on the percentage-of-completion method of accounting and how itdiffers from U.S. GAAP, see “Presentation of Financial and Other Information”.

 

Pursuantto US GAAP, we apply Accounting Standards Codification (ASC) No. 360.20(formerly FAS 66 *Accounting for Sales of Real Estate)* for the substantial majority of our revenues.The variations in the Company’s gross profit, gross profit margin andultimately operating profits arise due to the stated differences related tocost and revenue recognition between MFRS and US GAAP. In 2009, revenues underMFRS were Ps.19,425 million while revenues under US GAAP were Ps.17,616million. In 2008, revenues under MFRS were Ps.18,850 million whilerevenues under US GAAP were Ps.14,885 million. Revenues under US GAAP’s ASC360.20  are recognized when all thefollowing events occur: a) a sale is consummated; b) a significant initial downpayment is received (when applicable); and c) the earnings process is completeand the collection of any remaining receivables is reasonably assured. However,under MFRS, the Company uses the percentage-of-completion method of accountingto account for housing project revenues and costs related to housingconstruction. Under MFRS, progress towards completion is measured by comparingthe actual costs incurred to the estimated total cost of a project. For afurther discussion of revenue recognition policies under US GAAP, refer to Note27 to the Company’s consolidated financial statements.

 

Total units closed andrecognized as US GAAP revenue in 2009 were 46,631 units (41,679 in 2008)compared to 57,979 units sold under MFRS in 2009 (57,498 in 2008). The lowervolume in units closed in 2009 compared to units sold is primarily attributableto both our continued growth and therefore higher proportion ofconstruction-in-process, and our increased participation during 2009 and 2008in the construction of nearly-completed vertical building projects which takelonger to build, sell and collect.  Total units closed of 46,631 in 2009 represents a 12% increase comparedto total units closed in 2008 of 41,679. The increase is attributable to thecontinued growth in the Company’s business.  In 2008, units closed increasedby 5% over 2007.  The proportion of units sold and units closed aregenerally consistent when evaluated by operating segment during both 2009 and2008. As of December 31, 2009, approximately 11,348 units remain atvarious stages of completion under MFRS, and thus have yet to be recognizedinto revenue under US GAAP.

 

Except for ratios,percentages, and per share, per ADS, and operating data, all amounts arepresented in thousands of pesos.

 

For additional informationregarding financial information presented in this annual report, see “Presentationof Financial and Other Information.”

 

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**Homex Selected Consolidated Financial Information**

 
| ** **                                                                   | ** ** | **Years Ended December 31,**                       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **(In thousands of Mexican Ps., except as otherwise  specified)** | ** ** |
| Statement  of Operations Data:                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| **Mexican Financial Reporting Standards:**                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Revenues  (1) (11)                                                           |       | 19,425,182                                                        |       | 18,850,496 |   | 16,222,524 |   | 13,439,519 |   | 9,216,043 |   |
| Cost  of sales (5)                                                           |       | 13,748,416                                                        |       | 13,473,257 |   | 11,041,456 |   | 9,191,005 |   | 6,418,567 |   |
| Gross  profit                                                                |       | 5,676,766                                                         |       | 5,377,239 |   | 5,181,068 |   | 4,248,514 |   | 2,797,476 |   |
| Selling  and administrative expenses                                         |       | 2,506,756                                                         |       | 2,377,646 |   | 1,798,429 |   | 1,359,147 |   | 913,165 |   |
| Income  from operations                                                      |       | 3,170,010                                                         |       | 2,999,593 |   | 3,382,639 |   | 2,889,367 |   | 1,884,311 |   |
| Other  income (expenses), net (4)                                            |       | 49,475                                                            |       | (109,926 | ) | 209,223 |   | 11,004 |   | 14,956 |   |
| Net  comprehensive financing cost (2) (5)                               |       | 206,566                                                           |       | 558,485 |   | 278,904 |   | 790,969 |   | 494,005 |   |
| Income  before income taxes                                                  |       | 3,012,919                                                         |       | 2,331,182 |   | 3,312,958 |   | 2,109,402 |   | 1,405,262 |   |
| Income  tax expense                                                          |       | 1,182,992                                                         |       | 712,175 |   | 951,280 |   | 669,843 |   | 458,902 |   |
| Consolidated  net income                                                     |       | 1,829,927                                                         |       | 1,619,007 |   | 2,361,678 |   | 1,439,559 |   | 946,360 |   |
| Net  income of controlling interest                                          |       | 1,841,278                                                         |       | 1,580,876 |   | 2,233,066 |   | 1,391,281 |   | 953,611 |   |
| Net  income (loss) of non-controlling interest                               |       | (11,351                                                           | )          | 38,131 |   | 128,612 |   | 48,278 |   | (7,251 | ) |
| Weighted  average shares outstanding (in thousands)                          |       | 334,830                                                           |       | 334,870 |   | 335,688 |   | 335,869 |   | 324,953 |   |
| Basic  and diluted controlling interest earnings per share (in pesos)        |       | 5.50                                                              |       | 4.72 |   | 6.65 |   | 4.14 |   | 2.93 |   |
| Basic  and diluted controlling interest earnings per ADS (3) (in pesos) |       | 33.00                                                             |       | 28.32 |   | 39.91 |   | 24.85 |   | 17.60 |   |
| **US GAAP:**                                                                 |       |                                                              |       |   |   |   |   |   |   |   |   |
| Revenues  (1)                                                                |       | 17,615,888                                                        |       | 14,884,701 |   | 13,849,728 |   | 13,224,145 |   | 8,212,918 |   |
| Cost  of sales                                                               |       | 12,658,080                                                        |       | 10,398,464 |   | 9,814,725 |   | 9,311,415 |   | 6,150,813 |   |
| Gross  profit                                                                |       | 4,957,808                                                         |       | 4,486,237 |   | 4,035,003 |   | 3,912,730 |   | 2,062,105 |   |
| Operating  income (4)                                                        |       | 2,527,445                                                         |       | 2,108,793 |   | 2,116,650 |   | 2,519,346 |   | 1,142,318 |   |
| Consolidated  net income                                                     |       | 1,500,006                                                         |       | 605,913 |   | 1,795,846 |   | 1,680,855 |   | 834,541 |   |
| Net  income (loss) of non-controlling interests                              |       | (11,351                                                           | )          | 38,131 |   | 128,612 |   | 48,278 |   | (7,251 | ) |
| Net  income of controlling interests                                         |       | 1,511,357                                                         |       | 567,782 |   | 1,667,234 |   | 1,632,577 |   | 841,792 |   |
| Weighted  average shares outstanding (in thousands)                          |       | 334,830                                                           |       | 334,870 |   | 335,688 |   | 335,869 |   | 324,953 |   |
| Basic  and diluted controlling interest earnings per share (in pesos)        |       | 4.51                                                              |       | 1.70 |   | 4.96 |   | 4.86 |   | 2.59 |   |
| Basic  and diluted controlling interest earnings per ADS (3) (in pesos) |       | 27.06                                                             |       | 10.20 |   | 29.76 |   | 29.16 |   | 15.54 |   |

 

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| ** **                                          | ** ** | **As of and for the Years Ended December 31,**               | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(In thousands of Mexican Ps.,  except as otherwise specified)** | ** ** |
| Balance  Sheet Data:                                |       |                                                              |       |   |   |   |   |   |   |   |   |
| **Mexican Financial Reporting Standards:**          |       |                                                              |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                          |       | 3,122,074                                                         |       | 1,140,140 |   | 2,206,834 |   | 2,381,689 |   | 1,423,813 |   |
| Restricted  cash                                    |       | 129,342                                                           |       | 128,045 |   | 156,090 |   | 37,597 |   | 336 |   |
| Trade  accounts receivable                          |       | 13,038,211                                                        |       | 11,845,530 |   | 7,549,258 |   | 5,541,086 |   | 5,999,812 |   |
| Total  current assets                               |       | 20,842,299                                                        |       | 18,647,785 |   | 14,794,575 |   | 12,572,239 |   | 11,578,697 |   |
| Land  held for future development                   |       | 10,912,389                                                        |       | 9,254,469 |   | 7,091,074 |   | 5,180,583 |   | 1,927,217 |   |
| Property  and equipment                             |       | 1,110,582                                                         |       | 1,402,928 |   | 1,155,729 |   | 669,095 |   | 497,535 |   |
| Total  assets                                       |       | 34,565,164                                                        |       | 30,834,010 |   | 24,189,256 |   | 19,620,062 |   | 15,398,691 |   |
| Current  debt and current portion of long-term debt |       | 270,595                                                           |       | 1,417,404 |   | 260,758 |   | 91,392 |   | 92,235 |   |
| Current  portion of leases                          |       | 108,437                                                           |       | 89,255 |   | 68,187 |   | 8,704 |   | 7,588 |   |
| Total  current liabilities                          |       | 6,383,019                                                         |       | 8,761,917 |   | 6,967,592 |   | 6,268,537 |   | 4,075,951 |   |
| Long-term  obligations                              |       | 9,460,163                                                         |       | 5,990,119 |   | 3,177,884 |   | 3,605,029 |   | 3,601,864 |   |
| Swap  payable                                       |       | 119,084                                                           |       | — |   | 79,098 |   | 227,074 |   | 127,673 |   |
| Long-term  leases                                   |       | 254,679                                                           |       | 314,639 |   | 288,857 |   | — |   | — |   |
| Land  suppliers — long-term                    |       | 74,569                                                            |       | 405,426 |   | 992,801 |   | — |   | — |   |
| Total  long-term liabilities                        |       | 14,959,182                                                        |       | 10,554,836 |   | 7,380,534 |   | 5,759,021 |   | 5,179,421 |   |
| Total  liabilities                                  |       | 21,342,201                                                        |       | 19,316,753 |   | 14,348,126 |   | 12,027,558 |   | 9,255,372 |   |
| Common  stock                                       |       | 528,011                                                           |       | 528,011 |   | 528,011 |   | 528,011 |   | 528,011 |   |
| Total  equity                                       |       | 13,222,963                                                        |       | 11,517,257 |   | 9,841,130 |   | 7,592,504 |   | 6,143,319 |   |
| Total  liabilities and equity                       |       | 34,565,164                                                        |       | 30,834,010 |   | 24,189,256 |   | 19,620,062 |   | 15,398,691 |   |
|                                                |       |                                                              |       |   |   |   |   |   |   |   |   |
| **US GAAP:**                                        |       |                                                              |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                          |       | 3,122,074                                                         |       | 1,140,140 |   | 2,206,834 |   | 2,381,689 |   | 1,423,813 |   |
| Restricted  cash                                    |       | 129,342                                                           |       | 128,045 |   | 156,090 |   | 37,597 |   | 336 |   |
| Accounts  receivable                                |       | 321,736                                                           |       | 1,016,172 |   | 600,655 |   | 985,043 |   | 1,229,953 |   |
| Total  current assets                               |       | 18,389,873                                                        |       | 18,052,424 |   | 14,488,606 |   | 12,467,252 |   | 10,751,884 |   |
| Land  held for future development                   |       | 10,912,389                                                        |       | 9,254,469 |   | 7,091,074 |   | 5,180,580 |   | 1,927,217 |   |
| Property  and equipment                             |       | 1,110,582                                                         |       | 1,402,928 |   | 1,155,729 |   | 669,095 |   | 497,535 |   |
| Total  assets                                       |       | 31,613,252                                                        |       | 30,774,279 |   | 24,579,367 |   | 20,079,591 |   | 14,795,096 |   |
| Total  current liabilities                          |       | 10,625,255                                                        |       | 14,274,161 |   | 11,054,629 |   | 9,147,783 |   | 5,589,043 |   |
| Long-term  obligations                              |       | 10,103,812                                                        |       | 7,006,557 |   | 4,689,022 |   | 3,760,086 |   | 3,656,327 |   |
| Total  equity (12)                                  |       | 10,884,185                                                        |       | 9,493,561 |   | 8,835,716 |   | 7,171,722 |   | 5,549,726 |   |
| Other  Financial Data:                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| **Mexican Financial Reporting Standards:**          |       |                                                              |       |   |   |   |   |   |   |   |   |
| Depreciation                                        |       | 371,402                                                           |       | 323,727 |   | 196,307 |   | 130,829 |   | 66,626 |   |
| Gross  margin (6)                                   |       | 29.2                                                              | %          | 28.5 | % | 31.9 | % | 31.6 | % | 30.4 | % |
| Operating  margin (7)                               |       | 16.3                                                              | %          | 15.9 | % | 20.8 | % | 21.5 | % | 20.4 | % |
| Net  margin (8)                                     |       | 9.4                                                               | %          | 8.6 | % | 14.5 | % | 10.7 | % | 10.3 | % |
| Other  Financial Data:                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA (9)                                |       | 4,352,068                                                         |       | 4,351,923 |   | 4,031,097 |   | 3,173,119 |   | 2,151,208 |   |
| Net  debt (10)                                      |       | 6,885,277                                                         |       | 6,596,753 |   | 1,513,305 |   | 1,245,825 |   | 2,196,822 |   |
| Ratio  of total debt to total equity                |       | 75.7                                                              | %          | 67.2 | % | 37.8 | % | 47.7 | % | 58.9 | % |
| Ratio  of total debt to total assets                |       | 28.9                                                              | %          | 25.1 | % | 15.4 | % | 18.5 | % | 23.5 | % |
| **US GAAP:**                                        |       |                                                              |       |   |   |   |   |   |   |   |   |
| Gross  margin (6)                                   |       | 28.1                                                              | %          | 30.1 | % | 29.1 | % | 29.6 | % | 25.1 | % |
| Operating  margin (7)                               |       | 14.3                                                              | %          | 14.1 | % | 15.2 | % | 19.1 | % | 13.9 | % |
| Net  margin (8)                                     |       | 8.5                                                               | %          | 3.8 | % | 12.0 | % | 12.3 | % | 10.2 | % |
| Other  Financial Data:                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA (9)                                |       | 3,196,530                                                         |       | 1,357,188 |   | 2,855,834 |   | 2,715,514 |   | 1,701,859 |   |

 

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| (1)    | For US GAAP purposes, the  substantial majority of sales are recognized according to ASC  360.20 (formerly FAS 66 — *Accounting for Sales of  Real Estate)*, when title passes to the homebuyer and the  homebuyer has the legal right to occupy the home, as opposed to the  percentage-of-completion method of accounting used  for MFRS purposes, under which we recognize income from homes we  sell as we incur the cost of their construction. See (11) below for a  discussion of certain accounting pronouncements not yet adopted.                                                                                                                                                                                                                                                                                                                 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    | Represents  interest income, interest expense, monetary position gains  and losses (for 2007, 2006 and 2005), valuation effects of derivative  instruments and foreign exchange gains and losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    | Assumes all common shares  are represented by ADSs. Each ADS represents six common shares. Any  discrepancies between per share and per ADS amounts in the tables are due to  rounding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    | Employee statutory  profit-sharing expense is classified as an operating expense under US GAAP,  and as other income (expenses), net under MFRS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    | Interest capitalized as  part of the cost of inventories is included in cost of sales under US GAAP  and MFRS. Due to the application of MFRS D-6 during 2009, 2008 and  2007, the net comprehensive financing cost capitalized (CFC)  related to qualified assets for the same periods was Ps.563,154, Ps.1,250,080  and Ps.179,304, of which Ps.670,127 (of which Ps.419,338 is related to the  current year CFC and Ps.250,789 is related to prior years), Ps.976,707 (of  which Ps.931,682 is related to the current year CFC and Ps.45,025 is related  to prior years) and Ps.119,286 related to inventories sold and subsequently  were applied to cost of sales of the same periods, respectively.  The average period for the amortization of the capitalized comprehensive  financing cost is 4 months. The annual capitalization rates are 6.5%, 24.3%  and 7.6%, respectively. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)    | Represents gross profit  divided by total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (7)    | Represents operating  income divided by total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| (8)    | Represents net income  divided by total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (9)    | Adjusted EBITDA is not a  financial measure computed under Mexican or US GAAP. Adjusted EBITDA  derived from our MFRS financial information means MFRS net income excluding  (i) depreciation and amortization; (ii) net comprehensive financing  cost (“CFC”) (which are composed of net interest expense (income), foreign  exchange gain or loss, valuation effects of derivative instruments and  monetary position gain or loss) including CFC capitalized to land balances  that is subsequently charged to cost of sales; and (iii) income tax  expense and employee statutory profit-sharing expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | Adjusted EBITDA derived  from our U.S. GAAP financial information means US GAAP net income excluding  (i) depreciation and amortization; (ii) interest expense and  monetary position gain or loss; and (iii) income tax expense. Adjusted  EBITDA does not exclude interest income (Ps.52,203 in 2009, Ps.63,141 in  2008, Ps.100,874 in 2007, Ps.61,407 in 2006 and Ps.25,799 in 2005).

 

Adjusted EBITDA under MFRS  excludes the effect of CFC capitalized to land balances that is subsequently  charged to cost of sales.  The Company’s computation of Adjusted  EBITDA under US GAAP includes such expense in the computation of Adjusted  EBITDA for all periods. Accordingly, the two computations are not  comparable.

 

We believe that Adjusted  EBITDA can be useful to facilitate comparisons of operating performance  between periods and with other companies in our industry because it excludes  the effect of (i) depreciation and amortization, which represent a  non-cash charge to earnings; (ii) certain financing costs, which are  significantly affected by external factors, including interest rates, foreign  currency exchange rates, and inflation rates, which have little or no bearing  on our operating performance; and (iii) income tax expense and, for  Adjusted EBITDA derived from our MFRS financial information, employee  statutory profit-sharing expense.

 

Adjusted EBITDA is also a  useful basis for comparing our results with those of other companies because  it presents operating results on a basis unaffected by capital structure. You  should review Adjusted EBITDA, along with net income and cash flow from  operating activities, investing activities and financing activities, when  trying to understand our operating performance. While Adjusted EBITDA may  provide a useful basis for comparison, our computation of Adjusted EBITDA is  not necessarily comparable to Adjusted EBITDA as reported by other companies,  as each is calculated in its own way and must be read in conjunction with the  explanations that accompany it. While Adjusted EBITDA is a relevant and  widely used measure of operating performance, it does not represent cash  generated from operating activities in accordance with MFRS or US GAAP and  should not be considered as an alternative to net income, determined in  accordance with MFRS or US GAAP, as an indication of our financial  performance, or to cash flow from operating activities, determined in  accordance with MFRS or US GAAP, as a measure of our liquidity, nor is it  indicative of funds available to fund our cash needs.

 

Adjusted EBITDA has  certain material limitations: (i) it does not include interest  expense, which, because we have borrowed money to finance some of our  operations, is a necessary and ongoing part of our costs and assisted us in  generating revenue; (ii) it does not include taxes, which are a  necessary and ongoing part of our operations; and (iii) it does not  include depreciation, which, because we must utilize property and equipment  in order to generate revenues in our operations, is a necessary and ongoing  part of our costs. Therefore, any measure that excludes any or all of  interest expense, taxes and depreciation and amortization has material  limitations.

 

***Reconciliation of Net Income to Adjusted EBITDA Computed  from Our MFRS Financial Information*** |

 
| ** **                                                                       | ** ** | **Years Ended December 31,**                       | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(In thousands of Mexican Ps., except as otherwise  specified)** | ** ** |
| Net  income                                                                      |       | 1,829,927                                                         |       | 1,619,007 |   | 2,361,678 |   | 1,439,559 |   | 946,360 |   |
| Depreciation                                                                     |       | 371,402                                                           |       | 323,727 |   | 196,307 |   | 130,829 |   | 66,626 |   |
| Net  comprehensive financing cost                                                |       | 206,566                                                           |       | 558,485 |   | 278,904 |   | 790,969 |   | 494,005 |   |
| Amortization  of backlog (intangible)                                            |       | —                                                            |       | — |   | — |   | 10,714 |   | 125,808 |   |
| Amortization  of Beta trademark                                                  |       | 91,054                                                            |       | 91,054 |   | 92,958 |   | 94,477 |   | 49,153 |   |
| Employee  statutory profit-sharing                                               |       | —                                                            |       | 70,768 |   | 30,684 |   | 36,728 |   | 10,354 |   |
| Comprehensive  financing cost capitalized and subsequently charged cost of sales |       | 670,127                                                           |       | 976,707 |   | 119,286 |   | — |   | — |   |
| Income  tax expense                                                              |       | 1,182,992                                                         |       | 712,175 |   | 951,280 |   | 669,843 |   | 458,902 |   |
| Adjusted  EBITDA                                                                 |       | 4,352,068                                                         |       | 4,351,923 |   | 4,031,097 |   | 3,173,119 |   | 2,151,208 |   |

 

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|   | ***Reconciliation of Net Income to Adjusted EBITDA Computed  from Our US GAAP Financial Information*** |
|--------|--------------------------------------------------------------------------------------------------------|

 
| ** **                             | ** ** | **Years Ended December 31,**                       | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands of Mexican Ps., except as otherwise  specified)** | ** ** |
| Net  income                            |       | 1,511,357                                                         |       | 567,782 |   | 1,667,234 |   | 1,632,577 |   | 841,792 |   |
| Depreciation                           |       | 371,402                                                           |       | 323,727 |   | 196,307 |   | 130,829 |   | 66,626 |   |
| Interest  expense and inflation effect |       | 188,173                                                           |       | 85,926 |   | 173,719 |   | 47,631 |   | 49,653 |   |
| Amortization  of backlog (intangible)  |       | —                                                            |       | — |   | 16,747 |   | 58,397 |   | 296,445 |   |
| Amortization  of Beta trademark        |       | 91,054                                                            |       | 91,054 |   | 92,958 |   | 94,477 |   | 49,153 |   |
| Income  tax expense                    |       | 1,034,544                                                         |       | 288,699 |   | 708,869 |   | 751,603 |   | 398,190 |   |
| Adjusted  EBITDA                       |       | 3,196,530                                                         |       | 1,357,188 |   | 2,855,834 |   | 2,715,514 |   | 1,701,859 |   |

 
| (10) | Net debt is not a  financial measure computed under MFRS. We compute net debt as the sum of all  debt (not including interest payable) less cash and cash equivalents, each of  which is computed in accordance with MFRS. Management uses net debt as a  measure of our total amount of leverage, as it gives effect to cash  accumulated on our balance sheets. Management believes net debt provides  useful information to investors because it reflects our actual debt as well  as our available cash and cash equivalents that could be used to reduce this  debt. Net debt has certain material limitations in that it assumes the use of  our cash and cash equivalents to repay debt that is actually still  outstanding and not to fund operating activities or for investment. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Reconciliation of Total Debt to Net Debt Derived from Our MFRSFinancial Information***

 
| ** **                         | ** ** | **As of December 31,**                                  | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In thousands of Mexican Ps., except as otherwise  specified)** | ** ** |
| Current  portion of long-term debt |       | 184,072                                                                |       | 1,342,880 |   | 185,211 |   | 13,781 |   | 11,183 |   |
| Current  portion of leases         |       | 108,437                                                                |       | 89,255 |   | 68,187 |   | 8,704 |   | 7,588 |   |
| Long-term  debt                    |       | 9,714,842                                                              |       | 6,304,758 |   | 3,466,741 |   | 3,605,029 |   | 3,601,864 |   |
| Total  debt                        |       | 10,007,351                                                             |       | 7,736,893 |   | 3,720,139 |   | 3,627,514 |   | 3,620,635 |   |
| Cash  and cash equivalents         |       | 3,122,074                                                              |       | 1,140,140 |   | 2,206,834 |   | 2,381,689 |   | 1,423,813 |   |
| Net  debt                          |       | 6,885,277                                                              |       | 6,596,753 |   | 1,513,305 |   | 1,245,825 |   | 2,196,822 |   |

 
| (11)   |   | In December 2008 IMFRS 14 was issued by the CINIF to  complement Bulletin D-7, *Construction  Agreements and Manufacturing of Certain Capital Assets*. This  Interpretation is applicable to the recognition of revenues, costs and  expenses for all entities that undertake the construction of capital assets  directly or through sub contractors. This Interpretation was adopted as of  January 1, 2010, with retrospective application to prior accounting periods  when the Company presents its 2010 consolidated financial statements. While  differences in revenue recognition might still exist between MFRS and US GAAP  upon the adoption of IMFRS 14, it is anticipated that the Company’s MFRS  revenue recognition will more closely approximate its US GAAP revenue  recognition at that time. The Company’s US GAAP revenue recognition is  disclosed further in Note 28 to the Company’s consolidated financial  statements. For more information on the effects the application of IMFRS 14  would have had on the consolidated financial statements of the Company with  respect to the year ended December 31, 2009, see “Presentation of Financial  and Other Information”. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (12)   |   | Reflects the application of ASC 810.10 (formerly FAS  160). Specifically, non-controlling interest amounts are now included in  equity for all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

**DIVIDENDS**

 

A vote by the majority ofour shareholders present at a shareholders’ meeting determines the declaration,amount, and payment of dividends. Under Mexican law, dividends may only be paidfrom retained earnings and if losses for prior fiscal years have beenrecovered.

 

We have not paid dividendssince we were formed in 1989 and we do not currently expect to pay dividends.We intend to devote a substantial portion of our future cash flow to fundingworking capital requirements and purchasing land following a conservative replacement strategy for land bank acquisitions. Wemay consider adopting a dividend policy in the future based on a

 

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number of factors, includingour results of operations, financial condition, cash requirements, taxconsideration, future prospects, and other factors that our board of directorsand our shareholders may deem relevant, including the terms and conditions offuture debt instruments that may limit our ability to pay dividends.

 

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**EXCHANGE RATE INFORMATION**

 

The following table setsforth, for the periods indicated, the period-end, average, high and lowexchange rate between the peso and U.S. dollar. The average annual rates presentedin the following table were calculated by using the average of the exchangerates on the last day of each month during the relevant period. The dataprovided in this table for the years 2005 through 2008 is based on buying ratespublished by Bank of New York. The data provided in this table for the year2009 is based on the exchange rates published by Banco de México. All amountsare stated in pesos, and we have not restated the rates in constant currencyunits. We make no representation that the Mexican peso amounts referred to inthis annual report could have been or could be converted into U.S. dollars atany particular rate or at all.

 
| ** **                                  | ** ** | **Noon Buying Rate (Ps. per US$)** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|
| **Years Ended December 31,** | ** ** | **Low (1)**                                       | ** ** | **High (1)** | ** ** | **Average********(2)** | ** ** | **Period-********End** | ** ** |
| 2005                                        |       | 10.43                                                  |       | 11.37 |   | 10.89 |   | 10.64 |   |
| 2006                                        |       | 10.43                                                  |       | 11.49 |   | 10.90 |   | 10.84 |   |
| 2007                                        |       | 10.66                                                  |       | 11.27 |   | 10.97 |   | 10.88 |   |
| 2008                                        |       | 9.92                                                   |       | 13.94 |   | 11.14 |   | 13.77 |   |
| 2009                                        |       | 12.60                                                  |       | 15.37 |   | 13.50 |   | 13.07 |   |
|                                        |       |                                                   |       |   |   |   |   |   |   |
| **Month Ended**                        | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 31,  2009                     |       | 12.60                                                  |       | 13.07 |   | 12.86 |   | 13.07 |   |
| January 31,  2010                      |       | 12.65                                                  |       | 13.01 |   | 12.80 |   | 13.01 |   |
| February 29,  2010                     |       | 12.78                                                  |       | 13.18 |   | 12.94 |   | 12.78 |   |
| March 31,  2010                        |       | 12.33                                                  |       | 12.75 |   | 12.57 |   | 12.33 |   |
| April 30,  2010                        |       | 12.16                                                  |       | 12.37 |   | 12.23 |   | 12.26 |   |
| May 31,  2010                          |       | 12.26                                                  |       | 13.18 |   | 12.74 |   | 12.91 |   |
| June  29, 2010                              |       | 12.82                                                  |       | 12.88 |   | 12.85 |   | 12.85 |   |

 

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(1)                      Rates shown arethe actual low and high, on a day-by-day basis for each period.

(2)                      Average ofdaily rates.

 

On June 29, 2010, Banco deMéxico’s UDI conversion rate was Ps.4.413333 per UDI.

 

**Industryand Market Data**

 

Except during a liquiditycrisis lasting from September through December 1982, Banco de Méxicohas consistently made foreign currency available to Mexican private sectorentities (such as us) to meet their foreign currency obligations. Nevertheless,in the event of renewed shortages of foreign currency, it is possible thatforeign currency will not continue to be available to private sector companiesor that foreign currency that we may need to service foreign currencyobligations or to import goods will not be available for purchase in the openmarket without substantial additional cost.

 

**RISK FACTORS**

 

**RiskFactors Related to Our Business**

 

***Decreases in the Amount of Mortgage Financing Provided by MexicanHousing Funds on Which We Depend, or Disbursement Delays, Could Result in a Decreasein Our Sales and Revenues***

 

The home building industryin Mexico has been characterized by a significant shortage of mortgagefinancing. Historically, the limited availability of financing has restrictedhome building and contributed to the current shortage of affordable entry-levelhousing. Substantially all financing for affordable entry-level housing inMexico is provided by entities established for this purpose (“Mexican HousingFunds”) such as:

 

·                  the National Workers’Housing Fund Institute, or INFONAVIT (*Institutodel Fondo Nacional para la Vivienda de los Trabajadores*), which isfinanced primarily through mandatory contributions from the gross wages ofprivate sector workers, and securitization of mortgages in the capital markets;

 

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·                  the Social Security andServices Institute Public Segment Workers’ Housing Fund, or FOVISSSTE (*Fondo para la Vivienda y la Seguridad y ServiciosSociales para los Trabajadores del Estado* ), which is financedprimarily through mandatory contributions from the gross wages of public sectorworkers; and

 

·                  public mortgage providerssuch as the Federal Mortgage Society, or SHF (*SociedadHipotecaria Federal, S.N.C., Institucion de Banca de Desarrollo*),which is financed through its own funds as well as funds provided by the WorldBank and a trust managed by Banco de México.

 

See “Item 4. Information onthe Company— Business Overview—The Mexican Housing Market.”

 

The amount of fundingavailable and the level of mortgage financing from these sources is limited andmay vary from year to year.

 

These Mexican Housing Fundshave significant discretion in terms of the allocation and timing ofdisbursement of mortgage funds. We depend on the availability of mortgagefinancing provided by these Mexican Housing Funds for substantially all of oursales of affordable entry-level housing, which represented 78.2% of ourrevenues and 78.2% of our operating income for 2009 and 77.0% of our revenuesand 77.0% of our operating income for 2008.

 

Accordingly, our financialresults are affected by policies and administrative procedures of INFONAVIT,FOVISSSTE, SHF, and a federal housing subsidy program, as well as by theMexican government’s housing policy. The availability of mortgage financinggranted by INFONAVIT and FOVISSSTE has increased significantly during the pastseven years as compared to historical levels, while financing from SHF hasdecreased due to a change in its policy in 2005. The future Mexican governmenthousing finance policy may limit or delay the availability of mortgagefinancing provided by these agencies or otherwise institute changes, includingchanges in the methods by which these agencies grant mortgages and, in the caseof INFONAVIT, the geographic allocation of mortgage financing, that couldresult in a decrease in revenues.

 

Disruptions in theoperations of these Mexican Housing Funds, which could occur for any reason,may occur and result in a decrease in our sales and revenues. During 2009,disruptions included a delay in the disbursement of Mexican federal governmentsubsidies in certain cities delaying the timing by which INFONAVIT commits toclosing a transaction, and a slowdown in the collection process throughFOVISSTE, who employs sofoles to make payments which result in delays in thepayment process.

 

Decreases or delays in theamount of funds available from INFONAVIT, FOVISSSTE, SHF or other sources, orsubstantially increased competition for these funds, could result in a decreasein our sales and revenues. These funds may not continue to be allocated attheir current levels or in regions in which we have or can quickly establish asignificant presence.

 

The current administrationof President Felipe Calderón has initiated a National Housing Program (*Programa Nacional de Vivienda*) 2007-2012,through which the government expects that Mexican Housing Funds will provide sixmillion mortgages by 2012, mainly to low-income families. For 2010, thegovernment believes that Mexican Housing Funds will provide 1.1 millionresidential mortgages.

 

***A Slowdown in the Mexican Economy Could Limit the Availability ofPrivate-Segment Financing in Mexico, on Which We Depend for Our Sales ofMiddle-Income Housing, Which Could Result in a Decrease in Our Sales andRevenues***

 

One of our long-termstrategies is to expand our operations in the middle-income and residentialhousing segments while maintaining our margins and without adversely affectingour financial condition. Our expansion into these markets depends on privatesector lenders, such as commercial banks and Limited Purpose FinancingCompanies and Multiple Purpose Financing Companies (*Sociedades Financieras de Objeto Limitado y Sociedades Financieras deObjeto Múltiple,* or “sofoles” and “sofomes”), which provide asubstantial majority of mortgage financing for the middle-income segment. Theavailability of private sector mortgage financing in Mexico has been severelyconstrained in the past as a result of volatile economic conditions in Mexico,the level of liquidity and stability of the Mexican banking system, and theresulting adoption of more stringent lending criteria and bank regulations.From 1995 through 2001, commercial bank mortgage lending was generallyunavailable in Mexico. However, during the same period a number of sofoles wereformed, serving the mostly middle-income market. Since 2002, private sectorlenders have gradually increased their mortgage financing activities as aresult of improved economic conditions and increasing consumer demand. However,unfavorable general economic conditions, such as the recession and economicslowdown during 2009 in the United States negatively affected the Mexicaneconomy and the availability of private sector mortgage financing. As a result,commercial lenders tightened their criteria for mortgage origination.Additionally, sofoles and sofomes faced liquidity constraints due to increasedexposure to non-performing loans. As a result, during 2009, we decreased ourexposure to the middle-income segment. A prolonged economic slowdown in theUnited States and Mexico could result in reduced profitability and negativelyaffect our financial performance.

 

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***Our Strategy for Expansion in the Tourism/Resort Housing Market may beAffected by a Slowdown in U.S. General Economic Conditions, Which CouldAdversely Affect Our Business or Our Financial Results***

 

The tourism/resorthomebuilding industry is sensitive to changes in economic conditions and otherfactors, such as the level of employment, consumer confidence, consumer income,availability of financing, and interest rate levels. Adverse changes in any ofthese conditions, or in the markets where our targeted clients operate, coulddecrease demand and pricing for new homes in these areas or result in customercancellations of pending contracts, which could adversely affect the number ofhome deliveries we make or reduce the prices we can charge for homes in thetourism/resort housing markets, either of which could result in a decrease inour revenues and earnings and would adversely affect our financial condition.However, the Company believes that the targeted customers will consist of anexclusive sector of senior U.S. and Canadian residents, for whom theavailability of financing is not a key requisite for purchasing a second home.Nonetheless, we anticipate a reduction in potential customers for this segmentdue to softer demand from our targeted customers related to the economicslowdown.

 

***We Experience Significant Seasonality inOur Results of Operations***

 

The Mexican affordableentry-level housing industry experiences significant seasonality during theyear, principally due to the operational and lending cycles of INFONAVIT andFOVISSSTE. Payment by these lenders for home deliveries is slow at thebeginning of the year and increases gradually through the second and thirdquarters with a rapid acceleration in the fourth quarter. We build and deliveraffordable entry-level homes based on the seasonality of this cycle because wedo not begin construction of these homes until a mortgage provider commitsmortgage financing to a qualified homebuyer in a particular development.Accordingly, we tend to recognize significantly higher levels of revenue in thethird and fourth quarters and our debt levels tend to be highest in the firstand second quarters. We anticipate that our quarterly results of operations andour level of indebtedness will continue to experience variability from quarterto quarter in the future.

 

***We May Experience Difficulty inFinding Desirable Land Tracts or Increases in the Price of LandMay Increase Our Cost of Sales and Decrease Our Earnings***

 

Our continued growth dependsin large part on our ability to continue to be able to acquire land and to doso at a reasonable cost. As more developers enter or expand their operations inthe Mexican home building industry, land prices could rise significantly andsuitable land could become scarce due to increased demand or decreased supply.A resulting rise in land prices may increase our cost of sales and decrease ourearnings. We may not be able to continue to acquire suitable land at reasonableprices in the future.

 

***Increases in the Price of Raw MaterialsMay Increase Our Cost of Sales and Reduce Our Net Earnings***

 

The basic raw materials usedin the construction of our homes include concrete, concrete block, steel,windows, doors, roof tiles and plumbing fixtures. Increases in the price of rawmaterials, including increases that may occur as a result of shortages, duties,restrictions, or fluctuations in exchange rates, could increase our cost ofsales and reduce our net earnings to the extent we are unable to increase oursale prices. It is possible that the prices of our raw materials will increasein the future.

 

***Because We Recognize Income from Sales of HomesUnder the Percentage-of-Completion Method of Accounting Before Receiving CashRevenue, Failed Closings Could Result in a Shortfall of Actual Cash Receivedand Require an Adjustment to Revenue Previously Recorded***

 

In accordance with MFRS, andconsistent with industry practice in Mexico until December 31, 2009, werecognized income from the sale of homes based on the percentage-of-completionmethod of accounting, which in Mexico requires us to recognize income as weincur the cost of construction. See Note 3 to our consolidated financialstatements for a discussion of the percentage-of-completion method. However, wedo not receive the consideration from these sales until the homes are titled.As a result, there is a risk that revenue in respect of the income recognizedfor accounting purposes will not be received due to the failure of a sale toclose.

 

***The Implementation of IMFRS 14 is Expected to Result in MaterialChanges to our Financial Statements***

 

During 2008, IMFRS 14, “Construction, Sales andServices Agreements related to Real Estate”, was issued.  IMFRS 14 supplements Mexican AccountingBulletin D-7, “Construction and Manufacturing Contracts for Certain CapitalAssets,” and requires the separation of the various components of constructioncontracts into their separate elements in order to specify whether the contractrefers to the construction or sale of real property or to the provision ofrelated services. IMFRS 14 also establishes the applicable rules forrecognition of revenues and related costs and expenses based on theidentification of the different elements of the contracts.  In contracts involving the sale of realproperty, revenues may only be recognized when the entity has executed thepublic deed transferring the real property to the buyer; therefore, use of thepercentage-of-completion method currently applied by Mexican

 

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housing developers including Homex will no longerbe appropriate.  IMFRS 14 is effectivefor all entities that enter into construction and related real estate saleagreements for financial periods beginning January 1, 2010, with retrospectiveapplication to any prior financial periods presented in the correspondingconsolidated Financial Statements. The adoption of IMFRS 14 is expected tosignificantly affect our consolidated financial position and results ofoperations.  We estimate that theapplication of IMFRS 14 to the consolidated financial statements would have hadthe following effects with respect to the year ended December 31, 2009:

 

·                  sales wouldhave decreased 11.1% from Ps.19,425.2 million to Ps.17,277.7 million;

 

·                  operatingincome would have decreased 17.4% from Ps.3,170.0 million to Ps.2,618.3million;

 

·                  net profitwould have decreased 20.9% from Ps.1,829.9 million to Ps.1,446.9 million; and

 

·                  total equity as of December 31, 2009 would have decreased 15.8%from Ps.12,988.0 million to Ps.10,935.7 million.

 

In addition, the application of IMFRS 14 to theconsolidated financial statements would have had the following effects as of December31, 2009: (i) a decrease in accounts receivable for developments in progress,(ii) an increase in inventories consisting of housing under construction, (iii)a decrease in deferred income taxes for net income attributable to housing notyet titled, (iv) an increase in prepaid expenses and other current assets forthe sales commissions paid in advance and (v) a decrease in equity as indicatedabove. There can be no assurance that the application of IMFRS 14 will notresult in further fluctuations in our future consolidated financial position orresults of operations when compared to the percentage of completion method bywhich revenue is currently recognized.

 

***Loss of the Services of Our Key Management Personnel Could Result inDisruptions to Our Business Operations***

 

Our management andoperations are dependent in large part upon the contributions of a small numberof key senior management personnel, including Eustaquio Tomás de NicolásGutiérrez, our Chairman, and Gerardo de Nicolás Gutiérrez, our Chief ExecutiveOfficer. We do not have employment or non-compete agreements with or maintainkey-man life insurance in respect of either of these individuals. Because oftheir knowledge of the industry and our operations and their experience withHomex, we believe that our future results will depend upon their efforts, andthe loss of the services of either of these individuals for any reason couldadversely affect our business operations.

 

***Competition from Other Home Builders CouldResult in a Decrease in Our Sales and Revenues***

 

The home building industryin Mexico is highly competitive. Our principal competitors include publiccompanies like Corporación GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. de C.V.,URBI Desarrollos Urbanos, S.A.B. de C.V. and SARE, S.A.B. de C.V. Our abilityto maintain existing levels of home sales depends to some extent on competitiveconditions, including price competition, competition for available mortgagefinancing, and competition for available land. Competition is likely to continueto decrease as some smaller and medium-sized homebuilding companies in Mexicoare experiencing limited growth opportunities due to: (1) their dependence onbridge loans and short-term credit lines; (2) increases in the range of 300 to400 bps in these companies interest rates for short-term credit lines; and (3)tighter lending restrictions from commercial banks to renew existing creditlines. We may experience pressure to reduce our prices in certain regions ifsome of our competitors are forced to sell their inventory in distressed salesupon exiting the market. In addition, competitive conditions may prevent usfrom achieving our goal of increasing our sales volume, or result in a decreasein our sales and revenues.

 

***Adverse EconomicConditions in Mexico or in Other Emerging Markets Could Adversely Affect Us***

 

We currently maintainoperations in Mexico and to a lesser extent in other emerging markets.  We expect that in the future we will haveadditional operations in the countries where we currently operate or in othercountries with similar political and economic conditions.  These emerging markets have a history ofeconomic instability.  Our operations maybe adversely affected by trade barriers, currency fluctuations and exchangecontrols, high levels of inflation and increases in duties, taxes andgovernmental royalties, as well as changes in local laws and policies of thecountries in which we conduct business. The governments of countries in which we operate, or may operate in thefuture, could take actions that materially adversely affect us.  Accordingly, our results of operations andfinancial condition depend upon the overall level of economic activity andpolitical stability in these emerging markets. Should economic conditions deteriorate in these countries or in emergingmarkets generally, our results of operations and financial condition may beadversely affected.

 

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In addition, we cannotprovide any assurance that international markets will provide similar demandfor housing as Mexico, that we will have similar success selling the housesthat we may develop in international markets, or that the necessary financingfrom private and public sources will enable the public in these internationalmarkets to purchase the supply of housing that we may develop in these markets.  As a result of our expansion intointernational markets, our profitability could be reduced and our financialperformance could be negatively affected.

 

***Changes in Building and Zoning Regulations to Which We are SubjectCould Cause Delays in Construction and Result in Increased Costs***

 

The Mexican housing industryis subject to extensive building and zoning regulation by various federal,state and municipal authorities. These authorities oversee land acquisition,development and construction activities, and certain dealings with customers.The costs associated with obtaining building and zoning permits, payingpurchase or development fees and taxes, securing utility service rights andtitling new homes are substantially higher in Mexico than in other countries andvary significantly from region to region in Mexico. We are required to obtainthe approval of numerous federal, state and local governmental authorities forour development activities. Changes in local circumstances or applicable law orregulations of such entities may require modifying or applying for additionalapprovals or changing our processes and procedures to comply with them. It ispossible that these factors could cause delays in construction and result inincreased costs.

 

***Changes to Environmental Laws and Regulations to Which We are SubjectCould Cause Delays in Construction and Result in Increased Costs***

 

Our operations are subjectto Mexican federal, state and municipal environmental laws and regulations.Changes to environmental laws and regulations, or stricter interpretation orenforcement of existing laws or regulations, could cause delays in constructionand result in increased costs.

 

***Our Uninsured Housing Developments under Construction Could SufferUnforeseen Casualties, Which Could Result in Significant Losses to Us***

 

We do not generally obtainliability insurance to cover housing developments under construction unless itis required by providers of construction financing. In the event that ouruninsured housing developments suffer unforeseen casualties, we may experiencesignificant losses.

 

***A Reduction in Distributions from Our Operating Subsidiaries CouldLimit Our Ability to pay Dividends and Service Our Debt Obligations***

 

We are a holding companywith no substantial operations and no significant assets other than the commonshares of our majority-owned subsidiaries. We depend on receiving sufficientfunds from our subsidiaries for virtually all our internal cash flow, includingcash flow to pay dividends and service our debt obligations. As a result, ourcash flow will be affected if we do not receive dividends and other income fromour subsidiaries. The ability of our subsidiaries to pay dividends and makeother transfers to us is limited by requirements that need to be satisfiedunder Mexican law. This ability may also be limited by credit agreementsentered into by our subsidiaries.

 

***We Cannot Predict the Impact that Changing Climate Conditions, IncludingLegal, Regulatory and Social Responses Thereto, May Have on Our Business***

 

Various scientists,environmentalists, international organizations, regulators and othercommentators believe that global climate change has added, and will continue toadd, to the unpredictability, frequency and severity of natural disasters(including, but not limited to, hurricanes, tornadoes, freezes, other stormsand fires) in certain parts of the world. In response to this belief, a number of legal and regulatory measures aswell as social initiatives have been introduced in an effort to reducegreenhouse gas and other carbon emissions which some believe may be chiefcontributors to global climate change. We cannot predict the impact that changing climate conditions, if any,will have on our results of operations or our financial condition.  Moreover, we cannot predict how legal,regulatory and social responses to concerns about global climate change willimpact our business.

 

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**RiskFactors Related to Mexico**

 

***Adverse Economic Conditions in Mexico May Result in a Decrease inOur Sales and Revenues***

 

We are a Mexican companywith substantially all of our assets located in Mexico and substantially all ofour revenues derived from operations in Mexico. As such, our business may besignificantly affected by the general conditions of the Mexican economy.

 

Mexico experienced a periodof slow growth from 2001 through 2003 primarily as a result of the downturn inthe U.S. economy. In 2006, GDP grew by 4.5% and inflation increased to 4.1%; in2007, GDP grew by 5.6% and inflation decreased to 3.7%; in 2008, GDP grew by1.3% and inflation increased to 6.5%. In 2009, GDP contracted by 6.5% andinflation increased to 5.3% as a result of the global recession and economicslowdown as Mexico witnessed a contraction in the international flow of goodsand services, especially to and from Mexico’s main trading partner, the UnitedStates.

 

Historically, Mexico hasexperienced high real and nominal interest rates. The interest rates on 28-dayMexican government treasury securities (*Certificadosde la Tesoreria de la Federación*) averaged approximately 7.44% and7.97% for 2007 and 2008, respectively. As a result of the recession andeconomic slowdown in Mexico during 2009, Mexico’s central bank lowered itsbenchmark interest rate (TIIE) to 4.50% in an effort to encourage lending andstimulate the economy. As a result, the interest rates on 28-day Mexicangovernment treasury securities decreased to 5.39%. In the medium-term, it isexpected that Mexico’s central bank will increase its benchmark interest rate.Accordingly, if we incur peso-denominated debt in the future, it could be athigh interest rates.

 

As a consequence of theglobal recession and economic slowdown during 2008, the Mexican economy enteredinto a recession. In Mexico, GDP contracted 6.5% in 2009. During the first fewmonths of 2010, however, the Mexican economy has begun to show signs ofrecovery. Consumer confidence has improved to 82.5 as of April 30, 2010 ascompared to a low of 77.0 as of October 31, 2009. In addition, theunemployment rate has improved to 4.81% as of March 31, 2010 as comparedto 6.41% as of September 30, 2009 and GDP grew 4.3% in the first quarter.As of April 30, 2010, twelve-month accumulated inflation had decreased to4.27% as compared to 6.17% during the same period in 2009.  However, therecan be no assurance that the positive trends witnessed in recent months willcontinue. The Mexican economy’s inability to recover from the recession couldaffect our operations to the extent that we are unable to reduce our costs andexpenses in response to falling demand. These factors could result in adecrease in our sales and revenues.

 

***Fluctuations of the Peso Relative to the U.S. Dollar Could Result in anIncrease in Our Cost of Financing and Limit Our Ability to Make Timely Paymentson Foreign Currency-Denominated Debt***

 

Because substantially all ofour revenues are and will continue to be denominated in pesos, if the value ofthe peso decreases against the U.S. dollar, our cost of financing willincrease. Severe depreciation of the peso may also result in disruption of theinternational foreign exchange markets. This may limit our ability to transferor convert pesos into U.S. dollars and other currencies for the purpose ofmaking timely payments of interest and principal on our securities and any U.S.dollar-denominated debt that we may incur in the future. While the Mexicangovernment has not restricted the right or ability of Mexican or foreignindividuals to convert pesos into U.S. dollars or to transfer other currenciesout of Mexico since 1982, the Mexican government could institute restrictiveexchange rate policies in the future.

 

***Political Events in Mexico May Result in Disruptions to OurBusiness Operations and Decreases in Our Sales and Revenues***

 

The Mexican governmentexercises significant influence over many aspects of the Mexican economy. Inaddition, we depend on Mexican government housing policy, especially withregard to the operation of the Mexican Housing Funds, for a large portion ofour business. As a result, the actions of the Mexican government concerning theeconomy and regulating certain industries could have a significant effect onMexican private sector entities, including Homex, and on market conditions,prices of and returns on Mexican securities.

 

President Calderón mayimplement significant changes in laws, public policy and/or regulations thatcould affect Mexico’s political and economic situation, which could adverselyaffect our business. Social and political instability in Mexico or otheradverse social or political developments in or affecting Mexico could affect usand our ability to obtain financing. It is also possible that politicaluncertainty may adversely affect Mexican financial markets.

 

We cannot provide anyassurance that future political developments in Mexico, over which we have nocontrol, will not have an unfavorable impact on our financial position orresults of operations.

 

***Developments in Other Countries May Result in Decreases in thePrice of Our Securities***

 

The market value ofsecurities of Mexican companies is, to varying degrees, affected by economicand market conditions in other emerging market countries. Although economicconditions in these countries may differ significantly from economic conditions

 

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in Mexico, investors’reactions to developments in any of these other countries may have an adverseeffect on the market value of securities of Mexican issuers. In recent years,for example, prices of both Mexican debt securities and Mexican equitysecurities dropped substantially as a result of the levels of public debt,weakness of the economies, and other developments in the United States, Russia,Asia, Brazil, Greece, Italy, Portugal and Spain, among others.

 

In addition, the directcorrelation between economic conditions in Mexico and the United States hassharpened in recent years as a result of the North American Free TradeAgreement (NAFTA) and increased economic activity between the two countries. Asa result of the slowing economy in the United States and the uncertainty itcould have on the general economic conditions in Mexico and the United States,our financial condition and results of operations could be adversely affected.In addition, due to recent developments in the international credit markets,capital availability and cost could be significantly affected and couldrestrict our ability to obtain financing or refinance our existing indebtednesson favorable terms, if at all.

 

***We are Subject to Different Corporate Disclosure and AccountingStandards than U.S. Companies***

 

A principal objective of thesecurities laws of the United States, Mexico and other countries is to promotefull and fair disclosure of all material corporate information. However, theremay be less or different publicly available information about foreign issuersof securities than is regularly published by or about U.S. issuers of listedsecurities.

 

***We Face Risks Related to Health Epidemics and Other Outbreaks***

 

Our business could beadversely affected by the effects of avian flu, severe acute respiratorysyndrome, SARS, H1N1 flu or another epidemic or outbreak. In April 2009,an outbreak of Influenza H1N1 flu occurred in Mexico and the United States aswell as in China and elsewhere in Asia. A prolonged occurrence or recurrence ofavian flu, SARS, H1N1 flu or other adverse public health developments in Mexicomay have a material adverse effect on our business operations. Our operationsmay be impacted by a number of health-related factors, including, among otherthings, quarantines or closures of our facilities, which could disrupt ouroperations, and a general slowdown in the Mexican economy. Any of the foregoingevents or other unforeseen consequences of public health problems couldadversely affect our business and results of operations. We have not adoptedany written preventive measures or contingency plans to combat any futureoutbreak of avian flu, SARS, H1N1 flu or any other epidemic.

 

**RiskFactors Related to Our Common Shares and ADSs**

 

***Future Issuances of Shares May Result in a Decrease in the Pricesof Our ADSs and Common Shares***

 

In the future, we may issueadditional equity securities for financing and other general corporatepurposes, although there is no present intention to do so. Any such sales orthe prospect of any such sales could result in a decrease in the prices of ourADSs and common shares.

 

***Future Sales of Our Shares by Our Principal ShareholdersMay Result in a Decrease in the Prices of Our Securities***

 

Our principal shareholder,the de Nicolás family, holds 35.1% of our outstanding share capital. Actions bythese shareholders with respect to the disposition of the shares theybeneficially own, or the perception that such actions might occur, may decreasethe trading price of our shares on the Mexican Stock Exchange and the price ofthe ADSs on the New York Stock Exchange. Our principal shareholders are notsubject to any contractual restrictions that limit their right to dispose oftheir common shares.

 

***Pre-emptive Rights May be Unavailable to Holders of Our ADSs,Which May Result in a Dilution of ADS Holders’ Equity Interest in OurCompany***

 

Under Mexican law, if weissue new shares for cash as part of a capital increase, we must grantpre-emptive rights to our shareholders, giving them the right to purchase asufficient number of shares to maintain their pro rata interest unless we issueshares in a public offering. However, we may not be legally permitted to offerADS holders in the United States the right to exercise pre-emptive rights inany future issuances of shares unless we file a registration statement with theSEC with respect to that future issuance of shares, or the issuance qualifiesfor an exemption from the registration requirements of the U.S. Securities Actof 1933, or the Securities Act. At the time of any future capital increase,other than through a public offering, we will evaluate the costs and potentialliabilities associated with filing a registration statement with the SEC, thebenefits of enabling U.S. holders of ADSs to exercise pre-emptive rights, andany other factors that we consider important in determining whether to file aregistration statement to permit the exercise of mandatory pre-emptive rights.It is possible that we will not file such a registration statement. As aresult, the equity interests of ADS holders would be diluted to the extent thatADS holders cannot participate in a future capital increase.

 

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Under the terms of the ADSs,you may instruct the depositary, JPMorgan Chase Bank, to vote the ordinaryshares underlying the ADSs, but only if we request the depositary to ask foryour instructions. Otherwise, you will not be able to exercise your right tovote unless you withdraw the common shares underlying the ADSs and vote suchcommon shares. However, you may not receive sufficient notice of a shareholders’meeting to permit you to withdraw your common shares to allow you to cast yourvote with respect to any specific matter. In addition, the depositary and itsagents may not be able to send out or receive your voting instructions on timeor carry them out in the manner you have instructed. As a result, you may notbe able to exercise your right to vote.

 

In addition, Mexican law andour bylaws require shareholders to provide evidence of their status asshareholders through INDEVAL’s depositors’ list in order to attend shareholders’meetings. ADS holders will not be able to meet this requirement and aretherefore not entitled to attend shareholders’ meetings. ADS holders will alsonot be permitted to vote the common shares underlying the ADSs directly at ashareholders’ meeting or to appoint a proxy to do so without withdrawing thecommon shares.

 

***Minority Shareholders Have Different Rights Against Us, Our Directors,or Our Controlling Shareholders in Mexico***

 

Under Mexican law, theprotections afforded to minority shareholders are different from those affordedto minority shareholders in the United States. The grounds for shareholderderivative actions under Mexican law are extremely limited, which effectivelybars most of these kinds of lawsuits in Mexico. Procedures for class-actionlawsuits do not exist under Mexican law. Therefore, it may be more difficultfor minority shareholders to enforce their rights against us, our directors orour controlling shareholders than it would be for minority shareholders of aU.S. company.

 

***It May be Difficult to Enforce Civil Liabilities Against Us or OurDirectors, Executive Officers and Controlling Persons***

 

We are organized under thelaws of Mexico. A majority of our directors, executive officers and controllingpersons reside outside the U.S.; all or a significant portion of the assets ofour directors, executive officers and controlling persons, and substantiallyall of our assets, are located outside the U.S.; and certain of the expertsnamed in this annual report also reside outside the U.S. As a result, it may bedifficult for you to effect service of process within the U.S. upon thesepersons or to enforce against them or us in U.S. courts judgments predicatedupon the civil liability provisions of the federal securities laws of the U.S.We have been advised by our Mexican counsel, Cortés y Núñez Sarrapy, S.C., thatthere is doubt as to the enforceability, in original actions in Mexican courts,of liabilities predicated solely on U.S. federal securities laws and as to theenforceability in Mexican courts of judgments of U.S. courts obtained inactions predicated upon the civil liability provisions of U.S. federalsecurities laws.

 

**ITEM 4.      Information on the Company.**

 

**BUSINESS OVERVIEW**

 

**HISTORY ANDDEVELOPMENT**

 

Desarrolladora Homex, S.A.B.de C.V. is a corporation (*sociedad anónimabursátil de capital variable*) registered in Culiacán, Sinaloa,Mexico under the Mexican Companies Law (*LeyGeneral de Sociedades Mercantiles* ) on March 30, 1998 with anindefinite corporate existence. Our full legal name is Desarrolladora Homex,S.A.B. de C.V. Our principal executive offices are located at Boulevard AlfonsoZaragoza Maytorena 2204 Norte, Fraccionamiento Bonanza, 80020 Culiacán,Sinaloa, Mexico. Our telephone number is +52 (667) 758-5800. Our legal domicileis Boulevard Alfonso Zaragoza Maytorena 2204 Norte, Fraccionamiento Bonanza,80020 Culiacán, Sinaloa, Mexico.

 

Our Company traces itsorigins to 1989 and established its current legal structure in 1998. Beginningin 1999, various strategic investors and, in 2002, Equity InternationalProperties, Ltd., or EIP, an entity affiliated with Equity GroupInvestments, L.L.C., made equity investments in our Company. These strategicinvestors assisted us to develop and refine our operating and financialstrategies. On June 29, 2004 we obtained financing through a public equityoffering and dual listing on the Bolsa Mexicana de Valores and the New YorkStock Exchange. Since our initial public offering, our annual revenues havegrown 228%, and we have expanded our operations into four states and fivecities in México, as well as two countries internationally.

 

**CapitalExpenditures**

 

Our operations do notrequire substantial capital expenditures, as we lease, on a short-term basis,most of the construction equipment we use and subcontract a substantial portionof the services necessary to build the infrastructure of our developments. In2009 we spent Ps.89 million on capital expenditures, primarily to purchaseconstruction equipment, support growth and partially fund our corporateheadquarters. Our purchases of land are treated as additions to inventory andnot as capital expenditures.

 

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**Our Company**

 

We are avertically-integrated home development company engaged in the development,construction and sale of affordable entry-level, middle-income and tourismhousing in Mexico and have sold more homes in Mexico during 2009 and 2008 thanany other company.  During 2009 we sold57,979 homes, an increase of 0.84% over 2008 and during 2008 we sold 57,498homes, an increase of 11.3% over 2007. 91.2% of our homes sold in 2009 and 90.8% in 2008 were in the affordableentry-level segment.

 

As of December 31,2009, we had 140 developments under construction in 34 cities located in 21Mexican states.  We had total landreserves under title of approximately 77.2 million square meters as of December 31,2009, which include primarily land reserves in Mexico and approximately 750,441square meters of land reserves for our operations in Brazil.  Our land reserves include both titled landand land in the process of being titled. We estimate we could build approximately 348,940 affordable entry-levelhomes, approximately 28,810 middle-income homes and approximately 1,404 homestargeting the tourism market on our land reserves.

 

We believe our geographicdiversity is one of the strongest among home builders in Mexico, reflected byour operations in 34 cities located in 21 Mexican states as of December 31,2009.  For the year ended December 31,2009, 25% of our revenues were derived from the state of Jalisco and 21% fromthe Mexico City Metropolitan Area.

 

From time to time, weevaluate investments in real estate projects and companies outside Mexico witha view toward replicating our business model in other jurisdictions. To thisend, we may also enter into real estate development joint ventures andstrategic alliances with the assistance of knowledgeable local partners. Suchinvestments, if any, are not expected to be material in terms of cost ormanagement time.

 

We acquire land and plan thedevelopment of the homes we build through Proyectos Inmobiliarios de Culiacán,S.A. de C.V., or PICSA, Casas Beta del Centro, S. de R.L. de C.V., Casas Betadel Norte, S. de R.L. de C.V. and Casas Beta del Noroeste, S. de R.L. de C.V.Desarrolladora de Casas del Noroeste, S.A. de C.V. or DECANO builds thedevelopments that PICSA and Beta plan and promote. We also receive executiveand administrative services from Administradora PICSA, S.A. de C.V. and AltosMandos de Negocios, S.A. de C.V. Homex Atizapan, S.A. de C.V., which we operateand control as a joint venture with strategic partners in the region, owns oneof our middle-income developments in the Mexico City area and Hogares delNoroeste, S.A. de C.V. owns middle-income developments in Hermosillo, Sonora.Aerohomex, S.A. de C.V. provides transportation services to us as well asbuilding rental services for our corporate offices. Through AAA Homex Trust, aMexican trust, we establish factoring facilities for the settlement of tradepayables to many of our suppliers. See “—Materials and Suppliers.”

 

**Our Products**

 

Mexico’s developer-builthousing industry is divided into three tiers according to cost: affordable entry-level, middle-income, and residential. We consider affordableentry-level homes to range in price between Ps.195,000 and Ps.540,000(US$14,950 and US$41,399); middle-income homes to range in price betweenPs.541,000 and Ps.1,885,000 (US$41,476 and US$144,514); and residential homesto have a price above Ps.1,885,000 (US$144,514). We currently focus onproviding affordable entry-level and middle-income housing for our customers.In 2008, we launched a new market focused on houses in tourist and resortareas. This housing ranges between US$450,000 and US$750,000.

 

Our affordable entry-leveldevelopments range in size from 500 to 20,000 homes and are developed in stagestypically comprising 300 homes each. During 2009, our affordable entry-levelhomes had an average sale price of approximately Ps.284,000 (US$21,773). Atypical affordable entry-level home consists of a kitchen, living, dining area,one to three bedrooms, and one bathroom. We are able to deliver a completedaffordable entry-level home in approximately 7 to 10 weeks from the time ahomebuyer obtains mortgage approval. Currently, our largest affordableentry-level housing developments are located in the states of Jalisco, México,Nuevo León, Baja California Sur and Veracruz.

 

Our middle-incomedevelopments range in size from 400 to 2,000 homes and are developed in stagestypically comprising 200 homes each. During 2009, our middle-income homes hadan average sale price of approximately Ps.823,000 (US$63,096) as compared toPs.817,000 (US$59,316) for the same period in 2008. A typical middle-incomehome consists of a kitchen, dining room, living room, two or three bedrooms,and two bathrooms. We are able to deliver a completed middle-income home inapproximately 12 to 16 weeks from the time a homebuyer obtains mortgageapproval. In response to continued demand for middle-income housing in Mexicoand financing available through INFONAVIT’s and FOVISSSTE’s cofinancingproducts, we launched two new middle-income developments in one city in 2009.In 2009, 21.8% of our revenues were attributable to sales of middle-incomehousing compared to 23.0% in 2008.

 

In early 2008, we commencedthe development of the first stage of the new tourism/resort division called “LasVillas de Mexico.”  As part of Homex’s entry into the development ofhousing targeting the tourist market, our developments will be located in 

 

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the three major tourismcenters in Mexico, namely Los Cabos, Puerto Vallarta andCancún. Developments in each of the three areas will have three differenthousing styles: residential villas of up to 2,150 square feet in typical lotsof 3,230 square feet, townhouses of up to 1,725 square feet in typical lots of2,690 square feet and apartments or condominiums of up to 1,500 square feet inbuildings with five to 10 floors on average. Each style has been developedto maximize space but provide privacy and avoid the perception of highdensity.  The developments in each area will feature architectural andlandscaping elements unique to the geographical region.  Owners will havethe opportunity to choose from among the different layouts and a wide varietyof architectural and landscaping designs, as well as to tailor a property totheir individual tastes. Each development will feature either a privatebeach or country club (with priority golf club access), as well as a day spa,state-of-the-art fitness facilities, full-time concierge services, and spacefor exclusive commercial and service areas.

 

In targeting the new tourismresort division to foreign investors who will not live at their residencesfull-time, we have included a number of important amenities. All of thedevelopments will feature double gates, year-round, 24-hour security, and achoice of two branded property services: Casa Care and Opendoor. Casa Carewill handle the maintenance and bill payments for the property while residentsare away. The services include payment of monthly expenses, propertymanagement, and individually customized packages tailored to residents’specific needs. Opendoor will allow residents to share or rent their homewithin the Las Villas private property partnership. Owners will be able totravel throughout Mexico to stay at the different Las Villas developments, usethe amenities, and pay the same amount they would for their own residence.

 

In 2009, the tourismdivision did not contribute to the Company’s consolidated revenues; however,the Company has signed purchase applications for ten units at its Los Cabosproject and is currently waiting for mortgage financing to be obtained by thesecustomers before recognizing revenues in respect of these units.

 

**LandReserves**

 

We have developed specificprocedures to identify land that is suitable for our needs and perform ongoingmarket research to determine regional demand for housing. Suitable land must belocated near areas with sufficient demand, generally in areas where at least500 homes can be built, and must be topographically amenable to housingdevelopment. We also consider the feasibility of obtaining requiredgovernmental licenses, permits, authorizations, and adding necessaryimprovements and infrastructure, including sewage, roads and electricity inkeeping with a purchase price that will maximize margins within the limits ofavailable mortgage financing. We conduct engineering and environmentalassessments, and in some cases urbanization and land composition studies, ofland we consider for purchase in order to determine whether it is suitable forconstruction. We budget the majority of our land purchases for the second halfof the year to coincide with peak cash flow. Historically, our total landreserves fluctuated between 36 to 42 months of future home deliveries dependingupon the time of year. During 2009, the Company followed a strategy to replacesome of our existing land reserves where we held less than 2 to 3 years offuture home deliveries with longer-term land reserves. As a result of thisreplacement strategy, the amount that we spent on land acquisitions decreasedto Ps.1,119 million during 2009 as compared to Ps.3,782 million during 2008. Asof December 31, 2009, the Company had land inventory for 5.4 years offuture home deliveries.

 

We had total land reservesunder title of approximately 77.2 million square meters, as of December 31,2009, including primarily land reserves in Mexico and approximately 750,441square meters of land reserves for our operations in Brazil.  Our land reserves include both titled landand land in the process of being titled. We estimate we could build approximately 348,940 affordable entry-levelhomes, approximately 28,810 middle-income homes and approximately 1,404 homestargeting the tourism market on our land reserves. For 2010, we anticipateminimizing investments by continuing to follow a conservative replacementstrategy for land bank acquisitions.

 

**InternationalExpansion: Brazil, San Jose dos Campos Affordable Entry- Level Project**

 

During the first quarter of2009, the Company initiated operations in Brazil with the construction of a1,300-unit affordable entry-level development at San Jose dos Campos, northeastof Sao Paulo.  We have received purchaseapplications in respect of approximately 46 percent of the project’s firststage (comprised of 330 units) as construction of infrastructure and homes inthe first stage continues. During the fourth quarter of 2009, we collected thefirst advances from customers in respect of this project through the CaixaEconomica Federal (Caixa), a Brazilian government-sponsored home financeagency.

 

**International Expansion: IndianJoint Venture**

 

OnMarch 22, 2010, the Company, through its subsidiary Homex India PrivateLimited, entered into a Memorandum of Understanding (“MOU”) with PuravankaraProjects Limited (“Puravankara”), an Indian private limited company.  Pursuant to the MOU, Homex and Puravankarahave agreed to use their best efforts to form a non-exclusive joint venturecompany to undertake 

 

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projects in the affordable entry-level housing segment in India.  The first project developed by the jointventure company is expected to consist of 1,323 units in the metro area ofChennai, in southern India.

 

**TourismDivision**

 

Homex has pursued aconservative strategy for its tourism division by launching the first phase ofits development in Los Cabos.  We plan tolaunch sales of our Cancún properties in the fourth quarter of 2010, subject tothe current market conditions.  Toimprove the Company’s profitability and product offering in its tourismdivision, Homex reduced the size of the initial phases, increased the densityof the projects and retained a leading U.S.-based firm that specializes inhigh-end properties in Mexico to undertake all sales efforts.  During the third quarter of 2009, marketingefforts in California and Arizona have resulted in purchase applicationsfor ten units in Los Cabos.  Overall, weretain a positive outlook for this division in 2010, as Mexico becomes a topdestination for Americans living outside the U.S.

 

**Our Relationship with Equity International Properties, Ltd.**

 

Beginning in 2002, EIPbecame a major investor in Homex. However, EIP has been reducing its ownershipposition in the Company. On February 1, 2008, EIP sold 5.1% (17.1 millioncommon shares) of Homex common stock to the de Nicolás family, who are Homex’sfounders. On April 25, 2008, pursuant to the liquidation plans for EIP’sinvestment fund, EIP decided to sell the remainder of its stake in Homex, andsold approximately 11.0 million common shares in private transactions. As of March 31,2010 EIP had an ownership interest equivalent to 0.97% of the Company’s commonshares.

 

**Homex’Information Sharing Project with INFONAVIT**

 

Homex has implemented anelectronic file capture system with INFONAVIT****which enables the Company to uploadcustomer information to INFONAVIT’swebpage directly from Homex’ sales offices. Through this system, theCompany is able to directly upload customers’ mortgage files to create a moreexpedited mortgage authorization process for its clients. The Company will alsorealize significant process efficiencies including a faster collection processfrom INFONAVIT.

 

**Fovissste’sFactoring Program with NAFIN**

 

During the third quarter of2009, FOVISSSTE implemented a factoring program with Mexico’s NationalDevelopment Bank (NAFIN), which provided FOVISSSTE with a funding source tocomplement its housing programs. Pursuant to this program, Homex is able tocollect payments directly from NAFIN at an average 4% discount rather thanfollowing the regular payment process from FOVISSSTE. Homex is among the firsthome developers in Mexico to benefit from participation in this program. TheCompany will continue to work closely with FOVISSSTE in connection with thisprogram, which will help Homex to realize important efficiencies in thecollection process with this entity.

 

**BusinessStrengths**

 

***Standardized Business Processes***

 

We have developed andrefined scalable and standardized business processes that allow us to enter newmarkets rapidly and efficiently.  We havedesigned proprietary information technology systems that are intended to integrateand monitor our operations, including land acquisition, construction, payroll,purchasing, sales, quality control, financing, delivery, and maintenance.  Our systems connect every one of our branchlocations and help us monitor and control the home building process, administerour customer relations, and oversee the financing process for our customers.This standardized model drives our growth, geographic diversification, andprofitability, and is an integral component of our culture. During 2009, ourproprietary information technology systems were successfully implemented at ourpilot project at San Jose Dos Campos, Brazil.

 

***Efficient Working Capital Management***

 

Our standardized processesallow us to time the construction and delivery of our homes and payment to oursuppliers efficiently, which has allowed us to reduce our borrowing needs andminimize working capital requirements. We do not commence construction on a development stage until prospectivebuyers representing at least 10% of the planned number of homes in that stagehave qualified to receive mortgage financing and until December 31, 2009we did not recognize revenue on a given home until all the criteria under thepercentage-of-completion method had been met. We seek to maintain a construction period of less than 10 weeks foraffordable entry-level housing and less than 16 weeks for middle-income housingby using our systems to maximize the efficiency 

 

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of our standardized methods.This process allows us to maximize our working capital by minimizing overheadcosts and coordinating payables with receivables, which reduce our borrowingneeds, minimizing our costs.

 

***Geographic Diversification***

 

We believe that we are oneof the most geographically diversified housing development companies in Mexico.As of December 31, 2009, our operations included 140 developments in 34cities located in 21 Mexican states, which represent 76.5% of Mexico’spopulation, according to the Mexican Institute of Statistics, Geography andComputer Sciences, or INEGI (*Instituto Nacional deEstadistica, Geografia e Informática*). Many of our developments arelocated in markets where none of our major competitors currently operate.  In 2009, 25% of our revenues originated inthe state of Jalisco, and 21% in the Mexico City Metropolitan Area, the largestcity in Mexico.  The remaining revenuesoriginated in 32 other cities.  We believethat this geographic diversification reduces our risk profile as compared toour less-diversified competitors.

 

***Experienced and Committed Management Team***

 

Eustaquio Tomás de NicolásGutiérrez, our Chairman, co-founded Homex’s predecessor in 1989, and Gerardo deNicolás Gutiérrez, our CEO, joined us in 1993. Our senior management team is comprised of executives with an average of16 years of experience in their respective areas of responsibility.  Senior management owns an aggregate ofapproximately 29.45% of our common shares. Consistent with our standardizedbusiness processes and geographic diversification, we delegate significantmanagerial responsibility to our seasoned team of branch managers. Uponcompletion of a development, we typically relocate our branch managers toanother development in order to capitalize on their significant experience.

 

***Focus on the Affordable Entry-Level Segment***

 

Our affordable entry-levelsegment continues to succeed primarily due to the availability of mortgagefinancing provided by the main mortgage suppliers in Mexico. In 2009, INFONAVITand FOVISSSTE provided mortgage financing for 447,481 and 100,082 mortgagesthroughout Mexico, respectively. Additionally, we continue to experience high demand for affordableentry-level homes in Mexico due to the large deficit of housing stock, agrowing young population, high rates of urban growth, new household formation,and a decreasing number of occupants per home. In Mexico, ninety percent of thepopulation earns a monthly income of approximately Ps.6,000 and we believe thatan entry-level home valued at Ps.300,000 is an affordable option for thispopulation.  Our focus and expertise inthe affordable entry-level segment has enabled us to increase our marketshare.  As of December 31, 2009 ourmarket share in the affordable entry-level segment had remained relativelystable at 32.2% compared to 32.4% during the previous year.  In addition, 91.2% of the homes that we soldduring 2009 fell into the affordable-entry level category.

 

**BusinessStrategies**

 

***Maintain a Conservative Financial Position***

 

We operate our business withthe goal of reducing our exposure to interest rate and financing risk.  We begin construction only when an approvedhomebuyer has qualified for a mortgage and, if applicable, made a down payment,thereby reducing our working capital needs. We believe the resulting financial flexibility enhances our ability torespond quickly to market opportunities and lessens any negative effects thatmight result from a downturn in the economy.

 

***Strategic Growth in Tourism Housing***

 

On February 7, 2008 theCompany announced plans to strengthen its position in the tourism market.  The Company plans to achieve this goal bydeveloping communities in key tourist destinations within Mexico targeted topotential customers in the United States and Canada.  See “Business—Our Products.”

 

The first stage ofdevelopment will include launching sales of two “Las Villas de Mexico”developments in the cities of Cancún and Los Cabos. These private communities,with superior product and service offerings, will reflect the architecture andculture of Mexico adapted to the customs and living traditions of our targetmarkets.  The developments will includeresidential villas, townhouses, and apartments.

 

In October 2008, theCompany began construction of initial infrastructure and model homes at Cancúnand Los Cabos and has commenced sales efforts for the first stage of thedevelopment in Los Cabos.  Nonetheless,we anticipate a reduction in potential customers for our tourism market due tosofter demand from our targeted customers in the United States and Canada as aresult of the 

 

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economic slowdown.  As a result of the expected decrease indemand, in 2008 the Company adjusted its strategy and cut costs in order toremain profitable by improving and expanding its internal sales team andshifting to performance-based compensation for these employees, as well assubcontracting out a portion of its sales employees to subcontractors whosecompensation is also performance-based.****In addition,the Company has reduced the number of its administrative personnel, streamliningthe phases for approval of customer financing and increasing the density of ourtourism projects.  During 2009, Mexicohas become more attractive to foreigners and demand in the tourism segment hasincreased as a result of the sharp decline in the value of the Peso compared tothe U.S. Dollar, Canadian Dollar and Euro during the final quarter of 2008.

 

Tourist developments did notsee significant growth during 2009.  Asof December 31, 2009 and as a result of marketing efforts in Californiaand Arizona, the Company has signed purchase applications for ten units atits Los Cabos project and is currently waiting for mortgage financing to beobtained by these customers before recognizing revenues in respect of theseunits.

 

***Maintain Appropriate and Balanced Land Reserves***

 

Our ability to identify,acquire and improve land is critical to our success.  Because the success of our operationsdepends, among other things, on managing our land reserves efficiently, wecontinually review our portfolio and seek new development opportunities.  As of December 31, 2009, the Company hadland inventory for 5.4 years of future home deliveries by pursuing landinvestment opportunities.  For 2010, weanticipate minimizing investments by following a conservative replacement strategyfor land bank acquisitions.  We targethaving an average land inventory equal to 2 to 3 years of future homedeliveries.

 

We generally purchase largeparcels of land in order to amortize our acquisition and infrastructure costsover a large number of homes, minimize competition, and take advantage ofeconomies of scale. We had total land reserves under title of approximately77.2 million square meters, as of December 31, 2009, which includeprimarily land reserves in Mexico and approximately 750,441 square meters ofland reserves for our operations in Brazil. We estimate we could build approximately 348,940 affordable entry-levelhomes, approximately 28,810 middle-income homes and approximately 1,404 homestargeting the tourism market on our land reserves.

 

***Continue to Build and Contribute to Successful Communities***

 

We seek to foster brandloyalty by enhancing the quality and value of our communities through buildingspaces for schools, day-care facilities, parks and churches, and by providingother social services to residents of the housing we develop.  We are committed to fulfilling our customers’needs by responding to and meeting their demands.  In 2008, we responded to our clients’ needsby launching a customization program that allows our clients to choose from afull array of custom options, adding a personal touch to clients’ homes.  At the same time, we seek to become the bestemployer to our employees through training and educational opportunities.  We seek to hire and retain talented employeesand invest in training our workforce at all levels by offering programs such asmiddle-school equivalency courses for our construction laborers.  We are committed to becoming the bestcustomer to our suppliers by offering various payment alternatives andopportunities for cooperative growth, and through our factoring structure andother initiatives, including electronic ordering and payment systems.  We believe that these factors make us apreferred home builder, employer and customer and ultimately enhance ouroverall business.

 

***Mold Construction System***

 

During 2007, the Companyacquired cutting-edge construction technology based on aluminum molds that ithas used in some, but not all, of its projects. This new technology has improved the efficiency of the constructionprocess.  Among the advantages of the newmolds are:

 

·                  shorterconstruction time;

 

·                  better qualityand reduced reprocessing;

 

·                  the ability tore-use the same mold for several prototypes of homes, with an estimated life of2,000 usages per mold;

 

·                  versatility,because it permits construction ranging from simple floors to apartmentbuildings using the same system;

 

·                  labor savings;

 

·                  compatibilityamong international suppliers;

 

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·                  eco-friendlinessbecause, unlike traditional construction methods, mold construction does notutilize timber and therefore reduces our carbon footprint and the impact of ouroperations on deforestation; and

 

·                  durability, dueto the use of concrete.

 

During the year endedDecember 31, 2009 we used this technology in the construction of30,133 homes.  The Company intendsto continue using this technology in the future.

 

***Our Markets***

 

We operate in geographicallydiverse markets throughout Mexico, from Tijuana in the north to Tuxtla in thesouth, including more than 140 developments in 21 states and 34 cities as of December 31,2009, which states represent 76.5% of Mexico’s population, according toINEGI.  For the year ended December 31,2009, 25% of our revenues originated in the state of Jalisco and 21% in theMexico City Metropolitan Area, the largest city in Mexico.  The remaining revenues originated in 32 othercities.  As a diversified homebuilder,our national footprint covers: (i) capital cities, where we benefit from astable demand from government employees; (ii) industrial cities, includingPuebla, Monterrey, Guanajuato, Saltillo and Chihuahua, where we benefit fromMexico’s export-oriented economy; and (iii) tourism and service-orientedcities.  During 2009, México’s servicesector accounted for 62.5% of the country’s GDP, as the industry employsapproximately 35.0% of the active population. Our geographic diversity within Mexico has enabled the Company tomitigate our risk exposure to any one region.

 

We seek to continueoperations in markets where we have a strong presence and to expand intounderserved markets where demand for housing is high.  However, we do not anticipate expanding intoany new markets in Mexico during 2010. Rather, we intend to take a conservative approach and focus onconsolidating our presence in the markets where we have existing operations.

 

During the first quarter of2009, the Company initiated operations in Brazil with the construction of a1,300-unit affordable entry-level development in San Jose dos Campos, northeastof Sao Paulo.

 

***TotalHomes Sold***

 

The following table setsforth information on our historical sales by country and state. During 2006,90.5% and 9.5% of the homes we sold were affordable entry-level andmiddle-income, respectively, during 2007, 90.4% and 9.6% of the homes we soldwere affordable entry-level and middle-income, respectively, during 2008, 90.8%and 9.2% of the homes we sold were affordable entry-level and middle-income,respectively, and during 2009, 91.2% and 8.8% of the homes sold were affordableentry-level and middle-income, respectively.

 

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In 2009, the Companyrecognized revenues outside Mexico in connection with 102 affordableentry-level homes in San Jose dos Campos, northeast of Sao Paulo, Brazil.

 
| ** **           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------|------------|
| ** **           | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **           | ** ** | **Affordable********entry-level**           | ** ** | **Middle-********income** | ** ** | **Affordable********entry-level** | ** ** | **Middle-********income** | ** ** | **Affordable********entry-level** | ** ** | **Middle-********Income** | ** ** | **Affordable********entry-level** | ** ** | **Middle-********income** | ** ** |
|                 |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Mexico**           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Baja  California     |       | 1,203                                       |       | 619 |   | 3,509 |   | 355 |   | 2,810 |   | 387 |   | 2,170 |   | 423 |   |
| Baja  California Sur |       | 3,319                                       |       | 452 |   | 2,165 |   | 520 |   | 2,514 |   | 733 |   | 1,188 |   | 178 |   |
| Chiapas              |       | 2,350                                       |       | 217 |   | 2,127 |   | 297 |   | 1,071 |   | 287 |   | 1,369 |   | 192 |   |
| Chihuahua            |       | 636                                         |       | 34 |   | 219 |   | 122 |   | 188 |   | 62 |   | 481 |   | 96 |   |
| Coahuila             |       | 1,904                                       |       | — |   | 641 |   | — |   | — |   | — |   | — |   | — |   |
| Durango              |       | 1,530                                       |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Guanajuato           |       | 21                                          |       | 133 |   | 453 |   | 32 |   | 1,236 |   | — |   | 209 |   | 134 |   |
| Estado  de Mexico    |       | 10,879                                      |       | 1,208 |   | 19,842 |   | 1,688 |   | 15,815 |   | 1,224 |   | 15,666 |   | 554 |   |
| Guerrero             |       | 324                                         |       | 100 |   | 1,030 |   | 686 |   | 956 |   | 467 |   | 1,321 |   | 5 |   |
| Hidalgo              |       | —                                      |       | 15 |   | — |   | 53 |   | — |   | 263 |   | — |   | 161 |   |
| Jalisco              |       | 12,739                                      |       | 1,507 |   | 7,745 |   | 769 |   | 8,090 |   | 582 |   | 9,623 |   | 1,147 |   |
| Michoacán       |       | 765                                         |       | 36 |   | 983 |   | 1 |   | 890 |   | — |   | 646 |   | 323 |   |
| Morelos              |       | 1,971                                       |       | 141 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Nuevo  Leon          |       | 5,761                                       |       | 21 |   | 3,704 |   | 30 |   | 4,532 |   | — |   | 2,834 |   | — |   |
| Oaxaca               |       | —                                      |       | — |   | — |   | — |   | 64 |   | — |   | 467 |   | — |   |
| Puebla               |       | 1,686                                       |       | — |   | 942 |   | — |   | 2,360 |   | — |   | — |   | 82 |   |
| Querétaro       |       | 1,341                                       |       | — |   | 1,284 |   | — |   | — |   | — |   | — |   | — |   |
| Quintana  Roo        |       | 88                                          |       | 293 |   | 331 |   | — |   | — |   | — |   | — |   | — |   |
| Sinaloa              |       | 717                                         |       | 77 |   | 3,442 |   | 174 |   | 1,641 |   | 160 |   | 1,356 |   | 331 |   |
| Sonora               |       | 781                                         |       | 105 |   | 535 |   | 292 |   | 341 |   | 379 |   | 375 |   | 153 |   |
| Tamaulipas           |       | 6                                           |       | 46 |   | 621 |   | — |   | 714 |   | 58 |   | 427 |   | 306 |   |
| Veracruz             |       | 4,741                                       |       | 111 |   | 2,636 |   | 270 |   | 3,468 |   | 380 |   | 1,808 |   | 107 |   |
| Subtotal             |       | 52,762                                      |       | 5,115 |   | 52,209 |   | 5,289 |   | 46,690 |   | 4,982 |   | 39,940 |   | 4,192 |   |
| **Brazil**           |       | 102                                         |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total                |       | 52,864                                      |       | 5,115 |   | 52,209 |   | 5,289 |   | 46,690 |   | 4,982 |   | 39,940 |   | 4,192 |   |

 

**THE MEXICAN HOUSING MARKET**

 

We have obtained thefollowing information from public sources, including publications and materialsfrom the Mexican Ministry of Social Development, or SEDESOL (*Secretaría de Desarrollo Social*), theMexican Population Council, or CONAPO     (*Consejo Nacional de Población*), INEGI, INFONAVIT,SHF, the Mexican Home Building and Development Industry Chamber of Commerce, orCANADEVI (*Cámara Nacional de la Industria deDesarrollo y Promoción de la Vivienda*), CONAVI (*ComisiónNacional de Vivienda*) and SOFTEC, S.C. Although we believe oursources and estimates are reliable, we have not independently verified theinformation or data from third parties and cannot guarantee the accuracy orcompleteness of such information from third parties or the information and datawe have obtained ourselves.

 

**General**

 

The housing market in Mexicois influenced by several social, economic, industrial, and political factors,including demographics, housing supply, market segmentation, government policy,and available financing.

 

**Demographics**

 

National demographic trendsdrive demand for housing in Mexico. These trends include:

 

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·      sustained growth of arelatively young population;

 

·      a high rate of new householdformation;

 

·      a high urban area growthrate; and

 

·      a decrease in number ofoccupants per home.

 

According to INEGI, Mexicohad a population of approximately 107.9 million in 2009 and estimates that thiswill grow to 108.8 million in 2011. CONAPO estimates that there will beapproximately 28.1 million households in Mexico in 2010 and that therewill be approximately 28.7 million households by year-end 2011, approximately32.9 million by year-end 2018 and approximately 34 million by year-end 2020.

 

Mexico experienced a periodof particularly high population growth during the 1970s and 1980s. The childrenborn during this boom are contributing to the current increased demand forhousing. The target consumer group for our homes is typically between 25 and 50years old. In 2009, the 20-50 year-old age group represented approximately45.6 million people or 42% of Mexico’s population. CONAPO estimates thatby 2020, this age group will represent 44.3 million or 38.0% of Mexico’spopulation. The size stability of this group is expected to contribute toincreased housing demand in Mexico.

 

**HousingSupply**

 

In 2009, CONAVI’s housingstatistics indicated there was a shortage of 8.9 million homes in Mexico.This figure included the need for:

 

·       1.7 million new homesto accommodate multiple households currently living in a single home andhouseholds living in homes that must be replaced; and

 

·       7.2  millionsubstandard homes in need of extensive repair and possible replacement.

 

CONAVI estimates that the growth of the Mexicanpopulation will generate a sustained demand for new homes of at least 565,000units per year into the near future. To address the immediate shortage of 8.9million homes as well as the anticipated new demand, the Mexican governmentcommitted to financing and/or building at least 1.1 million units in 2010.

 

*Instituto de Vivienda delDistrito Federal (INVI)*

 

INVI is a public,decentralized institution for the public administration in the Federal District(*Distrito Federal*), legallyautonomous with its own working capital; its functions are the design,proposal, promotion, coordination, execution and evaluation of policies andhousing programs focused mainly on families with limited economic resources,all of which is regulated within the General Development for the FederalDistrict Program (*Programa General deDesarrollo del Distrito Federal*) derived from the Housing Law for theFederal District (*Ley de Vivienda delDistrito Federal*).

 

The mission of INVI is to satisfy the need for housingof families with limited economic resources located in the Federal Districtthrough the granting of mortgages for affordable entry-level homes, with thegoal of creating 192,544 new housing units in the years 2007-2012. For the yearended December 31, 2009, INVI had granted 3,571 mortgages for newhomes, and 14,487 credits for home improvements.

 

**MarketSegments**

 

In general, Mexico’sdeveloper-built (as opposed to self-built) housing market is divided into foursegments according to cost: affordable entry-level, middle-income, residentialand tourism. The developer-built housing market includes homes built bycontractors and developers, which are generally financed by mortgage providers.These homes are built with official permits, have municipal services, and arelocated on land that is registered and titled by the homebuyer. Developers mustobtain clear title to the land, proper zoning permits and any necessaryfinancing commitments from lenders in addition to installing infrastructure.

 

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Mexico’s developer-builthousing market is categorized in the table below:

 

**HousingMarket Segments**

 
| **Segment**            | ** ** | **Cost**                                                    | ** ** | **Size**                                       | ** ** | **Characteristics**                                                                                                                       |
|------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Affordable entry-level |       | Between Ps.195,000 and  Ps.540,000 (US$14,950-US$41,399)    |       | 45 m2-76 m2 (484 sq.  ft. -818 sq. ft.)   |       | Kitchen; living, dining  area; 1-3 bedrooms; 1 bath; parking; titled; all utilities available                                             |
|                   |       |                                                        |       |                                           |       |                                                                                                                                      |
| Middle-income          |       | Between Ps.541,000 and  Ps.1,885,000 (US$41,476-US$144,514) |       | 76 m2-172 m2 (818 sq.  ft.-1,851 sq. ft.) |       | Kitchen, family room,  living, dining room; 2-4 bedrooms; 2-4 baths; 1-4 parking; service quarters;  titled; all utilities available      |
|                   |       |                                                        |       |                                           |       |                                                                                                                                      |
| Residential            |       | More than Ps.1,885,000  (US$144,514)                        |       | more than 172  m2 (1,851 sq. ft.)         |       | Kitchen; family room;  living room; dining room; 3-4 bedrooms; 3-5 baths; 3-6 parking; service  quarters; titled; all utilities available |
|                   |       |                                                        |       |                                           |       |                                                                                                                                      |
| Tourism                |       | Between US$450,000 and  US$750,000                          |       | Between 1,500 sq. ft. and  2,150 sq. ft.       |       | Kitchen; family room;  living room; dining room; 3-4 bedrooms; 3-5 baths; 3-6 parking; service  quarters; titled; all utilities available |

 

**GovernmentPolicy and Available Financing**

 

The size of the developer-built market depends to agreat extent on the availability of mortgage financing.  Over the last 20 years, Mexico hasexperienced fluctuations in the availability of mortgage financing,particularly from private sector sources. As a result, the supply of affordableentry-level and middle-income housing has also remained low during this period.

 

During the 1980s, Mexican government policy focused onencouraging investment by the private sector, reducing development costs, andstimulating construction. Mexican Housing Funds provided mortgage loanguarantees and direct payment and savings procedures. In 1994, Mexicoexperienced an economic crisis that led to the devaluation of the Mexican pesoand a steep rise in interest rates. Smaller housing development companies wentout of business, and the industry experienced a sharp fall in home salesbetween 1995 and 1996 due to diminished commercial bank lending.

 

Following the 1994 economic crisis, government policysought to counterbalance the shortage of available financing and the increasesin interest rates that resulted by focusing primarily on providing mortgagesand construction financing via Mexican Housing Funds in the affordableentry-level segment. Government funds no longer provided development or salesactivities and functioned instead as true savings-and-loan programs.Legislative reforms with regard to community-owned agricultural territories (*ejidos*), which made it possible to sellthese formerly restricted properties, also increased the potential supply ofland available for development. During this period the government authorizedthe creation of sofoles, which underwrite mortgages with funds and guaranteesprovided by government agencies, private investment, national, foreign ordevelopment bank loans, or through the Mexican capital markets. Furthermore,the government encouraged industry growth and private sector lending bysupporting consolidation in the housing development industry.

 

Between1997 and 1998, home sales stabilized, growing slightly in 1997 due to improvingeconomic conditions. During 1999 and 2000, mortgage financing increased due tostabilizing economic conditions. The level of available financing has continuedto grow as a result of Mexican government policies. President Calderón’sadministration’s goal is to finance six million mortgages during hisadministration. As of 2009, 4.6 million mortgages have been financed sinceCalderón took office in 2006, satisfying 76% of the administration’s goal.President Calderón’s administration has supported four objectives for thehomebuilding industry, as originally set forth by President Fox:

 

·      makemore adequate land available, including infrastructure such as sewage andutilities;

 

·      increasederegulation of the housing industry;

 

·      encourageconsolidation within the industry; and

 

·      increasefinancing opportunities available to qualified homebuyers.

 

In conjunction with these efforts, the Mexicanlegislature amended existing tax regulations in order to allow individuals todeduct a portion of their mortgage loan interest payments from their personalincome taxes beginning in 2003, which the administration expects will lead toincreased mortgage financing activity.

 

Recently, the Mexican government implemented a newprogram to meet the housing needs of families in the very low end of theeconomic spectrum, a sector of the population whose monthly income wouldotherwise be insufficient for them to be able to afford the lower valued homesin the market.  This program demonstratesthe commitment of Mexican federal government to improving the quality of lifefor families in Mexico by providing affordable housing.

 

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The actions taken byPresident Calderón’s administration to accelerate the housing and mortgagesupply in Mexico has resulted in the emergence of an active housing industrysupported by solid private and public institutions. The developer-built markethas continued to expand due to higher levels of available mortgage financing,especially through Mexican Housing Funds such as INFONAVIT, SHF and FOVISSSTE.According to CONAVI, from 2000 to 2009 mortgage providers in Mexico granted5,373,941 mortgages, a 350.1% growth from 331,880 in 2000 to 1,493,747 in2009.  For the year endedDecember 31, 2009, a total of 1,493,747 mortgages were granted by allpublic and private entities involved in the Mexican housing market, accordingto CONAVI.

 

President Calderón has indicated that he will continueto support and promote the housing industry on three main lines: urbandevelopment, very affordable housing and home improvement. His administration’sgoal is for the Mexican Housing Funds to provide six million mortgages by 2012.

 

In early 2009, the Mexican federal governmentannounced a stimulus bill, the “National Agreement in Favor of Personal Financeand Employment” (*Acuerdo Nacional en Favor de la EconomíaFamiliar y el Empleo*), that contains assistance for the homebuildingindustry. Under the bill, the government increased aid from Ps.5.2 billion toPs.7.4 billion for a federal housing subsidy program designed to provideassistance to low-income families. In addition, the Mexican federal government,homebuilders and suppliers signed a separate agreement, the “National HousingProgram” that confirms the housing industry’s importance to the Mexican economyduring the current recession and economic slowdown.

 

Changes in the availability of mortgage financing fromgovernment agencies could adversely affect us. See “Item 3. KeyInformation—Risk Factors—Risk Factors Related to Our Business—Decreases in theAmount of Mortgage Financing Provided by Mexican Housing Funds on Which WeDepend, or Disbursement Delays, Could Result in a Decrease in Our Sales andRevenues.”

 

**Sources ofMortgage Financing**

 

Principalsources providing mortgage financing for Mexico’s housing market are:

 

·       mortgage providers financedby mandatory employer or member contributions to public funds, includingINFONAVIT & FOVISSSTE, serving private and public sector employees,respectively, and;

 

·       SHF, which providesfinancing to credit-qualified homebuyers through financial intermediaries suchas commercial banks, sofoles and sofomes through funds from the World Bank, theMexican government, and its own portfolio;

 

·       commercial banks and sofolesusing their own funds; and

 

·       direct subsidies from publichousing agencies and state housing trusts, including the Mexican Fund forPopular Housing, or FONHAPO (*FideicomisoFondo Nacional de Habitaciones Populares*).

 

Accordingto CONAVI, these mortgage providers originated 1,493,747 home mortgages in 2009from which 634,726 mortgages were granted for new homes.

 

***INFONAVIT***

 

INFONAVIT was established bythe Mexican government, labor unions and private sector employees in 1972 as asocial service entity to administer the National Housing Fund for the benefitof private sector employees. INFONAVIT provides financing, primarily foraffordable entry-level housing, to credit-qualified homebuyers. INFONAVIT makesloans for home construction, acquisition or improvement, to workers whoseindividual monthly earnings are generally less than five times the minimummonthly wage. It is funded through payroll contributions by private sectoremployers on behalf of their employees equal to 5.0% of their employees’ grosswages.

 

Homebuyers qualify forINFONAVIT loans according to a point system whereby points are awarded based onincome, age, amount of monthly contributions, and number of dependents, amongother factors.  The total loan amount may equal 100% of the cost of ahome, up to a maximum of between 300 and 350 times the *Salario MínimoGeneral Mensual del Distrito Federal*, the minimum monthly generalwage in Mexico City (“SMG”), depending on geographical region.  As of December 31, 2009, the dailyminimum wage in the Federal District was Ps.54.80 (US$4.20).  Repayment is calculated based on the borrower’swages, for a term of up to 30 years, and is made by direct wage deductions byemployers.  INFONAVIT generally grantsloans at variable annual interest rates, which are indexed to inflation andbased on a borrower’s income.

 

INFONAVIT has a programcalled Apoyo INFONAVIT that is directed at assisting higher-income borrowersobtain mortgage financing. Apoyo INFONAVIT customers can use the amountscontributed via payroll deductions to their INFONAVIT accounts as collateralfor mortgage loans held by private sector lenders. In addition, these customerscan apply their monthly INFONAVIT contributions toward the monthly mortgagepayments owed to private sector lenders.

 

In 2007, INFONAVITinaugurated a new program called Cofinanciamiento, or Cofinavit, which is meantto assist high-income borrowers in a manner similar to the Apoyo INFONAVITprogram. This new program enables Cofinavit customers to obtain a mortgage loangranted by INFONAVIT in conjunction with a commercial bank or a sofol. Inaddition, the customers can use their individual contributions in theirINFONAVIT accounts as part of the financing or as collateral for the mortgageloan. Apoyo INFONAVIT****and Cofinavit do not have a maximumlimit on the value of the home to be financed.

 

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INFONAVIT****also recently introduced anew program called “INFONAVIT****Total” targeted at workers whoqualify for the traditional INFONAVITprogram.  Through INFONAVIT Total, the loan recipient agrees to a partial assignmentof the INFONAVIT****mortgage loan to a commercialbank.  The terms of the INFONAVIT****Totalmortgage loan are substantially equal to the traditional INFONAVIT loan, and INFONAVIT****continuesto administer and service the loans under this program, yet INFONAVIT****sharesthe funding burden and the economic risks and benefits of the portfolio withthe commercial bank participating in the program.

 

In addition, during late2004 and early 2005, INFONAVIT initiated a new mortgage financing system,enabling it to expedite the issuance of mortgages in response to public demandby reducing documentation necessary for initial processing thereby helping itto achieve its year-end goals. In addition, this new system enhancestransparency and quality of service in connection with mortgage services.

 

Earlyin 2009, INFONAVIT launched a guarantee program (*Garantía**INFONAVIT*) designed toprovide assistance to borrowers who have lost their job, borrowers who have hadtheir wages decreased, and borrowers suffering economic difficulties due to ageor sickness. The program provides mortgage relief to borrowers who have losttheir jobs by: (1) allowing for a one-year grace period with no interestor principal payment; (2) providing partial unemployment insurance, whereborrowers pay a minimum required payment of 10.64 times the daily minimum wagein Mexico City and receive a 50% discount on their accrued interest payments; and(3) providing a payment protection program, where borrowers pay a minimumfee of 2% of their monthly mortgage and are protected for up to 6 months every5 years. The guarantee program also provides relief to borrowers who have hadtheir wages reduced by allowing these borrowers to take advantage of mortgagepayment reductions of up to 25% monthly, reductions corresponding to theborrowers’ new salary, and other adjustments depending on the borrowers’individual circumstances. Additionally, the guarantee program providesassistance to borrowers seeking to prepay their mortgages by offering a 30%discount for prepayment of mortgages entered into prior to July 31, 1995,a 10% discount for mortgages in good standing that are at least two years old.

 

INFONAVITprovided approximately 30.0% of all home mortgage financing in Mexico duringthe year ended December 31, 2009.

 

INFONAVIT has made acommitment to provide 475,000 new mortgages in 2010. In addition, this agencyhas agreed to guarantee mortgage loans granted to employees by commercial banksand sofoles in the case of job loss. INFONAVIT expects to continue to modernizeits operations and increase available financing by focusing on reducing paymentdefaults, participating more closely with the private sector, and implementinga voluntary savings program. INFONAVIT has also recently begun securitizing itsloan portfolio in order to contribute to the growth of the secondary mortgagemarket in Mexico and expand its available sources of funds.

 

The forecasted INFONAVITlending goal for 2010-2014 period has been recently announced as follows:

 
| **Year** | ** ** | **Mortgages** | ** ** |
|----------|------------|---------------|------------|
| 2010     |       | 475,000       |       |
| 2011     |       | 480,000       |       |
| 2012     |       | 505,000       |       |
| 2013     |       | 540,000       |       |
| 2014     |       | 570,000       |       |

 

***FOVISSSTE***

 

The Mexican governmentestablished FOVISSSTE in 1972 as a pension fund on behalf of public sectoremployees to provide financing for affordable housing. FOVISSSTE obtains fundsfrom Mexican government contributions equal to 5% of public sector employeewages. The Mexican government administers FOVISSSTE similarly to INFONAVIT andpermits FOVISSSTE to co-finance mortgage loans with private sector lenders inorder to maximize available funds.

 

FOVISSSTE mortgage financingis typically available for housing ranging from the affordable entry-levelsegment through the lower end of the middle-income segment. Eligible applicantscan obtain FOVISSSTE mortgage loans to purchase new or used homes, remodel orrepair existing homes, finance construction of self-built homes, and make downpayments on homes not financed through FOVISSSTE. FOVISSSTE loans are grantedbased on seniority within the public sector and allocated on a first-comefirst-served basis that also takes into account wages, number of dependents,and geographic location. Once the program establishes a number of approved applicants,it allocates mortgage loans by state based on historical demand.

 

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FOVISSSTE generally grantsloans at variable interest rates, indexed to inflation, for a maximum amount ofapproximately Ps.706,426 (US$54,158). Repayment is calculated based on theborrower’s wages, for a term of up to 30 years, and is made by direct wagedeductions.

 

FOVISSSTE has announced thatit is seeking to increase the total number of mortgages it grants.  During 2009, FOVISSTE granted more than100,000 mortgages. FOVISSSTE provided approximately 6.7% of all home mortgagefinancing in Mexico during the year ended December 31, 2009.

 

FOVISSSTE’s forecastedlending goal for 2010 is to grant at least 100,000 mortgages.

 

***SHF***

 

SHF was created in 2002 as apublic sector development bank. SHF obtains funds from the World Bank, theMexican government, and SHF’s own portfolio and provides financing throughintermediaries such as commercial banks and sofoles. In turn, financialintermediaries administer SHF-sponsored mortgage loans, including disbursementand servicing.

 

Traditionally, SHF has beenan important source of construction financing for housing developers byproviding loans to commercial banks, sofoles and sofomes (which in turn makedirect bridge loans to developers). As of September 1, 2004, however, SHFprovided funding for bridge loans only for homes with a purchase price of up toUDI 166,667 (approximately Ps.723,362 or US$55,457 as of December 31,2009). In lieu of funding bridge loans for homes with a higher purchase priceof up to UDI 500,000 (approximately Ps.2,170,083 or US$166,370 as ofDecember 31, 2009), SHF will provide guarantees to support efforts bycommercial banks and sofoles to raise capital for the financing of bridge loansto build such homes.

 

In addition, SHF makesfinancing available to commercial banks and sofoles for the purpose ofproviding individual home mortgages for affordable entry-level andmiddle-income homes. Historically, SHF has only financed a total amount equalto 80% to 90% of a home’s value, generally for a maximum of approximately UDI500,000 (approximately Ps.2,170,083 or US$166,370 as of December 31,2009). Beginning in 2005, however, in order to maximize the availability ofaffordable entry-level mortgages, SHF has replaced its financing of mortgagesfor homes with a purchase price greater than UDI 150,000 (approximatelyPs.651,025 or US$49,911 as of December 31, 2009) with credit enhancementsand loan guarantees for commercial banks and sofoles to support theircapital-raising efforts for the financing of such individual mortgage loans. Interms of total homes financed, SHF provided approximately 3.1% of all homemortgage financing in Mexico during the year ended December 31, 2009.

 

Inconnection with its mortgage financing operations, SHF also took an active rolein issuing mortgage backed securities (*Bonos Respaldados PorHipotecas* or “BORHIS”) as well as market making in these securitiesduring 2009.  In addition, SHF reviews issuances of BORHIS to ensure thatthey comply with market eligibility requirements and criteria, and providesinformation and analysis regarding historical information, risk of default, andmarket evolution concerning BORHIS issuances. By engaging in market-makingactivities and providing mortgage financing to underserved segments of thepopulation, SHF also provided liquidity to the Mexican housing market.Additionally, SHF has committed to focus its strategy on the promotion ofSelf-Sustainable Housing Environments (*Desarrollos UrbanosIntegrales Sustentales* or “DUIS”) and in the re-population of urbanareas.

 

***Commercial Banks, Sofoles and Sofomes***

 

Commercial banks generallytarget the middle-income and residential markets while sofoles generally targetthe affordable entry-level housing market and a portion of the middle-incomehousing market using SHF financing, and the balance of the middle-incomehousing market as well as the residential housing market using other sources offunding. Sofoles and sofomes provide mortgage loans to borrowers using fundsfrom securities offerings on the Mexican stock market, loans from Mexican andforeign lenders, their own portfolios, and public agencies such as SHF. Theyare not allowed to accept deposits from the public.

 

Although commercial banks,sofoles and sofomes provide mortgage financing directly to homebuyers, thefinancing is commonly coordinated through the home builder. In order to obtainfunding for construction, a home builder must submit proposals, includingevidence of title to the land to be developed, architectural plans, necessarylicenses and permits, and market studies demonstrating demand for the proposedhousing. On approval, lenders provide construction financing and disburse fundsat each stage of the housing development.

 

Commercial bank, sofol andsofom mortgage loans generally mature in 10 to 30 years, and payments aresometimes adjusted for increases in the monthly minimum wage and rates ofinflation.

 

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Commercial banks, sofolesand sofomes provided approximately 9.7% of all home mortgage financing inMexico during the year ended December 31, 2009.

 

***Other Public Housing Agencies***

 

Other public housingagencies such as FONHAPO, CONAVI and OREVIS (*OrganismosEstatales de Vivienda*), operate at the federal and local levels andtarget mainly non-salaried workers earning less than 25 times the minimumannual wage, often through direct subsidies. These agencies lend directly toorganizations such as state and municipal housing authorities, housingcooperatives, and credit unions representing low-income beneficiaries, as wellas to individual borrowers. Financing is made available to both the self-builtand developer-built markets. The total amount of available funds depends on theMexican government budget.

 

Other public housing agenciesprovided approximately 50.5% of all mortgage financing in Mexico during theyear ended December 31, 2009.

 

**Competition**

 

The Mexican home developmentand construction industry is highly fragmented and includes a large number ofregional participants and a few companies with a more national market presence,including publicly traded companies like Corporación GEO, S.A.B. de C.V.,Consorcio ARA, S.A.B. de C.V, SARE, S.A.B. de C.V. and URBI DesarrollosUrbanos, S.A.B. de C.V.

 

All things considered, weestimate that approximately 1,159 different companies operate new homedevelopments in Mexico. The following table sets forth the approximateoperating information of the largest home builders in Mexico with which wecompete based on public information and our estimates:

 
| **Competitor** | ** ** | **2009 Home Sales** | ** ** | **2009 Sales********(millions of Ps.)** | ** ** | **Location in Mexico**                    | ** ** |
|----------------|------------|---------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|
| GEO            |       | 56,537              |       | 19,211                                  |       | National                                  |       |
| URBI           |       | 42,100              |       | 13,046                                  |       | North, Mexico City and  Guadalajara areas |       |
| ARA            |       | 17,467              |       | 7,113                                   |       | National                                  |       |
| SARE           |       | 6,021               |       | 2,766                                   |       | Mexico City region                        |       |

 

Source: Companies’ 2009fourth quarter financial releases.

 

We believe that we arewell-positioned to capture future growth opportunities in the affordableentry-level and middle-income housing segments because of our principalbusiness strengths and strategies, as described above.

 

**Seasonality**

 

The Mexican affordableentry-level housing market experiences significant seasonality during the year,principally due to the operational and lending cycles of INFONAVIT andFOVISSSTE. The programs, budgets, and changes in the authorized policies ofthese mortgage lenders are approved during the first quarter of the year.Payment by these lenders for home deliveries is slow at the beginning of theyear and increases gradually through the second and third quarters with a rapidacceleration in the fourth quarter. We build and deliver affordable entry-levelhomes based on the seasonality of this cycle because we do not beginconstruction of these homes until a mortgage provider commits mortgagefinancing to a qualified homebuyer in a particular development. Accordingly, wealso tend to recognize significantly higher levels of revenue in the third andfourth quarters and our debt levels tend to be highest in the first and secondquarters. We budget the majority of our purchases for the second half of theyear to coincide with peak cash flows. We anticipate that our quarterly resultsof operations and our level of indebtedness will continue to experiencevariability from quarter to quarter in the future. Mortgage commitments fromcommercial banks, sofoles and sofomes for middle-income housing are generallynot subject to significant seasonality. We do not expect significant changes inthe overall seasonality of our results.

 

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**Marketing**

 

We develop customerawareness through our marketing and promotion efforts and referrals fromsatisfied customers. Through surveys we conduct through our marketingdepartment and with sales agents, we gather demographic and market informationto help us gauge the feasibility of new developments. We use these surveys totarget groups of customers who share common characteristics or have commonneeds and offer packages of services, including housing models and financingsources, tailored to these groups.

 

We conduct advertising andpromotional campaigns principally through print media, including billboards,fliers, and brochures designed specifically for the target market, as well aslocal radio and television. Moreover, we complement these campaigns withadditional advertising efforts, including booths at shopping centers and otherhigh traffic areas, to promote open houses and other events. In some locations,we work with local employers and other groups to offer our homes to theiremployees or members and rely on positive word-of-mouth from satisfiedcustomers for a large percentage of our sales. We also employ specially-trainedsalespeople to market our middle-income homes.

 

**Sales**

 

In general, we make saleseither at sales offices or model homes. Using data we gather through ourmarketing efforts, we open sales offices in areas where we identify demand. Asof December 31, 2009, we operated 127 sales offices, one in each of thedevelopments we have established. Similarly, once we have purchased land andplanned a development in regions we have identified as underserved, we buildand furnish model homes to display to prospective customers. We have sales officesin each of our branches where trained corporate sales representatives areavailable to provide customers with relevant information about our products,including financing, technical development characteristics, and informationabout our competitors and their products. We provide the same informationthrough trained corporate sales representatives at model homes. During 2005, wechanged our method of compensating our sales agents to an exclusivelyperformance-based commission method, typically 1.8% of the total home price.

 

We provide our customerswith assistance through our sales departments from the moment they contact us,during the process of obtaining financing, and through the steps ofestablishing title to their new home. We have specialized sales areas in eachof our offices that advise customers on financing options, collecting necessarydocumentation, and applying for a loan. We also help to design down paymentplans tailored to each customer’s economic situation. Once houses are sold anddelivered, our specialized teams are available to respond to technicalquestions or problems during the two-year warranty period following thedelivery.

 

**CustomerFinancing**

 

We assist qualifiedhomebuyers in obtaining mortgage financing by participating in all the stagesof applying for and securing mortgage loans from housing funds, commercialbanks Sofomes and Sofoles.

 

For sales of affordableentry-level homes, the process of obtaining customer financing generally occursas follows:

 

·      a potentialhomebuyer enters into an agreement by signing a purchase application andfurnishes the necessary documentation to us;

 

·      we review the documentationto determine whether all the requirements of the relevant mortgage providerhave been met;

 

·      we create an electronic creditfile for each homebuyer and submit it to the relevant mortgage provider forapproval;

 

·      we supervise and administereach client file via our database through all the phases of its processing andarrange for signing the required documentation once approval has been obtained;

 

·      the homebuyer makes anyrequired down payment;

 

·      once the home has beencompleted, the homebuyer signs the deed of transfer of title and the mortgageagreement; and

 

·      we deliver the home to thehomebuyer and register the title.

 

For sales of middle-incomehomes, the process of obtaining customer financing occurs as above, except thatwe collect a down payment of between 10% to 25% of a home’s total sale priceimmediately following the homebuyer’s execution of the purchase application,and the homebuyer signs the deed of transfer of title and the mortgageagreement when the home is at least 95% complete.

 

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In all cases, the proceduresand requirements for obtaining mortgage financing are determined by themortgage provider.

 

We have not experienced anddo not expect to experience losses resulting from rejections by homebuyers oftheir purchase applications because we generally have been able to locate otherbuyers immediately in these cases. However, we cannot guarantee that we will be able to continue to findreplacement buyers in the future.

 

The purchase price of thehomes we sell is denominated in pesos and is subject to an upward adjustmentfor the effects of inflation, except for the purchase price of homes in ourtourism division which is denominated in US dollars. In cases where the priceof a home is subject to adjustment and increases due to inflation, anydifference is payable by the homebuyer.

 

**Design**

 

Most of the designs that weuse in our construction are developed internally. Our architects and engineersare trained to design structures that maximize efficiency and minimizeproduction costs. Our standardized modular designs, which focus on quality andsize of construction, allow us to build our homes quickly and efficiently. Byallowing our customers to upgrade finishing details on a custom basis afterhomes are delivered, we experience savings that allow us to build larger homesthan our competitors.

 

We use advancedcomputer-assisted design systems and combine market research data in order toplan potential developments. We believe that our comprehensive design andplanning systems, which are intended to reduce costs, maintain competitiveprices, and increase sales, constitute a significant competitive advantage inthe affordable entry-level housing market. In order to further enhance theresidential nature of our communities, we often design our developments asgated communities, install infrastructure for security surveillance, andarrange street layouts to foster road safety. We continue to invest in thedevelopment of design and planning construction systems to further reduce costsand continue to meet clients’ needs.

 

**Construction**

 

We manage the constructionof each development directly, coordinate the activities of our laborers andsuppliers, oversee quality and cost controls, and ensure compliance with zoningand building codes. We have developed efficient, durable, and low-costconstruction techniques, based on standardized tasks, which we are able toreplicate at all of our developments. We pay each laborer according to thenumber of tasks completed. We generally subcontract preliminary site work andinfrastructure development such as roads, sewage and utilities. Currently, wealso subcontract the construction of a limited number of multi-unitmiddle-income apartment buildings in the Mexico City Metropolitan Area.

 

Our designs are based onmodular forms with defined parameters at each stage of construction, which areclosely controlled by our central information technology systems. Our methodsresult in low construction costs and high quality products. We use substantiallysimilar materials to build our middle-income homes, with higher qualitycomponents for certain finishing details and fixtures.

 

During 2007, the Companyacquired cutting-edge construction technology based on aluminum molds; this newtechnology will improve the efficiency of the construction process. Among theadvantages are the shorter construction time; better quality and reducedreprocessing; re-use of the same mold for several prototypes of homes, with anestimated life of 2,000 usages per mold; versatility, because the molds permitconstruction ranging from simple floors to apartment buildings using the samesystem; labor savings; compatibility among international suppliers;eco-friendliness because, unlike traditional construction methods, mold constructiondoes not utilize timber; and durability, due to the use of concrete. As ofDecember 31, 2009 we used this technology in the construction of 30,133homes.

 

**Materialsand Suppliers**

 

We maintain strict controlover our building materials through a sophisticated electronic barcodeidentification system that tracks deliveries and monitors all uses of supplies.In general, we reduce costs by negotiating supply arrangements at the corporatelevel for the basic materials used in the construction of our homes, includingconcrete, concrete block, steel, windows, doors, roof tiles, and plumbingfixtures. We take advantage of economies of scale in entering into agreementsfor materials and services in every situation and seek to establish excellentworking relationships with our suppliers. In order to better manage our workingcapital, we also arrange lines of credit for many of our suppliers through afactoring program sponsored by Nacional Financiera, S.N.C., or NAFINSA, aMexican government-owned development bank, as well as certain additionalfinancial institutions. We guarantee a portion of the financing provided tosome of our suppliers for materials we buy from them during construction andrepay these lenders 

 

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directly with funds receivedwhen homes are delivered, which allows us to ensure suppliers are paid on timewhile minimizing our need to secure construction financing.

 

Ourmain suppliers include Cemex, S.A. de C.V., Lámina y Placa Comercial, S.A. deC.V., Aceros Turia, S.A. de C.V., Aceros de Toluca, S.A. de C.V.,Electroferretera Orvi, S.A. de C.V., Distribuidora Jama, S.A. de C.V., KSTubería, S.A. de C.V., Prefabricados y Sistemas, S.A. de C.V., IndustrialBloquera Mexicana, S.A. de C.V., Sanitarios Azulejos y Recubrimientos, S.A. deC.V., Mexicana de Laminación, S.A. de C.V., Coacero, S.A. de C.V., Aceros elArbol, S.A. de C.V., Grupo Forestal el Nayar, S.A. de C.V., Materiales paraConstrucción los Grandes, S.A. de C.V., Distribuidora de Acero Comercial, S.A.de C.V., Armasel, S.A. de C.V., Distribuidora Tamex, S.A. de C.V., Masonite deMéxico, S.A. de C.V., Termoplásticos del Centro, S.A. de C.V. and LogísticaDistribución y Servicios, S.A. de C.V.

 

Substantially all of thematerials that we use are manufactured in Mexico and are delivered to our sitesfrom the supplier’s local facilities on a time-efficient basis designed to keeplow levels of inventory on hand. Our principal materials and supplies arereadily available from multiple sources and we have not experienced anyshortages or supply interruptions.

 

**Labor**

 

As of December 31, 2009we had a total of approximately 12,295 employees, of whom  11,854 were employed in Mexico, 19 wereemployed in India and 422 in Brazil. Our total employees for the years ended2008 and 2007 were 17,280 and 15,127, respectively. For the year ended December 31,2008, we had 29 employees in India. The Company did not have any employeesoutside Mexico for the year ended December 31, 2007. Approximately 42% ofour employees as of December 31, 2009 were administrative and managerialpersonnel.

 

We hire local labor forcesfor specific housing developments in each region that we operate in, as well asexperienced in-house personnel for supervisory and highly skilled work. We havean efficient information technology system that controls payroll costs. Oursystems, using bar-coded identification cards, track the number of tasks completedby each employee according to the parameters of our modular constructiondesigns, assign salaries according to tasks and homes completed, and awardincentives for each stage of the development based on team performance. We alsostreamline governmental and social security costs for our workforce using astrict attendance control system that captures information fed via our systemthrough workers’ identification cards.

 

We have implemented programsthroughout Homex to assist our employees in obtaining elementary andmiddle-school equivalency degrees. We believe that these programs enhance ourability to attract and retain high quality employees. In 2004, 2005, 2007 and2008 we were named as one of the top 100 “Great Places to Work” in Mexico bythe Great Place to Work Institute, which is based in the United States.

 

As of December 31,2009, all of our construction employees were members of a national labor unionof construction workers. The economic terms of our collective bargainingagreements are negotiated on an annual basis. All other terms and conditions ofthese agreements are negotiated every other year. We believe that we have anexcellent working relationship with our workforce. We have not experienced alabor strike or any significant labor-related delay to date.

 

**CustomerServices and Warranties**

 

The Company holds insurancethat covers defects, hidden or visible, during construction and which alsocovers the warranty period provided by the Company to homebuyers. Asmentioned in Note 25 to the Company’s consolidated financial statements, weprovide a two-year warranty to all of our customers. This warranty couldapply to damages derived either from our operations or from defects inmaterials supplied by third parties (such as electrical installations, plumbing,gas, waterproofing, etc.) or other circumstances outside our control.

 

For manufacturing defects,we do not recognize a warranty accrual in our consolidated financial statementssince we obtain a security bond from our contractors that covers the claimsrelated to the quality of their work. We withhold a guarantee deposit fromthem, which is reimbursed to our contractors once the warranty formanufacturing defects period expires. Generally, the warranty period lastsfor one year after the contractors complete their work and covers any visibleor hidden defect. We believe that at December 31, 2009 we had nounrecorded losses with respect to these warranties.

 

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**CommunityServices**

 

We seek to foster brandloyalty after construction is complete, by strengthening community relations inthe developments we build. As part of agreements with potential customers andgovernmental authorities, we donate land and build community infrastructuresuch as schools, day-care centers, churches, and green areas, oftenamounting to 10% to 15% of the total land area of the developments weconstruct. For a period of 18 months, we also provide for community developmentspecialists to assist in promoting community relations in certain developmentsby organizing neighborhood events such as competitions for beautiful homes andgardens.

 

**RiskManagement**

 

The Company is exposed bothto general entrepreneurial risks and to industry-specific risks. Key areas ofexposure are capacity and utilization risks, strategy-related risks, politicalrisks, operational risks, procurement risks, wage policy risks, IT risksand financial and treasury management risks. The Company’s risk managementstrategy permits the exploitation of business opportunities that presentthemselves as long as a risk-return ratio in line with market conditions can berealized and the associated risks are an appropriate and sustainable componentvalue creation.

 

Sensible management ofentrepreneurial opportunities and business risks is an integral part of theCompany’s corporate management and decision-making. Consequently, the Company’ssystem for the timely detection and management of risk consists of a largenumber of components that are systematically embedded in the entireorganization and operational structure of the Company. There is no autonomousorganizational structure; instead, risk management is regarded as a primaryresponsibility of the managers of all business entities and of the process andproject managers in the Company. One of their management responsibilities is toensure that the staff is also integrated into the risk management system.

 

The Risk ManagementCommittee ensures, on behalf of the board of directors, that risks areidentified and assessed continuously across the Company’s many functions andprocesses. The Committee reports to the board of directors and is responsiblefor refining and verifying the effectiveness of the Company’s risk managementsystem. The Committee develops the Company’s risk policy and evaluates theCompany’s compliance with this policy. In addition, the Committee disseminatesthe Company’s risk policy, determines the documentation required to comply withthe policy and initiates any reviews of specific aspects of the risk managementsystem that may be necessary by the internal audit department.

 

All major potential risks tothe Company’s profitability or continued existence are documented by a riskmap. This risk map is regularly updated and extended, where appropriate.Potential interdependencies between risks are duly noted. This measure isdesigned to ensure that the timely detection, limitation and elimination ofthese risk systems are regularly reviewed and reinforced.

 

Over and above appropriateinsurance solutions, contingency plans tailored to each individual risksituation are in place for the purpose of combating and controlling risks. Ananalysis of risks, together with the possibilities of limiting and overcomingthem, also forms an integral part of the Company’s strategy development processand is incorporated into the Company’s operational planning.

 

**Regulation**

 

***General***

 

Our operations are subjectto Mexican federal, state and local regulation as a corporation doing businessin Mexico. Some of the most relevant statutes, regulations and agencies thatgovern our operations as a housing development company include the following:

 

·       the Mexican General HumanSettlements Law (*Ley General deAsentamientos Humanos*), which regulates urban development, planningand zoning and delegates to the Mexico City and state governments the authorityto promulgate urban development laws and regulations within their jurisdiction,including the Urban Development*Law*(*Ley de Desarrollo Urbano*) ofeach state where we operate, which regulates state urban development.

 

·       the Mexican Federal HousingLaw (*Ley Federal de Vivienda*),which coordinates the activities of states, municipalities and the privatesector within the context of the housing industry. As in effect, the FederalHousing Law seeks to encourage and promote the construction of affordableentry-level housing.

 

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·       local BuildingRegulations (*Reglamentos deConstrucción*) and urban development plans promulgated by the states,Mexico City, and local municipalities, which control building construction,establish the required licenses and permits, and define local zoning andland-use requirements.

 

·       the Mexican INFONAVIT Law (*Ley del Instituto del Fondo Nacional de la Viviendapara los Trabajadores*), which requires that financing provided byINFONAVIT be granted only to homebuyers of registered developers that participatein public INFONAVIT bidding processes.

 

·       the Federal Mortgage SocietyOrganizational Law (*Ley Orgánica de laSociedad Hipotecaria Federal*), which encourages the development ofthe primary and secondary home mortgage markets by authorizing SHF to granthome mortgage loans pursuant to the Federal Mortgage Society General FinancingConditions (*Condiciones Generales deFinanciamiento de Sociedad Hipotecaria Federal*), which regulate thegeneral terms and conditions on which these loans may be granted.

 

·       the Mexican Federal ConsumerProtection Law (*Ley Federal de Protección alConsumidor*), which promotes and protects consumer rights and seeksto establish equality and legal certainty in relationships between consumersand commercial suppliers.

 

***Environmental***

 

Our operations are subjectto the Mexican General Environmental Protection Law (*Ley General del Equilibrio Ecológico y la Protección al Ambiente*),the Mexican General Waste Prevention and Management Law (*Ley General para la Prevención y Gestión Integral delos Residuos*), and the related regulations. The Mexican Ministry ofthe Environment and Natural Resources (*Secretaríadel Medio Ambiente y Recursos Naturales*) and the Mexican FederalEnvironmental Protection Agency (*ProcuraduríaFederal de Protección al Ambiente*) are the Mexican federalgovernment authorities responsible for enforcing environmental regulations inMexico, including environmental impact studies, which are required forobtaining land-use permits, investigations and audits, as well as to provideguidelines and procedures regarding the generation, handling, disposal andtreatment of hazardous and non-hazardous waste.

 

We are committed toconducting our business operations in a manner that minimizes theirenvironmental impact. Our business processes include procedures that areintended to ensure compliance with the Mexican General Environmental ProtectionLaw, the Mexican General Waste Prevention and Management Law, and the relatedregulations. In accordance with these laws, we build our homes with aluminummold metal instead of wooden beams and treat waste water. We plant trees on theland of homes we sell and provide seedlings on land that we donate to ourcommunities. Our internal teams conduct environmental studies for each projectand produce environmental reports that are intended to identify environmentalissues and assist in project planning in order to minimize adverseenvironmental effects, such as limiting the felling of trees during the processof urbanizing rural land for use in our developments. Our costs include thecost of complying with applicable environmental regulations. To date, the costof complying and monitoring compliance with environmental regulationsapplicable to us has been immaterial.

 

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**SignificantSubsidiaries**

 

We are a holding company andconduct our operations through subsidiaries. The table below sets forth ourprincipal subsidiaries as of December 31, 2009.

 
| ** **                                                                  | ** ** | **Jurisdiction  of ** | ** ** | **Ownership******** percentage** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|------------|
| **Name of Company**                                               | ** ** | **Incorporation**          | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Products/Services** |
| Proyectos Inmobiliarios de Culiacán, S.A. de  C.V. (“PICSA”) |       | Mexico                     |       | 100                                   | %          | 100        | % | Promotion,  design, construction and sale of entry-level, middle-income and upper-income  housing |
| Nacional Financiera, S.N.C. Fid. del Fideicomiso  AAA Homex 80284           |       | Mexico                     |       | 100                                   | %          | 100        | % | Financial  services |
| Administradora Picsa, S.A. de C.V.                                          |       | Mexico                     |       | 100                                   | %          | 100        | % | Administrative  services and promotion related to the construction industry |
| Altos Mandos de Negocios, S.A. de C.V.                                      |       | Mexico                     |       | 100                                   | %          | 100        | % | Administrative  services |
| Aerohomex, S.A. de C.V.                                                     |       | Mexico                     |       | 100                                   | %          | 100        | % | Air  transportation and lease services |
| Desarrolladora de Casas del Noroeste, S.A. de  C.V. (DECANO)                |       | Mexico                     |       | 100                                   | %          | 100        | % | Construction  and development of housing complexes |
| Homex Atizapán, S.A. de C.V.                                           |       | Mexico                     |       | 67                                    | %          | 67         | % | Promotion,  design, construction and sale of entry-level and middle-income housing |
| Casas Beta del Centro, S. de R.L. de C.V. (1)                               |       | Mexico                     |       | 100                                   | %          | 100        | % | Promotion,  design, construction and sale of entry-level and middle-income housing |
| Casas Beta del Norte, S. de R.L. de C.V.                                    |       | Mexico                     |       | 100                                   | %          | 100        | % | Promotion,  design, construction and sale of entry-level housing |
| Casas Beta del Noroeste, S. de R.L. de C.V.                                 |       | Mexico                     |       | 100                                   | %          | 100        | % | Promotion,  design, construction and sale of entry-level housing |
| Hogares del Noroeste, S.A. de C.V. (2)                                      |       | Mexico                     |       | 50                                    | %          | 50         | % | Promotion,  design, construction and sale of entry-level and middle-income housing |
| Opción Homex, S.A. de C.V. (4)                                         |       | Mexico                     |       | 100                                   | %          | 100        | % | Sale,  lease and acquisition of properties |
| Homex Amuéblate, S.A. de C.V. (4)                                      |       | Mexico                     |       | 100                                   | %          | 100        | % | Sale  of housing-related products |
| Homex Global, S.A. de C.V. (3)                                              |       | Mexico                     |       | 100                                   | %          | 100        | % | Holding  company for foreign investments |
| Sofhomex,  S.A. de C.V. S.F.O.M. E.R.                                  |       | Mexico                     |       | 100                                   | %          | 100        | % | Financial  services |
| Nacional Financiera, S.N.C. Fid. del Fideicomiso  Homex 80584               |       | Mexico                     |       | 100                                   | %          | 100        | % | Employee  stock option plan administration |
| HXMTD, S.A. de C.V. (5)                                                     |       | Mexico                     |       | 100                                   | %          | 100        | % | Promotion,  design, construction and sale of upper-income tourism housing |
| Homex Central Marcaria, S.A. de C.V. (5)                                    |       | Mexico                     |       | 100                                   | %          | 100        | % | Administration  of industrial and intellectual property |

 

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(1)       Casas Beta del Centro, S. deR.L. de C.V. (CBC) owns 100% of the outstanding stock of Super AbastosCentrales y Comerciales, S.A. de C.V. and 50% of the outstanding stock ofPromotora Residencial Huehuetoca, S.A. de C.V. (Huehuetoca), which are engagedin the promotion, design, construction and sale of entry-level housing.Huehuetoca is fully consolidated in accordance with MFRS B-8, Consolidated orCombined Financial Statements, since the Company has control over thissubsidiary. Through October 20, 2009, CBC owned 100% of the outstandingstock of Comercializadora Cántaros, S.A. de C.V. That company was sold to athird party on that date.

 

(2)       Hogares del Noroeste, S. A.de C.V. is a 50% owned and controlled subsidiary of Desarrolladora Homex,S.A.B. de C.V., which is engaged in the promotion, design, construction andsale of entry-level and middle-income housing. This entity is fully 

 

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consolidated in accordancewith the guidance included in Bulletin B-8 *Consolidated and CombinedFinancial Statements and Valuation of Permanent Investments*, sincethe Company has control of this subsidiary.

 

(3)       Homex Global, S.A. de C.V,(Homex Global) owns the outstanding stock of the following companies:

 

(a)       Effective March 2008,Homex Global owns 100% of the outstanding stock of Homex India Private Limited,a subsidiary located in India and engaged in the construction and developmentof entry-level and middle-income housing in India. This company had nosignificant operations during 2008 and 2009.

 

(b)       Effective September 2007,Homex Global owned 15% of the outstanding stock of Orascom Housing Communities “S.A.E.”,an associated company located in Cairo, Egypt that performs the constructionand development of entry-level and middle-income housing in Egypt. Pursuant theapplication of MFRS C-7, Investments in Associates and Other PermanentInvestments, effective January 1, 2009, this company was no longerconsidered an associated but other permanent investment. On December 31,2009 the Company sold its total investment in this company to a third party.

 

(c)       Effective February 2008,Homex Global owns 100% of the outstanding stock of Desarrolladora deSudamérica, S.A. de C.V., a Mexican company that had no operations during 2008and 2009.

 

(d)       Effective November 2008,Homex Global owns 100% of the outstanding common stock of Homex BrasilIncorporacoes a Construcoes Limitada (Homex Brasil), through its subsidiariesÉxito Construcoes e Participacoes Limitada and HMX Empreendimentos ImobiliariosLimitada. Through eight subsidiaries, Homex Brasil performs construction anddevelopment of entry-level housing in Sao Paulo, Brazil. During 2009, HomexBrasil started operations in Brazil with a 1,300-unit affordable entry-leveldevelopment in San Jose dos Campos, northeast of Sao Paulo. As of December 31,2009 the Company had recognized revenues of Ps.62,178 from its Brazilianoperations.

 

(4)      These companies wereincorporated in 2007; however, they had no significant operations during 2007,2008 and 2009.

 

(5)      These companies wereincorporated in 2008; however, they had no significant operations during 2008and 2009.

 

**ITEM 4A.      Unresolved Staff Comments.**

 

Not applicable.

 

**ITEM 5.       Operatingand Financial Review and Prospects.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionshould be read in conjunction with our audited consolidated financialstatements and their accompanying notes included elsewhere herein. Ourconsolidated financial statements and other financial information included inthis annual report, unless otherwise specified, are stated in pesos for theyears ended December 31, 2009 and December 31, 2008 and in constant pesos as of December 31,2007 for the year ended December 31, 2007. Our consolidatedfinancial statements have been prepared in accordance with Mexican FinancialReporting Standards (MFRS), which differ in certain respects from US GAAP as describedin Notes 28 and 29 to our audited consolidated financial statements.

 

This annual report containsforward-looking statements that reflect our plans, estimates and beliefs. Ouractual results could differ materially from those discussed in the forward-lookingstatements. Factors that could cause or contribute to these differencesinclude, but are not limited to, those discussed below and elsewhere in thisannual report, particularly in “Forward-Looking Statements” and “Item 3. KeyInformation.”

 

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***Critical Accounting Estimates***

 

Our consolidated financialstatements have been prepared in accordance with MFRS, which require that wemake certain estimates and use certain assumptions that affect the amountsreported in our consolidated financial statements and the accompanying notes.Although these estimates are based on our best knowledge of current events,actual results may differ. Our critical accounting estimates are listed below:

 

***Goodwill and Intangible Assets***

 

We are required to apply thepurchase method of accounting for all business combinations, which requires therecognition of certain acquired intangible assets separate from goodwill.Goodwill and other intangibles determined to have an indefinite life are nolonger to be amortized but are to be tested for impairment at least annually.In our allocation of the purchase price of the acquisition of ControladoraCasas Beta, S.A. de C.V., we identified and allocated a value to intangibleassets totaling Ps.488 million (Ps.455.3 million at historic cost) related tothe Beta trademark and Ps.140.4 million (Ps.126.8 million at historic cost)related to the value of the backlog which represents the houses underconstruction as of the date of the Beta acquisition. As of December 31,2009, the net book value of the Beta trademark was Ps.45.5 million. The backloghas been completely amortized as of December 31, 2009 and 2008. Thevaluation of these intangible assets required us to use our judgment. We alsorecorded goodwill related to the acquisition of Controladora Casas Beta, S.A.de C.V. of Ps.731.8 million. The annual impairment testing requirements requireus to use our judgment and could require us to write down the carrying value ofour goodwill and other intangible assets in future periods.

 

***Revenue and Cost Recognition***

 

Pursuant to MFRS, we haveused the percentage-of-completion method of accounting for revenues and costs,which differs in certain significant respects from the ASC 360.30 (formerly FAS66 — *Accounting for the Sales of Real Estate)*methodused for the substantial majority of our revenues under accounting principlesgenerally accepted in the United States, referred to as US GAAP. UnderMFRS, applying the percentage-of-completion method, we measure the progresstowards completion in terms of actual costs incurred versus estimatedexpenditures for each stage of a development. Also, under the percentage-of-completionmethod of accounting, revenues for work completed are recognized prior toreceipt of actual cash proceeds. We receive consideration from the sale ofa home at closing when title to the home is transferred to thehomebuyer. We include revenues in excess of billings as accountsreceivable on our balance sheet, and any cash proceeds we receive as advancepayments prior to completion of the actual work related to the payments,including customer down payments, are included in current liabilities asadvances from customers. See Note 3 to our consolidated financialstatements.

 

The percentage-of-completionmethod of accounting requires us to determine on a monthly basis thepercentage-of-completion of each stage of a development based on actual expendituresincurred to date versus estimated expenditures. To the extent that theactual costs of a development stage differ from the estimated costs incurred,our recognized revenues could change.  In addition, to the extent thatestimated revenues derived from home sales per development stage differ fromrevenues derived from home deliveries per development stage, our recognizedrevenues could change.

 

We apply thepercentage-of-completion method to recognize revenues from our housingdevelopment subject to the following conditions:

 

·       the homebuyer has submittedall required documents in order to obtain financing from the mortgage lender;

 

·       the Company has establishedthat the homebuyer will obtain the required financing from the mortgage lender;

 

·       the homebuyer has signed apurchase application for the processing and granting of a loan to buy aproperty to be used as housing; and

 

·       the homebuyer has made adown payment, where down payments are required.

 

Pursuantto US GAAP, we apply ASC 360.20 for the substantial majority of our revenues.The variations in the Company’s gross profit, gross profit margin andultimately operating profits arise due to the stated differences related tocost and revenue recognition between MFRS and US GAAP. In 2009, revenues underMFRS were Ps.19,425 million while revenues under US GAAP were Ps.17,616million. In 2008, revenues under MFRS were Ps.18,850 million whilerevenues under US GAAP were Ps.14,885 million. Revenues under US GAAP’s ASC360.20 are recognized when all the following events occur: a) a sale isconsummated; b) a

 

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significant initial downpayment is received (when applicable); and c) the earnings process is completeand the collection of any remaining receivables is reasonably assured. However,under MFRS, the Company uses the percentage-of-completion method of accountingto account for housing project revenues and costs related to housingconstruction. Under MFRS, progress towards completion is measured by comparingthe actual costs incurred to the estimated total cost of a project. For afurther discussion of revenue recognition policies under US GAAP, refer to Notes27 and 28 to the Company’s consolidated financial statements.

 

Total units closed andrecognized as US GAAP revenue in 2009 were 46,631 units (41,679 in 2008)compared to 57,979 units sold under MFRS in 2009 (57,498 in 2008). The lowervolume in units closed in 2009 compared to units sold is primarily attributableto both our continued growth and therefore higher proportion ofconstruction-in-process, and our increased participation during 2009 in theconstruction of nearly-completed vertical building projects which take longerto build, sell and collect.

 

Total units closed of 46,631in 2009 represents a 12% increase compared to total units closed in 2008 of41,679. The increase is attributable to the continued growth in the Company’sbusiness, as measured by number of units closed.  In 2008, units closedincreased by 5% over 2007.  The proportion of units sold and units closedare generally consistent when evaluated by operating segment during both 2009and 2008. As of December 31, 2009, 11,348 units remain at various stagesof completion under MFRS, and thus have yet to be recognized into revenue underUS GAAP.

 

***Income Taxes***

 

We recognize deferred tax assets and liabilities basedon the differences between the financial statements, carrying amounts and the taxbases of assets and liabilities. We regularly review our deferred tax assetsfor recoverability and, if necessary, establish a valuation allowance based onhistorical taxable income, projected future taxable income and the expectedtiming of the reversals of existing temporary differences. If these estimatesand related assumptions change in the future, we may be required to record avaluation allowance against deferred tax assets resulting in additional incometax expense. Included as a component of our net deferred tax liabilities arenet operating loss carry-forward assets (“NOL carry-forwards”) of Ps. 2,071,753as of December 31, 2009.   We believethat it is more likely than not that such NOL carry-forwards’s will beultimately recovered, primarily through the reversal of deferred taxliabilities. Accordingly, no valuation allowance has been recognized against theseNOL carry-forwards in our consolidated financial statements.  See Notes 3 and 23 to our consolidatedfinancial statements.

 

OnDecember 7, 2009, a tax reform bill was approved and published which reforms,amends and annuls certain tax laws and is applicable effective January 1, 2010.This new tax law implements changes to the income tax rate (*Impuesto Sobre la Renta,* or ISR) effective as follows:  (a) from 2010 to 2012, 30%; (b) for 2013,29%; and (c) for 2014 and future years, 28%. The impact of this new tax law hasbeen reflected in the calculation of our deferred tax assets and liabilities asof December 31, 2009.

 

Weestablish reserves to remove some or all of the tax benefit of any of our taxpositions at the time we determine that it becomes evident that the taxposition is “more likely than not” to not be sustainable upon challenge by thetax authorities.  For purposes ofevaluating whether or not a tax position is uncertain, (1) we presume the taxposition will be examined by the relevant taxing authority that has fullknowledge of all relevant information, (2) the technical merits of a taxposition are derived from authorities such as legislation and statutes,legislative intent, regulations, rulings and case law and their applicabilityto the facts and circumstances of the tax position, and (3) each tax positionis evaluated without consideration of the possibility of offset or aggregationwith other tax positions taken.

 

A number of years may elapse before a particularuncertain tax position is audited and finally resolved or when a tax assessmentis raised. The number of years subject to tax assessments varies depending onthe tax jurisdiction and is generally five years for the countries in which theCompany principally operates. The tax benefit that has been previously reservedbecause of a failure to meet the “more likely than not” recognition thresholdwould be recognized in our income tax expense in the first period in which: (1) thetax position meets such threshold, (2) the tax position, amount, and/ortiming is ultimately settled through negotiation or litigation, or (3) thestatute of limitations for the relevant taxing authority to examine andchallenge the tax position has expired.

 

We have taken certainpositions in our annual tax returns which are classified as uncertain taxpositions for financial reporting purposes. Specifically, uncertain taxpositions currently outstanding relate to our interpretation of the MexicanIncome Tax Law (MITLA) related to the inclusion of certain debts in thecalculation of the inflation adjustment, and the deduction of land by realestate developers. As of December 31, 2008, amounts related to uncertaintax positions totaled Ps. 102,969. As of December 31, 2009, uncertain taxpositions resulted in Ps. 421,843 in deferred tax assets which have beenprovided for through a full valuation allowance, and an additional currentliability in the amount of Ps. 248,781 in our consolidated financialstatements.

 

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**OPERATING RESULTS**

 

The following table setsforth selected data for the periods indicated, stated in nominal pesos for theyears ended December 31, 2009 and 2008, and in constant pesos for the yearended December 31, 2007. The table also sets forth the data as apercentage of our total revenues:

 
| ** **                            | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **(in thousands of Mexican pesos (Ps.))** | ** ** |
| **MFRS:**                             |       |                                                |       |       |       |       |       |
| Revenues                              |       | Ps.                                                 | 19,425,182 |       | Ps.        | 18,850,496 |       | Ps. | 16,222,524 |   |
| Cost  of sales                        |       | 13,748,416                                          |       | 13,473,257 |       | 11,041,456 |       |
| Gross  profit                         |       | 5,676,766                                           |       | 5,377,239  |       | 5,181,068  |       |
| Selling  and administrative expenses  |       | 2,506,756                                           |       | 2,377,646  |       | 1,798,429  |       |
| Income  from operations               |       | 3,170,010                                           |       | 2,999,593  |       | 3,382,639  |       |
| Other  income (expenses), net         |       | 49,475                                              |       | (109,926   | )          | 209,223    |       |
| Net  comprehensive financing cost (1) |       | 206,566                                             |       | 558,485    |       | 278,904    |       |
| Income  tax expense                   |       | 1,182,992                                           |       | 712,175    |       | 951,280    |       |
| Net  income                           |       | Ps.                                                 | 1,829,927  |       | Ps.        | 1,619,007  |       | Ps. | 2,361,678 |   |

 
| ** **                           | ** ** | **(as a percentage of sales)** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|
| **MFRS:**                            |       |                                               |       |   |   |   |   |
| Revenues                             |       | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Cost  of sales                       |       | 70.8                                               | %          | 71.5 | % | 68.1 | % |
| Gross  profit                        |       | 29.2                                               | %          | 28.5 | % | 31.9 | % |
| Selling  and administrative expenses |       | 12.9                                               | %          | 12.6 | % | 11.1 | % |
| Income  from operations              |       | 16.3                                               | %          | 15.9 | % | 20.8 | % |
| Other  (expenses) income, net        |       | 0.3                                                | %          | (0.6 | )% | 1.2 | % |
| Net  comprehensive financing cost    |       | 1.1                                                | %          | 3.0 | % | 1.7 | % |
| Income  tax expense                  |       | 6.1                                                | %          | 3.7 | % | 5.8 | % |
| Net  income                          |       | 9.4                                                | %          | 8.6 | % | 14.6 | % |

 

----

(1)    Representsinterest income, interest expense, monetary position gains and losses (for2007), foreign exchange gains and losses and valuation effects of derivativeinstruments.

 

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***Results of Operations for the Year Ended December 31, 2009Compared to the Year Ended December 31, 2008 - MFRS***

 

***Revenues***

 

Total housing revenues in2009 increased 3.0% to Ps.19,425.2 million from Ps.18,850.4 million in 2008,driven both by increased sales volume and higher average prices in theaffordable entry-level segment. Affordable entry-level homes represented 77.4% of total revenues in 2009compared to 76.5% in 2008.  Middle-incomehomes represented 21.8% of total revenues in 2009 compared to 23.0% in2008.  In 2009, other revenues increasedto Ps.165.1 million, compared to Ps.100.0 million in 2008.  The increase is mainly due to constructionservice contracts we entered into with the Mexican federal government.

 

Units sold in 2009 increased0.84% to 57,979 homes, from 57,498 homes in 2008 primarily due to theCompany’s focus on affordable entry-level and low-cost products and theavailability of mortgage financing in this segment through INFONAVIT andothers.  Affordable entry-level salesvolume increased to 52,864 homes in 2009 or 91.2% of total sales volumecompared to 90.8% in 2008.  Middle-incomesales volume decreased 3.3% to 5,115 homes in 2009 compared to 5,289 homesin 2008, reflecting the Company’s strategy to reduce its exposure to themiddle-income segment in light of current economic conditions.

 

***Gross Profit***

 

Gross profit increased to 29.2% in 2009 from28.5% in 2008, due to the effects of MFRS D-6. Pursuant to the application of MFRS D-6, which was implemented in 2007,the Company is required to capitalize a portion of its CFC, which includesinterest expense, exchange gains and losses and monetary position gains andlosses and to apply capitalized CFC to cost of sales as the related inventoryis sold in future periods.

 

During the year ended December 31,2009, the Company’s capitalized CFC that was applied to cost of sales decreased31% to Ps.670.1 million compared to Ps.976.7 million during the same period in2008 primarily as a result of:

 

a) a 46% increase incapitalized interest expense to Ps.669.2 million during the year ended December 31,2009 from Ps.459.4 million as of December 31, 2008. The increase incapitalized interest expense that was applied to cost of sales was partiallydriven by the recognition of previous years’ capitalized interest expense oninventory pursuant to the application of MFRS D-6 and a 29% increase in theCompany’s total debt position in 2009; and

 

b) capitalized foreignexchange gain applied to cost of sales of Ps.2.3 million, compared to a loss ofPs.538.8 million during the same period in 2008.  The gain was a result of the appreciation ofthe Mexican peso relative to the U.S. dollar during 2009.

 

Costs of salesincreased by 2.0% for the year ended December 31, 2009 to Ps.13,748.4million from Ps.13,473.2 million for the same period in 2008, due primarily tohigher CFC capitalization applied to cost of sales during 2009 as explainedabove.  On a pro-forma basis(without considering the application of MFRS D-6 in 2008 and 2009) Homex’ grossmargin in 2009 was 32.7%, compared to 33.7% in 2008.  The decrease in gross margin was mainly drivenby a decline in the percentage of our total revenues generated from sales ofmiddle-income homes, from 23.0% in 2008 to 21.8% in 2009.

 

***Selling, General and AdministrativeExpenses***

 

Selling, general and administrativeexpenses increased by 5.4% to Ps.2,506.8 million in 2009 compared to Ps.2,377.6million in 2008.  As a percentage oftotal revenues, SG&A expenses increased 0.3% to 12.9% in 2009 compared to12.6% in 2008.  The increase in SG&Awas primarily a result of the addition of personnel in our tourism andinternational divisions, an expense which was not offset by additional revenuecontributions from those divisions.

 

***Income from Operations***

 

In2009, income from operations increased by 5.7% to Ps.3,170.0 million comparedto Ps.2,999.6 million in 2008. On a pro-forma basis (without considering theapplication of MFRS D-6), the Company’s operating margin in 2009 decreased 133bps to 19.8% compared to 21.1% in 2008. The lower margin was mainly a result ofaffordable entry-level housing generating a higher percentage of our revenue,as well as higher selling general and administrative expenses.

 

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***NetComprehensive Financing Cost***

 

Net comprehensive financingcost (comprised of interest income, interest expense, foreign exchange gainsand losses, valuation effects of derivative instruments and monetary positiongains and losses) decreased to Ps.206.5 million in 2009 compared to Ps.558.4million in 2008, substantially as a result of the following:

 

a)net interest expense increased to Ps.199.6 million in 2009 from Ps.80 millionin 2008, primarily due to an increase in the Company’stotal debt of 29 percent;

 

b)the Company had a foreign exchange gain of Ps.59.5 million in 2009 compared to a foreign exchange lossof Ps.164.8 million in 2008, which wascaused by the appreciation of the Mexican peso relative to the US dollar.

 

c)the net valuation effects of financial instruments decreased from Ps.313.9million in 2008 to Ps.66.4 million in 2009, partially due to the cancellationof a foreign currency derivative transaction in October 2008 and the factthat certain financial instruments entered into in 2009 qualified for “hedgeaccounting” treatment, while certain of the Company’s previous financialinstruments did not qualify for such accounting treatment.

 

***Foreign Exchange exposure and currency derivatives***

 

As of December 31, 2009,Homex’s US Dollar denominated debt was mainly limited to two US$250 millionbonds issued in 2005 and 2009 with single principal payments due at maturity in2015 and 2019, respectively.  Inconnection with its US$250 million bond maturing in 2015, the Company enteredinto an interest-only swap to hedge the foreign exchange risk in respect of theinterest payable on this debt at an average rate of Ps.13.89 per U.S. dollarthrough 2012.  In connection with itsUS$250 million bond maturing in 2019, the Company entered into a principal-onlyswap to hedge the foreign exchange risk associated with the principal amount ofthis debt at a rate of Ps.12.93 per U.S. dollar through 2019 and at an averageweighted cost of 3.87%.  In addition, theCompany entered into an interest-only swap to hedge the foreign exchange riskin respect of the interest payable on this debt at an average rate of Ps.11.67per U.S. dollar through 2012.

 

The net valuation effects offinancial instruments for the years ended December 31, 2009, 2008 and 2007,were Ps.66,451, Ps.313,962 and Ps.(147,977), respectively.

 

***Income Tax Expense***

 

Income tax expense increasedby 66.1% to Ps.1,182.9 million in 2009 compared to Ps.712.2 million in 2008.The increase was primarily a result of the application of IMFRS 18, whichspells out the effects of the 2010 tax reform. As a result of the income tax reform, the effective ISR rate increasedto 39.3 percent in 2009 compared to 31.0 percent in 2008.  As a result, the Company registered anadditional income tax charge in the consolidated statement of income of Ps.78.6million related to a change in the ISR rate applied to deferred tax assets andliabilities. For more information on the effects of IMFRS 18, see “Item 5.  Operating and Financial Review and Prospects—NewAccounting Pronouncements.”

 

***Net Income of controlling interest***

 

Net income of controllinginterest increased 13% to Ps.1,830 million in 2009 compared to Ps.1,619 millionin 2008, as a result of the factors described above.

 

***Results of Operations forthe Year Ended December 31, 2008 Compared to the Year EndedDecember 31, 2007 — MFRS***

 

***Revenues***

 

Total housing revenuesin 2008 increased 16.2% to Ps.18,850.4 million fromPs.16,222.5 million in 2007, primarily due to higher affordable-entrylevel sales volume and higher average prices in the middle-income segment,where average prices increased 4.6% to Ps.817,000 as of December 31,2008 from Ps.781,000 in the same period in the previous year.  Affordable entry-level homesrepresented 77.0% of total revenues in 2008 compared to 77.3%in 2007.  Middle-income homesrepresented 23.0% of total revenues in 2008 compared to 22.6% in 2007.  In 2008, other revenues (included in revenuesabove) decreased 34.9% to Ps.100 million, compared to

 

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Ps.153.6 million in2007, mainly due to increased internal use of our prefabricated constructionmaterials, ready-mix concrete and concrete blocks, consequently leading tolower sales of these products to third parties.

 

Units sold in 2008 increased11.3% to 57,498 homes, from 51,672 homes in 2007 primarily due to the Company’sfocus on affordable-entry level and low-cost products and the availability ofmortgage financing in this segment through INFONAVIT and FOVISSSTE.  Affordable entry-level sales volume increasedto 52,209 homes in 2008 or 90.8% of total sales volume compared to 90.4% in2007.  Middle-income sales volumeincreased 6.2% to 5,289 homes in 2008 compared to 4,982 homes in 2007 primarilydue to the availability of mortgages for this segment through co-financingproducts from INFONAVIT, FOVISSSTE and commercial banks.

 

***Gross Profit***

 

Gross profit decreased to28.5% in 2008 from 31.9% in 2007, due to the effects of MFRS D-6.  Pursuant to the application of MFRS D-6 in2007, the Company is required to capitalize its CFC, which include the interestexpense, exchange loss and monetary position (until December 31,2007).  In 2008, the Company’s foreignexchange loss increased 970% to Ps.714 million compared to a foreignexchange gain of Ps.82 million in 2007, which was caused by thedepreciation of the Mexican peso relative to the U.S. dollar.  Likewise, interest expense increased 28% toPs.765 million in 2008 compared to Ps.597 million in 2007.  The increase in our capitalization during2008 ultimately caused the Company’s CFC to increase 721% toPs.977 million compared to Ps.119 million in 2007.

 

Costs of sales increased by22.0% in 2008 to Ps.13,473.3 million from Ps.11,041.5 million in2007, due primarily to higher CFC capitalization in 2008 as explainedabove.  As a percentage of totalrevenues, gross profit decreased 3.4% to 28.5% in 2008 from 31.9% in 2007,primarily due to higher CFC capitalization in 2008.  In 2008, the Company’s gross margin measuredwithout considering the application of MFRS D-6 increased 1.0% to 33.7%compared to 32.7% in 2007.  The highermargin was mainly due to the increased implementation of aluminum molds in theCompany’s projects.

 

***Selling, General and AdministrativeExpenses***

 

SG&A expenses increasedby 32.3% to Ps.2,378 million in 2008 compared to Ps.1,798 million in2007.  As a percentage of total revenues,SG&A expenses increased 1.6% to 12.6% in 2008 compared to 11.0% in2007.  The increase in SG&A as apercentage of sales was primarily due to severance payments the Company made inconnection with a restructuring of our personnel.  Further, the Company expanded its marketingefforts, including a nation-wide brand recognition campaign, and the additionof a marketing consultant to apply a new sales technique designed to increasethe Company’s market share.

 

***Income from Operations***

 

In 2008, income fromoperations decreased by 11.3% to Ps.2,999.6 million compared toPs.3,382.6 million in 2007. Including the non-cash items, income from operations as a percentage ofrevenues was 15.9% in 2008 compared to 20.8% in 2007, as a result of theincrease in SG&A explained above.

 

***Net Comprehensive Financing Cost***

 

Net comprehensive financingcost (comprised of interest income, interest expense, foreign exchange gainsand losses, valuation effects of derivative instruments and monetary positiongains and losses for 2007) increased****toPs.558 million in 2008 compared to Ps.279 million in 2007.  The increase is primarily due to thedepreciation of the Mexican peso relative to the U.S. dollar, which resulted ina significant increase in the cost of servicing our foreign currency-denominateddebt.  In 2008, we also incurred anon-recurring loss of Ps.314 million in connection with a foreign-exchangederivative transaction.  Thisforeign-exchange derivative transaction has been terminated as ofDecember 31, 2008.  As a percentageof revenues, net CFC increased 1.3% to 3.0% in 2008 compared with 1.7% in 2007.

 

Net interest expensedecreased to Ps.80 million in 2008 from Ps.205 million in 2007.  The decrease was primarily due to a reductionin interest expense in connection with the capitalization of CFC previouslyexpensed on a current basis, as well as an increase of 12.2% in interest incometo Ps.157 million in 2008 compared to Ps.140 million in 2007.

 

Foreign exchange lossincreased 511% in 2008 to Ps.165 million compared to Ps.27 million in2007.  The increase is due to thedepreciation of the Mexican peso relative to the U.S. dollar, which resulted ina significant increase in the cost of servicing our foreigncurrency-denominated debt.

 

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***Foreign Exchange Exposure and CurrencyDerivatives***

 

As of December 31,2008, Homex’ U.S. dollar-denominated debt was mainly limited to aUS$250 million bond issued in 2005, with a single principal payment atmaturity in 2015.  The Company has aninterest-only swap that effectively minimizes short and mid-term exchange riskin interest payments.  As ofDecember 31, 2008 the fair value of this instrument was a favorable assetposition of Ps.66 million.  See “—Item11. Quantitative and Qualitative Disclosures about Market Risk.”

 

During 2008, the Company had a netliability in foreign currency originated by its operations, short and long-termliabilities. Due to such obligations, during 2008 the Company entered intohedging derivative financial instruments that were expected to mitigate therisks associated with the exchange loss in the acquisition of foreigncurrencies. However, due to the devaluation of the Mexican peso, the Companydecided to cancel these derivative instruments in October 2008. During2008, the Company’s statement of income reflects a loss of Ps.404.6 millionrelated to these instruments.

 

The net accumulated effectin the statement of income of the principal-only swap and the interest-onlyswap for the year ended December 31, 2008 was Ps.(90.6) million.

 

The net valuation effects offinancial instruments for the years ended December 31, 2008, 2007 and2006, were Ps.314 million, Ps.(148) million and Ps.102 million, respectively.

 

***Income Tax Expense***

 

Income tax expense decreasedby 25.1% to Ps.712.2 million in 2008 compared to Ps.951.3 million in2007, due principally to decreased income before taxes. The income taxeffective rate increased to 31% in 2008 compared to 29% in 2007.  The increase in the income tax effective ratebetween 2008 and 2007 is mainly a result of a recovery of VAT taxes during 2007for Ps.395 million that generated non-taxable income.

 

***Net Income of controlling interest***

 

Net income of controllinginterest decreased by 29.2% to Ps.1,580.9 million in 2008 fromPs.2,233.1 million in 2007 as a result of the factors described above.

 

***Results of Operation—Years ended December 31, 2008 and 2009 —US GAAP***

 

Asdisclosed in Note 28 to the Company’s consolidated financial statements, theprimary differences between the Company’s financial statements prepared underMFRS and US GAAP relate to revenue and cost recognition for constructionprojects, although certain smaller differences exist for other accounts.

 

In2009, revenues under MFRS were 19,425 million while revenues under US GAAP werePs.17,616 million.  In 2008, revenues under MFRS were Ps.18,850 millionwhile revenues under US GAAP were Ps.14,885 million.  Revenues under US GAAP’s ASC 360.20 arerecognized when all the following events occur: a) a sale is consummated; b) asignificant initial down payment is received (when applicable); and c) theearnings process is complete and the collection of any remaining receivables isreasonably assured. However, under MFRS, the Company uses thepercentage-of-completion method of accounting to account for housing projectrevenues and costs related to housing construction.  Under MFRS, progress towards completion ismeasured in terms of comparing the actual costs incurred to the estimated totalcost of a project. For a further discussion of revenue recognition policiesunder US GAAP, refer to Note 28 to the Company’s consolidated financialstatements.

 

Total units closed andrecognized as US GAAP revenue in 2009 were 46,631 units (41,679 in 2008)compared to 57,979 units sold under MFRS in 2009 (57,498 in 2008). The lowervolume in units closed in 2009 compared to units sold is primarily attributableto both our continued growth and therefore higher proportion ofconstruction-in-process, and our increased participation during 2009 in theconstruction of nearly-completed vertical building projects which take longerto build, sell and collect.  Total unitsclosed of 46,631 in 2009 represents a 12% increase compared to total unitsclosed in 2008 of 41,679. The increase is attributable to the continued growthin the Company’s business.  In 2008, units closed increased by 5% over2007.  The proportion of units sold and units closed are generallyconsistent when evaluated by operating segment during both 2009 and 2008. As ofDecember 31, 2009, approximately 11,348 units remain at various stages ofcompletion under MFRS, and thus have yet to be recognized into revenue under USGAAP.

 

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Grossprofit margins were 29.2% for MFRS in 2009, compared to 28.1% for US GAAP.  Gross profit margins were 28.5% for MFRS in2008, compared to 30.1% for US GAAP. During 2009, the primary differencebetween gross profit margins under MFRS and US GAAP is attributable to a lowerproportion of middle-income revenues under US GAAP, as middle-income projects,which include vertical building projects, take longer to build and collect.During 2008, the primary difference between gross profit margins under MFRS andUS GAAP was attributable to the differences in accounting policies with respectto the capitalization of CFC. MFRS provides for the capitalization of foreignexchange gains and losses on borrowings. However, US GAAP only provides for thecapitalization of interest costs. In 2008, foreign exchange losses werecapitalized into construction inventory. When the underlying projects weresold, greater amounts of CFC were recognized in cost of sales, which had theeffect of reducing gross profit margins in 2008 compared to 2007 under MFRS.The capitalization of CFC in 2008 also resulted in reduced gross profit marginsunder MRFS as compared, to US GAAP.

 

Asdisclosed in Note 26 to the Company’s consolidated financial statements, IMFRS14 was adopted on January 1, 2010, with retrospective application to prioraccounting periods presented with its 2010 consolidated financialstatements.  While differences in revenuerecognition might still exist between MFRS and US GAAP upon the adoption ofINIF 14, it is anticipated that the Company’s MFRS revenue recognition willmore closely approximate its US GAAP revenue recognition at that time.

 

Selling, general andadministrative expenses are not significantly impacted by the differencesbetween MFRS and US GAAP.   Accordingly,fluctuations in US GAAP SG&A expenses during 2009 and 2008 are consistentwith those described for MFRS discussed above.

 

CFC are different betweenMFRS and US GAAP for the reasons discussed above. These differences couldresult in periodic fluctuations in gross profit margins and CFC levels betweenthe two accounting frameworks.

 

The Company’s effective taxrate is not significantly impacted by the differences between MFRS and US GAAP.The Company’s effective tax rate under MFRS was 39% in 2009 compared to 41%under US GAAP and 31% under MFRS in 2008 compared to 32% under US GAAP.

 

Refer to Note 28 to theCompany’s consolidated financial statements for a complete reconciliation ofnet income between MFRS and US GAAP.

 

For information regardinggovernmental policies, see “Item 4. Information on the Company––The MexicanHousing Market.”

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have experienced, andexpect to continue to experience, substantial liquidity and capital resourcerequirements, principally to finance development and construction of homes andfor land inventory purchases.

 

Adverse economic conditionsin the U.S. mortgage banking sector are currently affecting the homebuildingindustry in the U.S. Recently, these negative conditions have impacted thefinancial positions of a majority of U.S. homebuilders. Our domestic mortgage system,as explained herein, differs from that of the U.S. The Mexican housing marketdiffers from the U.S. housing industry in several significant respects. Thehousing market in Mexico is in an early stage of development compared to theU.S. housing industry, which, according to some economists, has been subjectedto heightened price speculation that has led to an excess supply of housing anda lack of liquidity stemming from earlier excessive mortgage lending activity.The Mexican housing market on the other hand is characterized by a largedeficit of housing stock driven in part by a growing young population, highrates of urban growth, new household formation, and a decreasing number ofoccupants per home. Additionally, the Mexican government has implementedhousing policies and created agencies designed to address the housing deficitby making funds available to a large segment of the population. As a result, inthe past few years, a significant market for companies like Homex in theaffordable entry-level segment has emerged. Accordingly, Homex does not believethat the housing market in Mexico is suffering from the same impairment andliquidity issues currently facing the U.S. housing industry. Moreover, while itmay be reasonably possible that the impairment and liquidity issues currentlyfacing the U.S. housing industry may deteriorate further, Homex does not haveany current reason to believe these specific problems will materially affectits operations and liquidity directly. However, no assurances can be given that impairment or liquidity issuesin the United States will not affect our operations and liquidity in thefuture, or that impairment or liquidity issues will not arise in Mexico.

 

As of December 31,2009, we had Ps.3,122.1 million of cash and cash equivalents and Ps.10,093.9million of outstanding indebtedness for money borrowed (none of which wasconstruction financing provided by sofoles for developments underconstruction), as compared to Ps.1,140.1 million of cash and cash equivalentsand Ps.7,811.4 million of outstanding indebtedness as of December 31,2008.

 

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Although we do not commenceconstruction of any development until the availability of mortgage financingfor qualified homebuyers is determined, we do acquire land and performlicensing, permit-securing, and certain infrastructure development activitiesprior to receiving confirmation of the availability of mortgage financing.Historically, we have financed our development and construction activitiesthrough internally generated funds, commercial paper programs, bridge loans andlong-term financing.

 

Our primary sources ofliquidity are:

·                     cash flow from operations;

·                     financing from sellers ofland and, to a lesser extent, suppliers of materials;

·                     commercial banks and otherfinancial institutions; and

·                     down payments fromhomebuyers.

 

We believe that our workingcapital will be sufficient during the next 12 months to meet our liquidityrequirements.

The table below sets forthinformation regarding our outstanding debt as of December 31, 2009:

 

**Debt Outstanding as of December 31, 2009**

 
| **Homex Debt**                                                                                                          | ** ** | **Aggregate Lender  Principal Amount** | ** ** | **Interest  Rate** | ** ** | **Maturity**                              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **(in thousands of  pesos)**           | ** ** | ** **         | ** ** | ** **                                | ** ** |
| Senior  Guaranteed Notes due 2019(1)                                                                                         |       | Ps.                                              | 3,232,500  |               |       |                                      |       |   |
| Senior  Guaranteed Notes due 2015(2)                                                                                         |       | 3,260,925                                        |       |               |       |                                      |       |
| Grupo Financiero Inbursa, S.A.                                                                                               |       |                                             |       |               |       |                                      |       |
| A  credit line of Ps.2,078 million granted on June 26, 2008.                                                            |       | 2,078,000                                        |       | TIIE +1.50    | %          | June 26, 2013                        |       |
| Banco Nacional de México S.A.                                                                                           |       |                                             |       |               |       |                                      |       |
| A  line of credit of Ps.1,000 million granted on July 16, 2009.                                                         |       | 888,738                                          |       | TIIE +4.50    | %          | July 16, 2013                        |       |
| GE  Capital                                                                                                                  |       |                                             |       |               |       |                                      |       |
| A  line of credit granted to Aerohomex, S.A. de C.V. to purchase an executive  jet for US$2.3 million on July 29, 2005. |       | 4,520                                            |       | 7.40               | %          | July 29, 2010                        |       |
| Banco Itau BBA, S.A.                                                                                                         |       |                                             |       |               |       |                                      |       |
| Seven  credit lines granted by Banco Itau BBA, S.A. on May, September and  October 2009 for BR$9.1 million.        |       | 68,535                                           |       | 6.50               | %          | March, April, May and  July 2010     |       |
| Banco  Fibra, S.A.                                                                                                           |       |                                             |       |               |       |                                      |       |
| A  revolving credit line granted by Banco Fibra, S.A. on July 22, 2009 for  BR$1.3 million.                             |       | 9,569                                            |       | 9.90               | %          | July 20, 2010                        |       |
| Banco ABC Brasil, S.A.                                                                                                       |       |                                             |       |               |       |                                      |       |
| Three  credit lines granted by Banco ABC Brasil, S.A. on August, October and  November 2009 for BR$12 million.     |       | 90,171                                           |       | 8.50               | %          | February, October and  November 2010 |       |
| Banco  HSBC, S.A.                                                                                                            |       |                                             |       |               |       |                                      |       |
| A  revolving credit line granted by Banco HSBC, S.A. on November 23, 2009  for BR$1.5 million.                          |       | 11,277                                           |       | 3.10               | %          | November 18,2010                     |       |
| Financial  leases provided by Bancomer, S.A. in June 2007                                                               |       | 221,550                                          |       | TIIE +0.80    | %          | January, 2013                             |       |
| Financial  leases provided by Bancomer, S.A. in September 2008.                                                              |       | 44,524                                           |       | TIIE +0.80    | %          | October, 2013                             |       |
| Financial  leases provided by Bancomer, S.A. in December 2008.                                                               |       | 48,565                                           |       | TIIE +3.50    | %          | January, 2014                             |       |
| Financial  leases provided by Bancomer, S.A. in March 2009.                                                             |       | 19,481                                           |       | TIIE +3.50    | %          | April, 2014                               |       |
| Financial  leases provided by Banco Itau, S.A. from May through October 2009.                                      |       | 8,534                                            |       | 20.60              | %          | May through  October 2012       |       |
| Financial  leases provided by Banco Bradesco, S.A. in November and  December 2009.                                 |       | 18,751                                           |       | 14.00              | %          | November and  December 2012     |       |
| Interest  payable                                                                                                            |       | 88,234                                           |       |               |       |                                      |       |
| Total  debt                                                                                                                  |       | Ps.                                              | 10,093,874 |               |       |                                      |       |   |

 

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| (1) | Issued in an aggregate  principal amount of US$250 million with a coupon rate of 9.50%. We  entered into a principal-only swap to hedge the foreign exchange risk  associated with the principal amount of this debt at a rate of  Ps.12.93 per U.S. dollar and at an average weighted cost of 3.87%.                                                  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Issued in an aggregate  principal amount of US$250 million with a coupon rate of 7.50%. We  entered into a foreign exchange swap to hedge the foreign exchange risk  associated with the principal amount of this debt at a rate of Ps.10.83 per  U.S. dollar and at an average weighted cost of 2.92%. This swap was cancelled  on July 5, 2008. |
| (3) | TIIE refers to the 28-day  Mexican interbank rate (*Tasa de Interés  Interbancaria de Equilibrio*), which was 4.92% as of  December 31, 2009.                                                                                                                                                                                                          |

 

Our total indebtednessincreased to Ps.10,093.9 million as of December 31, 2009 from Ps.7,811.4million as of December 31, 2008, mainly as a result of working capitalrequirements.

 

As of December 31,2009, our short-term debt was Ps.379.0 million, mainly as a result of Ps.180.4million of various revolving credit lines and financial leases granted byfinancial institutions in Mexico and Brazil. Our long-term debt was Ps.9,714.9million, which includes mainly the long-term portion of our equipment leaseobligations in the amount of Ps.254.7 million, a line of credit granted byGrupo Financiero Inbursa S.A. for Ps.2,078.0 million, the Senior GuaranteedNotes due 2015 in the aggregate principal amount of Ps.3,260.9 million and theSenior Guaranteed Notes due 2019 in the aggregate principal amount ofPs.3,232.5 million.

 

On September 28, 2005,we issued US$250 million of Senior Guaranteed Notes due 2015 with a couponrate of 7.50%, payable semiannually.

 

On December 11, 2009,we issued US$250 million of Senior Guaranteed Notes due 2019 with a coupon rateof 9.50%, payable semiannually.

 

As of December 31, 2009, Homex’ U.S. dollar-denominateddebt was mainly limited to the Company’s Senior Guaranteed Notes due 2015 andthe Company’s Senior Guaranteed Notes due 2019, both with a single principal payment at maturity. The Company hasan interest-only swap that effectively minimizes short and mid-term exchangerisk in interest payments on the Senior Guaranteed Notes due 2015. As of December 31, 2009, the fair value of thisinstrument was a favorable asset position of Ps.4.4 million.

 

During 2008, the Company’s short and long-termnet liabilities resulted in a negative foreign exchange position.  As a result, the Company entered into hedgingtransactions, including foreign exchange derivative instruments designed tomitigate the risk associated with foreign currency exchange rates. As a resultof 2008’s devaluation of the Mexican peso relative to the U.S. dollar, theCompany decided to cancel these derivative instruments. The Company’s statementof income for the year ended December 31, 2008 reflected a loss of Ps.404,601related to these foreign exchange derivative transactions.

 

The net accumulated expense in the statement ofincome of the interest-only swap covering the 2015 bonds and the 2019 bonds wasPs.66,451 for the year ended December 31, 2009. The net accumulated income ofthe principal-only swap and the interest-only swap covering the 2015 bond wasPs.(90,639) for the year ended December 31, 2008.

 

The net valuation effects of financialinstruments for the years ended December 31, 2009, 2008 and 2007, werePs.66,451, Ps.313,962 and Ps.(147,977), respectively.

 

We have not paid dividends since the inceptionof the Company in 1998 and we do not foresee paying dividends in the nearfuture.

 

**Covenants**

 

Loan covenants require theCompany and its guarantor subsidiaries to meet certain obligations. Thesecovenants cover changes in ownership control, restrictions on incurringadditional debt that does not meet certain requirements established in the loancontracts, restrictions on the sale of assets and the sale of capital stock insubsidiaries, unless they meet certain requirements, restricted payments wheredividends cannot be paid or capital reimbursed to equity unless they are madebetween the guarantor subsidiaries. In addition, the Company cannot pledge anyof its assets or properties to guarantee any additional debt until certainlimits.

 

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Financial covenants, derivedfrom the Senior Guaranteed Notes due 2015, the Senior Guaranteed Notes due2019, and the credit lines with Inbursa and Banamex require the Company tomaintain:

 

·                     a total equity of at leastPs.11,850,000 thousand; the actual equity as of December 31, 2009 wasPs.13,222,963 thousand;

 

·                     a ratio of interest coverage(EBITDA) to the net financing expense of at least 3.0 to 1.0. The actual ratioas of December 31, 2009 was 4.7 to 1.0; and

 

·                     a ratio of leverage(liabilities with cost) to EBITDA of less than 2.50 to 1.0. The actual ratio asof December 31, 2009 was 2.3 to 1.0;

 

There are also restrictionsapplicable to additional debt based on EBITDA levels, such as EBITDA tointerest expense, including payment of dividends, which should not be less than2.25 to 1.0. The actual ratio as of December 31, 2009 was 3.9 to 1.0.

 

In the event the Companydoes not comply with any of the above provisions, there is a resulting limitationon its ability to pay dividends to its stockholders.

 

Included in its creditagreements with the aforementioned financial institutions, if the Company failsto comply with the terms and conditions of its covenants, an event of defaultmay occur that may result in the amounts owing to these institutions togetherwith interest accrued becoming due and payable. In addition, an event ofdefault under any of the Company’s credit agreements may in turn trigger eventsof default under the Company’s other credit agreements which may result in theamounts outstanding under such agreements becoming due and payable. Accelerationor cross-default under any of our credit agreements could have a materialadverse effect upon our business, financial condition, results of operationsand prospects.

 

As of December 31, 2009and 2008, the Company was in compliance with the financial covenants of itsdebt agreements.

 

The financial covenants ofthe leases from BBVA Bancomer require the Company and its subsidiaries tomaintain:

 

·                     a liquidity ratio of currentassets to short-term liabilities no less than 1.50 to 1.0. The actual ratio asof December 31, 2009 was 3.3 to 1.0;

 

·                     a financing ratio of totalliabilities to equity no greater than 1.70 to 1.0. The actual ratio as of December 31,2009 was 1.2 to 1.0; and

 

·                     a relation of operationalincome to net comprehensive financing cost at a minimum level of 2.0 to 1.0.The actual ratio as of December 31, 2009 was 2.8 to 1.0.

 

As of December 31, 2009and 2008, the Company was in compliance with these financial covenants.

 

TheCompany will utilize cash from operations and new debt financings to financeworking capital needs throughout 2010. In 2010, the Company intends to follow aconservative strategy to improve cash generation and maintain a stable debtlevel while minimizing land investments and capital expenditures.

 

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**TRENDINFORMATION**

 

The current recession and economic slowdown in theU.S. and global markets is affecting the global economy and causing uncertaintyin the Mexican economy that could negatively affect performance of the housingmarket. The recession and rising unemployment may result in softer demand forhousing in Mexico, which could have a negative impact on sales and revenue. Inaddition, our profitability may be negatively affected by the liquidityrestraints facing sofoles, sofomes and other sources of mortgage financing, aswell as delays in disbursements from these agencies similar to the delays thatoccurred during 2009. At the same time, as a result of the current recession,commercial banks, sofoles and sofomes have implemented tighter originationcriteria and restricted commercial credit lending affecting our suppliers. Thiscould also affect the Company’s profitability to the extent that the Company isunable to cut costs to compensate for softer demand and less credit fromsuppliers. Accordingly, we may need to adjust our business and financial modelsto account for the foregoing factors, which may have a negative effect on ourrevenues.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

We have no off-balance sheet arrangements as ofDecember 31, 2009.

 

**CONTRACTUALOBLIGATIONS**

 

The following table sets forth information regardingour contractual obligations as of December 31, 2009:

 
| ** **                        | ** ** | **Payment Due by Period**   | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                  | ** ** | **Less than   1 Year** | ** ** | **1-3 Year** | ** ** | **3-5 Years** | ** ** | **More than   5 Years** | ** ** |
| ** **                        | ** ** | **(in thousands of pesos)** | ** ** |
| Long-term debt  obligations       |       | Ps.                                        | 9,644,235  |   | Ps. | 184,072 |   | Ps. |   |   | Ps. | 2,966,738 |   | Ps. | 6,493,425 |   |
| Capital (finance)  leases         |       | 361,405                                    |       | 106,726 |   | 251,568 |   | 3,111 |   |   |   |
| Total debt                        |       | 10,005,640                                 |       | 290,798 |   | 251,568 |   | 2,969,849 |   | 6,493,425 |   |
| Estimated interest (1)            |       | 4,547,456                                  |       | 806,363 |   | 1,561,383 |   | 1,320,966 |   | 858,744 |   |
| Operating leases  obligations (2) |       | 148,769                                    |       | 49,232 |   | 99,254 |   | 283 |   | — |   |
| Land suppliers                    |       | 1,412,885                                  |       | 1,338,226 |   | 74,659 |   | — |   | — |   |
| Total                             |       | Ps.                                        | 16,114,750 |   | Ps. | 2,484,619 |   | Ps. | 1,986,864 |   | Ps. | 4,291,098 |   | Ps. | 7,352,169 |   |
|                                   |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1)    | In estimating interest expense we used the  applicable rate (see debt table in “Liquidity and Capital Resources”) as of  December 31, 2009. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                       |
| (2)    | Operating leases are calculated in the nominal bases  or future cash flows at the rate as of December 31, 2009.                                       |

 

Contractual obligations increased by 18% fromPs.13,637,089 as of December 31, 2008 to Ps.16,114,750 as ofDecember 31, 2009. This change was mainly due to working capitalrequirements.

 

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**New Accounting Pronouncements**

 

***Mexican FinancialReporting Standards (MFRS)***

 

The most relevant standards that came into force in2009 are described below:

 

**MFRS B-7, Business Acquisitions**

 

This MFRS substitutes Bulletin B-7 *Business Acquisitions* and was issued bythe *Consejo Mexicano para la Investigación yDesarrollo de Normas de la Información Financiera, A.C.*(the MexicanFinancial Information Standards Research Development Board or “CINIF”) toreplace Mexican accounting Bulletin B-7 *BusinessAcquisitions*. This standard establishes general rules for theinitial recognition of net assets, non-controlling interests and other items,as of the acquisition date.

 

According to this statement, purchase andrestructuring expenses resulting from the acquisition process should not bepart of the consideration, because these expenses are not an amount beingshared by the business acquired.

 

In addition, MFRS B-7 requires a company to recognizenon-controlling interests in the acquiree at fair value as of the acquisitiondate.

 

MFRS B-7 is effective for future acquisitions and didnot have any effect on the Company’s consolidated financial statements.

 

**MFRS B-8, Consolidated or CombinedFinancial Statements**

 

On December 2008, the CINIF issued MFRS B-8Consolidated or Combined Financial Statements which replaces Mexican BulletinB-8 *Consolidated Financial Statements*and describes general rules for the preparation, presentation and disclosure ofconsolidated and combined financial statements.

 

The main changes of this MFRS are as follows: (a) thisrule defines “Specific-Purpose Entity” (SPE), establishes the cases in which anentity has control over a SPE, and when a company should consolidate this typeof entity; (b) addresses that potential voting rights should be analyzed whenevaluating the existence of control over an entity; and, (c) sets new terms for“controlling interest” instead of “majority interest,” and “non-controllinginterest” instead of “minority interest.”

 

The adoption of this MFRS did not have any effect onthe Company’s consolidated financial statements.

 

**MFRS C-7, Investments in Associatesand Other Permanent Investments**

 

MFRS C-7 was issued by CINIF on December 2008 anddescribes the accounting treatment for investments in associates and otherpermanent investments, which were previously treated within Bulletin B-8 *Consolidated Financial Statements*. ThisMFRS requires the recognition of a Specific-Purpose Entity, through the equitymethod. Also, this MFRS establishes that potential voting rights should beconsidered when analyzing the existence of significant influence.

 

In addition, this rule defines a procedure and a limitfor the recognition of losses in an associate.

 

The adoption of this MFRS required the Company toconsider the associate in Egypt as other permanent investment effective January1, 2009, and no longer as an associate, and therefore to stop recognizing theequity method over this company.

 

**MFRS C-8, Intangible Assets**

 

This rule substitutes Bulletin C-8 *Intangible Assets*. The new rule definesintangible assets as non-monetary items and broadens the criteria ofidentification, indicating that an intangible asset must be separable; meaningthat such asset could be sold, transferred, or used by the entity. In addition,intangible assets arise from legal or contractual rights, whether those rightsare transferable or separable from the entity.

 

On the other hand, this standard establishes thatpreoperative costs should be eliminated from the capitalized balance, affecting

 

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retained earnings,and without restating prior financial statements.

 

This amount shouldbe presented as an accounting change in consolidated financial statements.

 

The adoption ofthis MFRS did not have any effect on the Company’s consolidated financialstatements.

 

**MFRSD-8, Share-Based Payments**

 

MFRS D-8establishes the recognition of share-based payments. When an entity purchasesgoods or pay services with share-based payments, the entity is required torecognize those goods or services at fair value and the corresponding increasein equity. According to MFRS D-8, if share-based payments cannot be settledwith equity instruments, they have to be settled using an indirect methodconsidering MFRS D-8 parameters.

 

The adoption ofthis MFRS did not have a material effect on the Company’s consolidatedfinancial statements.

 

**IMFRS 18, Effects on Recognition fromthe 2010 Tax Reform Bill in Income Taxes**

 

On December 15, 2009, the CINIF published Interpretation18 of Mexican Financial Reporting Standards (IMFRS) to provide guidanceregarding the 2010 Tax Reform Bill and the corresponding accounting recognitionthat should be completed in the companies’ financial statements.

 

This IMFRS establishes certain parameters for therecognition of changes in connection with the new tax reform, mainly as theyconcern income tax rate changes, changes to the consolidation regime(fundamentally related to tax losses), losses on stock transfers, specialconsolidation terms, distributed dividends not from Net Tax Profit Account(CUFIN), consolidation tax benefits and differences involving CUFIN. For moreinformation regarding the effects of the application of IMFRS 18, see Note 23to our audited consolidated financial statements.

 

The most relevant standards that came into force in2008 are described below:

 

**MFRS B-2, Statement of Cash Flows**

 

In November 2007, MFRS B-2 was issued by the CINIF toreplace Mexican accounting Bulletin B-12, *Statementof Changes in Financial Position*. This standard establishes that thestatement of changes in financial position is substituted by a statement ofcash flows as part of the basic financial statements. The main differencesbetween both statements lie in the fact that the statement of cash flows showsthe entity’s cash receipts and disbursements for the period, while thestatement of changes in financial position showed the changes in the entity’sfinancial structure rather than its cash flows. In an inflationary environment,the amounts of both financial statements are expressed in constant Mexicanpesos. However, in preparing the statement of cash flows, the entity must firsteliminate the effects of inflation for the period and, accordingly, determinecash flows at constant Mexican pesos, while in the statement of changes infinancial position, the effects of inflation for the period were noteliminated.

 

MFRS B-2 establishes that in the statement of cashflows, the entity must first present cash flows derived from operatingactivities, then from investing activities, the sum of these activities andfinally cash flows derived from financing activities. The statement of changesin financial position first shows the entity’s operating activities, thenfinancing activities and finally its investing activities. Under this newstandard, the statement of cash flows may be determined by applying the director indirect method.

 

The transitory rules of MFRS B-2 establish that theapplication of this standard is prospective. Therefore, the financialstatements for 2007 include the statement of changes in financial position, aspreviously established by Mexican accounting Bulletin B-12.

 

**MFRS B-10, Effects of Inflation**

 

In July 2007, the CINIF issued MFRS B-10, *Effects of Inflation*. MFRS B-10 definesthe two economic environments in Mexico that will determine whether or notentities must recognize the effects of inflation on financial information: i)inflationary, when inflation is equal to or higher than 26%; accumulated in thepreceding three fiscal years (an 8% annual average); and ii) non-inflationary,when accumulated inflation for the preceding three fiscal years is less thanthe aforementioned accumulated 26%. Based on these 

 

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definitions, the effects of inflation on financialinformation must be recognized only when entities operate in an inflationaryenvironment.

 

This standard also establishes the accounting rulesapplicable whenever the economy changes from any type of environment toanother. When the economy changes from an inflationary environment to anon-inflationary one, the entity must maintain in its financial statements theeffects of inflation recognized through the immediate prior year, since theamounts of prior periods are taken as the base amounts of the financialstatements for the period of change and subsequent periods. Whenever theeconomy changes from a non-inflationary environment to an inflationary one, theeffects of inflation on the financial information are recognizedretrospectively, meaning that all information for prior periods must beadjusted to recognize the accumulated effects of inflation of the periods inwhich the economic environment was considered non-inflationary.

 

This standard also abolishes the use of thespecific-indexation method for the valuation of imported fixed assets and thereplacement-cost method for the valuation of inventories, thus eliminating theresult from holding non-monetary assets.

 

The Interpretation 9 of MFRS establishes thatcomparative financial statements for years prior to 2008 must be expressed inMexican pesos with purchasing power at December 31, 2007, which was the lastdate on which the effects of inflation were recognized.

 

The realized result from holding non-monetary assetsmust be reclassified to retained earnings, while the unrealized portion must bemaintained as such within equity, and reclassified to results of operationswhen the asset giving rise to it is realized. Whenever it is deemed impracticalto separate the realized from the unrealized result from holding non-monetaryassets, the full amount of this item may be reclassified to the retainedearnings.

 

The effect of the adoption of this standard on theCompany’s 2008 financial statements is the Company’s ceasing to recognize theeffects of inflation on its financial information; therefore no monetary resultwas determined. The accumulated monetary position as of December 31, 2007 thatwas Ps.346,641 thousand was reclassified to the retained earnings.

 

**MFRS B-15, Foreign CurrencyTranslation**

 

MFRS B-15 incorporates the concepts of recordingcurrency, functional currency and reporting currency, and establishes themethodology to translate financial information of a foreign entity, based onthose terms. Additionally, this rule is aligned with NIF B-10, which definestranslation procedures of financial information from subsidiaries that operatein inflationary and non-inflationary environments. Prior to the application ofthis rule, translation of financial information from foreign subsidiaries wasaccording to inflationary environments methodology.

 

The Company’s foreign operations are insignificant atthis time and thus the impact of the adoption of this MFRS on the Company’sconsolidated financial statements was also insignificant.

 

**MFRS D-3, Employee Benefits**

 

MFRS D-3, *EmployeeBenefits* replaces the previous MFRS accounting Bulletin D-3, *Labor Obligations*. The most significant changescontained in MFRS D-3 are as follows:

 

i) shorter periods for the amortization of unamortizeditems such as transition obligations, with the option to credit or chargeactuarial gains or losses directly to results of operations, as they accrue. Asfurther disclosed in Note 13, during 2008 the Company prospectively changed theamortization periods for its transition liability from those of 10-22 yearperiods in prior years, to a four year period starting in 2008, resulting inPs.5,559 thousand in additional labor costs being recognized in its 2008statement of income as compared to prior periods;

 

ii) elimination of the recognition of an additionalliability and resulting recognition of an intangible asset and comprehensiveincome item. As further disclosed in Note 13, upon the adoption of MFRS D-3 theCompany reversed its intangible asset of Ps.30,092 thousand and additionalliability of Ps.34,189 thousand resulting in a credit to shareholders equity ofPs.4,097 thousand in 2008;

 

iii) accounting treatment of current-year and deferredemployee profit-sharing, requiring that deferred employee profit-sharing berecognized using the asset and liability method established under MFRS D-4. TheCompany recorded a deferred profit sharing asset of 

 

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Ps.29,667 thousand upon adoption of MFRS D-3. Thatasset has been adjusted to a value of Ps.26,606 thousand as of December 31,2008. As of December 31, 2009 there was no deferred profit sharing.

 

iv) current-year and deferred employee profit-sharingexpense is to be presented as an ordinary expense in the income statementrather than as part of taxes on profits.

 

The impact of the adoption of MFRS D-3 is as indicatedabove.

 

**MFRS D-4, Taxes on Profit**

 

The CINIF also issued Mexican FRS D-4, *Taxes on Profits* which replaces Mexicanaccounting Bulletin D-4 *Accounting forIncome Taxes, asset Tax and Employee Profit-sharing*. The mostsignificant changes attributable to MFRS D-4 are as follows:

 

i)      the concept of permanent differences is eliminated.The asset and liability method requires the recognition of deferred taxes onall differences in balance sheet accounts for financial and tax reportingpurposes, regardless of whether they are permanent or temporary;

ii)     because current and deferred employee profit-sharingis now considered as an ordinary expense under MFRS D-3, it is excluded fromthis standard;

iii)    asset taxes are required to be recognized as a taxcredit and, consequently, as a deferred income tax asset only in those cases inwhich there is certainty as to its future realization; and

iv)   the cumulative effect of adopting Mexican accountingBulletin D-4 is to be reclassified to retained earnings, unless it isidentified with comprehensive items in equity not yet taken to income.

 

The application of this standard is prospective innature; therefore the comparative financial statements from prior years werenot modified. The adoption of this MFRS did not have any effect on theCompany’s consolidated financial statements.

 

The most relevant standard that came into force in2007 is described below:

 

**MFRS D-6, Capitalization of theComprehensive Financing Cost**

 

MFRS D-6 establishes that entities must capitalizecomprehensive financing cost (CFC), which had been optional, under Mexicanaccounting Bulletin C-6, *Property, Plant andEquipment*.

 

Capitalized CFC is defined as the amount attributableto qualifying assets that could have been avoided if its acquisition had nottaken place, which in the case of Mexican peso denominated financing, includesits interest and the net monetary position, and in the case of foreign currencydenominated financing, also includes any exchange gains or losses. Qualifyingassets are defined as those assets acquired by an entity requiring a prolongedperiod of time to carry out the activities to get them ready for their intendeduse, that are to be sold or leased, that require a prolonged period to be acquiredor readied for its sale or lease including inventories that require a period oftime to take possession or to get them in conditions for their sale. Thecapitalization of the comprehensive result of financing starts and continueswhile investments for its acquisition are being made, the activities requiredfor conditioning the asset for sale or use are underway and interest is beingaccrued.

 

MFRS D-6 establishes that the amount of capitalizedCFC will be determined based on the loans that were specifically used toacquire the qualifying assets, or if such identification cannot be made, byapplying the weighted average capitalization rate for financing to the weightedaverage number of investments in qualifying assets made during the acquisitionperiod. Financing with imputed interest cost may be capitalized against thecost of acquired assets, since the financing is recognized at its presentvalue.

 

The application of MFRS D-6 for the years endedDecember 31, 2009, 2008 and 2007 represented a decrease in CFC ofPs.563,154 thousand, Ps.1,250,080 thousand and Ps.179,304 thousand,respectively, although Ps.670,127 thousand (of which Ps.419,338 thousand isrelated to the current year CFC and Ps.250,789 thousand is related to prioryears) in 2009, Ps.976,707 thousand (of which Ps.931,682 thousand is related tothe current year CFC and Ps.45,025 thousand is related to prior years) in 2008and Ps.119,286 thousand in 2007 were ultimately charged to cost of sales as theunderlying projects were sold.

 

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The most relevant standards that will come into forcein 2010 and 2011 are described below:

 

**Effective in 2010**

 

**IMFRS 14, Construction, Sales andServices Agreements related to Real Estate**

 

In December 2008 IMFRS 14 was issued by the CINIF tocomplement Bulletin’s D-7 regulation, *ConstructionAgreements and Manufacturing of Certain Capital Assets*. ThisInterpretation is applicable to the recognition of revenues, costs and expensesfor all entities that undertake the construction of capital assets directly orthrough sub contractors.

 

Due to the application of this Interpretation,effective January 1, 2010, the Company will stop recognizing its revenues,costs and expenses based on the percentage-of-completion method. At that date,the Company will begin to recognize them based on methods mentioned in thisInterpretation. Revenue and cost recognition will then more closely approximatewhat is often referred to as a “completed contract method” in which revenues,costs and expenses should be recognized, when all of the following conditionsare fulfilled:

 

·      the entity has transferred the control to thehomebuyer, in other words, the significant risks and benefits due to theproperty  or the assets ownership;

·      the entity does not keep for itself  any continue participation on the actualmanagement of the sold assets, in the usual grade associated with the property,nor does retain the effective control of the sold assets;

·      the revenues amount can be estimated reliably;

·      it is probable that the entity receives the economicbenefits associated with the transaction; and

·      the costs and expenses incurred or to be incurredrelated to the transaction can be estimated reliably.

 

This Interpretation will be adopted as of January 1,2010, with retrospective application to prior accounting periods presented withits 2010 consolidated financial statements. We estimate that the application ofIMFRS 14 to the consolidated financial statements would have had the followingeffects with respect to the year ended December 31, 2009:

 

·      sales would have decreased 11.1% from Ps. 19,425.2million to Ps. 17,277.7million;

 

·      operating income would have decreased 17.4% from Ps.3,170.0 million to Ps. 2,618.3 million;

 

·      net income would have decreased 20.9% from Ps. 1,829.9million to Ps. 1,446.9 million; and

 

·      total equity would have decreased 15.8% from Ps.12,988.0 million to Ps. 10,935.7 million.

 

In addition, the application of IMFRS 14 to theconsolidated financial statements would have had the following effects as ofDecember 31, 2009: (i) a decrease in accounts receivable for the developmentsin progress, (ii) an increase in inventories consisting of housing underconstruction, (iii) a decrease in deferred income taxes for net incomeattributable to housing not yet titled, (iv) an increase in prepaid expensesand other current assets for the sales commissions paid in advance and (v) adecrease in equity as indicated above.

 

**MFRS C-1, Cash and cash equivalents**

 

This MFRS replaces MFRS C-1, *Cash*and describes general rules for thevaluation, presentation and disclosure of cash and cash equivalents items thatare included in a Company’s balance sheet.

 

The main changes of this MFRS are as follows: (a) seta new name for this MFRS, from Cash to Cash and Cash Equivalents; (b) addressesthe restricted cash presentation in the financial statements; and, (c) set anddefines new terms like: temporary investments, acquisition costs, cashequivalents, restricted cash, net realizable value, nominal value, and fairvalue.

 

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**Effective in 2011 and 2012**

 

**MFRS B-5, Reporting FinancialInformation by Segment**

 

This MFRS replaces MFRS B-5, *Reporting Financial Information by Segment*andestablishes the criteria to identify the entity’s segments to disclose as wellas the disclosures about those segments. In addition, establishes disclosurerequirements of certain of the Entity’s information.

 

The main changes of this MFRS are as follows: (a) MFRSB-5 includes a managerial approach, while previous MFRS B-5, although itreferred to managerial approach, required that the information to disclose werereferred to identified segments based on the products or services, geographicalareas and customers homogenous groups, also requiring that information would besegregated in primary and secondary information; (b) new MFRS does not requirethat business areas are subject to different risks amongst them, in order toqualify as operative segments, while previous MFRS B-5 did; (c) in accordance with new MFRS B-5, business areas indevelopment stage could be catalogued as operative segment, while previous MFRSB-5 required operative segments to generate revenues; (d) MFRS B-5 requires todisclose by segments income interest and interest expense, as well as othercomprehensive financial cost items, while previous MFRS B-5 did not requirethis information; and (e) MFRS B-5 requires to disclose the amounts ofliabilities that are included in the usual information of an operative segmentthat the Company normally uses to make decisions, while previous MFRS B-5 didnot require this and let management the option to do so or not.

 

**International Financial ReportingStandards (IFRS)**

 

On January 27, 2009 the Mexican Securities Commission(Comisión Nacional Bancaria y de Valores or CNBV) established through theFederation Official Gazette the requirements for the listed companies toprepare and reveal their financial information under IFRS beginning the year2012. Likewise it was specified that early adoption for the years 2008, 2009,2010 and 2011 is allowed.

 

***U.S. GAAP***

 

The United States Financial Accounting Standards Board(“FASB”) released the *FASB AccountingStandards Codification*, or “ASC” for short, on January 15, 2008and it became effective in the summer of 2009. At that time all previous US GAAP reference sources becameobsolete.  The ASC organizes thousands ofU.S. GAAP pronouncements under approximately 90 accounting topic areas.  The objective of this project was to arriveat a single source of authoritative U.S. accounting and reporting standards,other than guidance issued by the SEC. Below are references to various ASC’s,and their former US GAAP references.

 

The most relevant US GAAP standards that came intoforce in each of the three years ended December 31, 2009 are describedbelow:

 

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**In 2009:**

 

***ASC 810.10 (formerly FAS 160)***

 

In December 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160,“Non-controlling Interest in Consolidated Financial Statements — an amendmentof ARB No. 51” (“FAS 160”). FAS 160 was codified as a component of ASC810.10. ASC 810.10 requires non-controlling interests held by parties otherthan the parent in subsidiaries to be clearly identified, labeled, andpresented in the consolidated statements of financial position within equity,but separate from the parent’s equity.

 

This new guidance is effective for fiscal yearsbeginning after December 15, 2008. The Company’s US GAAP financialinformation included in Note 28 has been retrospectively adjusted for allperiods to reflect the adoption of ASC 810.10.

 

***ASC 805.10 (formerly FAS 141 (R))***

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 141 (revised 2007), “BusinessCombinations” (“FAS 141 (R)”). FAS 141 (R) was a revision of FAS 141 andwas codified as a component of ASC 805.10. This new guidance requires thatcosts incurred to effect the acquisition (i.e., acquisition-related cost) berecognized separately from the acquisition. In addition, restructuring coststhat the acquirer expected but was not obligated to incur, which includedchanges to benefit plans, were recognized as if they were a liability assumedat the acquisition date. This new guidance requires the acquirer to recognizethose costs separately from the business combination. This new guidance iseffective for the Company in 2009, and did not have any impact on the Company’sconsolidated financial statements, primarily as no acquisitions occurred duringthe year.

 

***ASC 815.10 (formerly FAS 161)***

 

In March 2008, the FASB issued Statement ofFinancial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of FASB Statement No. 133”(“FAS 161”). FAS 161 was codified as a component of ASC 815.10. This new guidancerequires enhanced disclosures about an entity’s derivatives and hedgingactivities to improve the transparency of financial reporting. It is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008. This new guidance increases year end disclosuresbut did not have an impact on the Company’s consolidated financial position andresults of operations.

 

***ASC 350.10 (formerly FSP FAS 142-3)***

 

In April 2008, the FASB issued FASB StaffPosition FAS 142-3, “Determination of the Useful Life of Intangible Assets”(“FSP FAS 142-3”). FSP FAS 142-3 was codified as a component of ASC 350. Thisnew guidance amends the factors that should be considered in developing renewalor extension

 

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assumptions used to determine the useful life of arecognized intangible asset. The new guidance is effective for financialstatements issued for fiscal years beginning after December 15, 2008. Thispronouncement did not have any impact on the Company’s financial position andresults of operation.

 

***ASC 323.10 (formerly EITF 08-6)***

 

In November 2008, the Emerging Issues Task Force(EITF) reached a consensus on EITF 08-6, “Equity Method Investment AccountingConsiderations”. EITF 08-6 was codified as a component of ASC 323.10. This newguidance provides guidance on the application of the equity method. It statesequity-method investments should be recognized using a cost accumulation model.Also, it requires that equity method investments as a whole be assessed forother-than-temporary impairments. This new guidance is effective on aprospective basis for transactions in an investee’s shares occurring orimpairments recognized in fiscal years beginning on or after December 15,2008.   During the years ended December 31,2009, the Company’s equity method investments did not represent a significantcomponent of its operations. Accordingly, the adoption of this EITF did nothave a significant impact on its consolidated financial statements.

 

***ASC 350.30 (formerly EITF 08-7)***

 

In November 2008, the EITF reached a consensus onEITF 08-7 “Accounting for Defensive Intangible Assets”. EITF 08-7 was codifiedas a component of ASC 350.30. This new guidance provides that intangible assetsthat an acquirer intends to use as defensive assets, intangible assets acquiredin a business combination or an asset acquisition that an entity does notintend to actively use but does intend to prevent others from using, are aseparate unit of account from the existing intangible assets of the acquirer.It also states that a defensive intangible asset should be amortized over theperiod that fair value of the defensive intangible asset diminishes. This newguidance is effective on a prospective basis for transactions occurring infiscal years beginning on or after December 15, 2008. This new guidancedid not have any impact on the Company’s consolidated financial position andresults of operations.

 

***ASC 855 (formerly FAS 165)***

 

In May 2009, the FASB issued ASC 855, “SubsequentEvents”. ASC 855 establishes general standards of accounting for and disclosureof events that occur after the balance sheet date but before financialstatements are issued or are available to be issued. In particular, ASC 855sets forth (1) the period after the balance sheet date during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements,(2) the circumstances under which an entity should recognize events ortransactions occurring after the balance sheet date in its financial statementsand (3) the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date. In accordance with ASC855, an entity should apply the requirements to annual financial periods endingafter June 15, 2009.

 

**In 2008:**

 

***ASC 820.10 (formerly FAS 157)***

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 was codified as a component of ASC 820.10. This guidance defines fair value, establishes a frameworkfor the measurement of fair value, and enhances disclosures about fair valuemeasurements. The statement does not require any new fair value measures.

 

The statement is effectivefor fair value measures already required or permitted by other standards forfiscal years beginning after November 15, 2007 and it is required to beapplied prospectively, except for certain financial instruments. Any transitionadjustment will be recognized as an adjustment to opening retained earnings inthe year of adoption. When adopted in 2008, this guidance did not have an impact on the Company’s consolidated financial position andresults of operations at adoption.

 

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***ASC 820.10 (formerly FSP 157-3)***

 

In October 2008, theFASB issued FASB Staff Position 157-3, “Determining the Fair Value of aFinancial Assets When the Market of that Asset is not Active” (FSP 157-3). FSP157-3 was codified as a component of ASC 820.10. This new guidance provides anexample that clarifies and reiterates certain provisions of the existing fairvalue standard, including basing fair value on orderly transactions and usageof management and broker inputs. This new guidance was effective immediatelyand did not have a material impact on financial position or results of operationsof the Company.

 

***ASC 825.10 (formerly FAS 159)***

 

In February 2007, theFASB issued FASB Statement No. 159, The Fair Value Option for FinancialAssets and Financial Liabilities (the “Statement” or “Statement 159”). FAS 159was codified as a component of ASC 825.10. This guidance allows entities tovoluntarily choose, at specified election dates, to measure many financialassets and financial liabilities (as well as certain nonfinancial instrumentsthat are similar to financial instruments) at fair value (the “fair valueoption”, or “FVO”). The election is made on an instrument-by-instrument basisand is irrevocable. If the fair value option is elected for an instrument, theStatement specifies that all subsequent changes in fair value for thatinstrument shall be reported in earnings (or another performance indicator forentities such as not-for-profit organizations that do not report earnings).

 

The fair value option willmitigate some of the volatility in reported earnings that results from the useof different measurement attributes to account for financial assets andfinancial liabilities. By electing the fair value option, an entity can achieveconsistent accounting for related assets and liabilities without having toapply complex hedge accounting provisions.

 

Statement 159 requiresextensive disclosures whose primary objective is to facilitate comparison amongentities that choose different measurement attributes for similar assets andliabilities, as well as, comparison of similar assets and liabilities for whichan individual entity selects different measurement attributes.

 

The Statement is effectiveas of the beginning of an entity’s first fiscal year that begins after November 15,2007 (January 1, 2008 for the Company). The Company did not elect the Fair ValueOption for any of its financial assets or liabilities, and therefore, theadoption of ASC 825.10 in 2008 had no impact on the Company’s financialposition, results of operations or cash flows at adoption.

 

**In 2007:**

 

***ASC 740.10 Income taxes (formerly FIN 48)***

 

The Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48) as of January 1, 2007.  FIN 48 was codified as a component of ASC740.10. FIN48 clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with ASC 740.20 Income taxes,(formerly FAS 109). The adoption of FIN 48 in 2007 did not have an impact onthe Company’s financial statements and did not result in a cumulativeadjustment to retained earnings at adoption.

 

The most relevant US GAAP standards that have yetto come into force are described below.  The Company is currently in the process of evaluating the impact thatthese new pronouncements will have on its consolidated financial statements.

 

***ASC 715.20 (formerly FSP FAS 132(R)-1)***

*** ***

In December 2008, the FASB issued FASB StaffPosition FAS 132(R)-1, “Employers ́ Disclosures about Postretirement BenefitPlan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 was codified as a componentof ASC 715. This new guidance amends previous US GAAP in that this guidancereplaces the requirement to disclose the percentage of fair value of total planassets with a requirement to disclose the fair value of each major assetcategory. It also clarifies that defined benefits pension or otherpostretirement plan assets not subject to certain disclosure requirements. Thisnew guidance is effective for fiscal years ending after December 2009.

 

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***ASC 860.10 (formerly FAS 166)***

 

FASB Statement No. 166 “Accounting for Transfersof Financial Assets - an amendment of FASB Statement No. 140” (“FAS 166”)was codified as a component of ASC 860. ASC 860 provides for removal of the concept of a qualifyingspecial-purpose entity and removes the exception from applying variableinterest entity accounting, to qualifying special-purpose entities. It alsoclarifies that one objective of US GAAP is to determine whether a transferorand all of the entities included in the transferor’s financial statements beingpresented have surrendered control over transferred financial assets. ASC 860modifies the financial-components approach used in US GAAP and limits thecircumstances in which a financial asset, or portion of a financial asset,should be derecognized when the transferor has not transferred the entireoriginal financial asset to an entity that is not consolidated with thetransferor in the financial statements being presented and/or when thetransferor has continuing involvement with the transferred financial asset. ASC860 also defines the term participating interest to establish specificconditions for reporting a transfer of a portion of a financial asset as asale.

 

ASC 860 requires that a transferor recognize andinitially measure at fair value all assets obtained (including a transferor’sbeneficial interest) and liabilities incurred as a result of a transfer offinancial assets accounted for as a sale. Enhanced disclosures are alsorequired by ASC 860. This new guidance must be applied as of the beginning ofeach reporting entity’s first annual reporting period that begins afterNovember 15, 2009. This guidance must be applied to transfers occurring onor after the effective date.

 

***ASC 810.10 (formerly FAS 167 )***

 

FAS 167 was codified as a component of ASC 810. TheFASB’s objective in issuing this new guidance was to improve financialreporting by enterprises involved with variable interest entities. The Boardundertook this project to address (1) the effects on certain provisions ofASC 810 (formerly FIN 46R “Consolidation of Variable Interest Entities”(“FIN46R”)), as a result of the elimination of the qualifying special-purpose entityconcept in FAS 166, and (2) constituent concerns about the application ofcertain key provisions, including those in which the accounting anddisclosures  under previous guidance donot always provide timely and useful information about an enterprise’sinvolvement in a variable interest. The new guidance shall be effective as ofthe beginning of each reporting entity’s first annual reporting period thatbegins after November 15, 2009. Earlier application is prohibited. TheCompany has not yet quantified the impact (if any) that this new standard willhave on its consolidated financial statements.

 

***ASC 505 — ASU 2010-01***

 

In January 2010, the FASB issued ASU2010-01, “Accounting for Distributions to Shareholders with Components of Stockand Cash.” The ASU clarifies when the stock portion of a distribution allowsshareholders to elect to receive cash or stock, with a potential limitation onthe total amount of cash which all shareholders could elect to receive in theaggregate, the distribution would be considered a share issuance as opposed toa stock dividend and the share issuance would be reflected in earnings pershare prospectively.

 

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**ITEM6.       Directors, Senior Management andEmployees.**

 

**DIRECTORSAND EXECUTIVE OFFICERS**

 

Our board of directors currently consists of ninemembers and is responsible for managing our business. Each director is electedfor a term of one year or until a successor has been appointed. Our board ofdirectors meets quarterly. Pursuant to Mexican law, at least 25% of the membersof the board of directors must be independent, as such term is defined by theMexican Securities Market Law. As required by New York Stock Exchangeregulations, a majority of the members of our board of directors areindependent.

 

As of the date of this annual report, the members ofour board of directors are as follows:

 
| **Name**                                             | ** ** | **Born** | ** ** | **Position**            |
|------------------------------------------------------|------------|----------|------------|-------------------------|
| Eustaquio Tomás de Nicolás  Gutiérrez |       | 1961     |       | Chairman                |
| Gerardo de Nicolás Gutiérrez               |       | 1968     |       | Chief Executive Officer |
| José Ignacio de Nicolás  Gutiérrez    |       | 1964     |       | Director                |
| Luis Alberto Harvey MacKissack                       |       | 1960     |       | Director                |
| Z. Jamie Behar                                       |       | 1957     |       | Director                |
| Wilfrido Castillo Sánchez-Mejorada              |       | 1941     |       | Director                |
| Edward Lowenthal                                     |       | 1944     |       | Director                |
| Rafael Matute Labrador                               |       | 1960     |       | Director                |
| Dennis G. Lopez                                      |       | 1954     |       | Director                |

 

**Eustaquio Tomás de Nicolás Gutiérrez** is Chairman of the board of directors.Before co-founding our predecessor in 1989, Mr. de Nicolás founded andmanaged DENIVE, a clothing manufacturing company. Mr. de Nicolás has beena Board Member of the Mexican Stock Exchange since 2005, and has served asregional Chairman and regional Vice Chairman of the Mexican Chamber ofIndustrial Housing Promoters and Development, or CANADEVI (Cámara Nacional dela Industria de Desarrollo y Promoción de Vivienda) and as a member of theregional advisory board of financial institutions such as BBVA Bancomer andHSBC (formerly BITAL). Currently, Mr. de Nicolás oversees our mainoperations, focusing on land acquisition and developing new geographicalmarkets. Mr. de Nicolás received a B.S. in Business from UniversidadPanamericana in Mexico City.

 

**Gerardo de Nicolás Gutiérrez** is the Company’s Chief ExecutiveOfficer. Mr. de Nicolás served as Chief Strategic Officer and head of theExecutive Committee from October 2006 to June 5, 2007. Mr. deNicolás also served as the CEO of the Company from 1997 to September 2006.Prior to his appointment as CEO, Mr. de Nicolás served as regionalmanager, systems manager, and as construction supervisor. He holds anundergraduate degree in industrial engineering from Universidad Panamericana,in Mexico City and an MBA from Instituto Tecnológico y de Estudios Superioresde Monterrey in Guadalajara.

 

**José Ignacio de Nicolás Gutiérrez** is the Minister of Economic Developmentfor the State Government of Sinaloa, was founder and Chairman of the Board ofDirectors from 1997 to 2007 of Hipotecaria Crédito y Casa, S.A. de C.V.,Mr. de Nicolás also cofounded Homex and served as CEO from 1989 to 1997.Mr. de Nicolás is a member of the regional advisory board of NacionalFinanciera (NAFIN), a Mexican government-owned development bank. He hasrecently been appointed member of the Board of Directors of Afore Coppel, aretirement fund administrator. In addition, Mr. de Nicolás founded and waschairman of a non-profit organization for social assistance in the state ofSinaloa from 2002 to 2005, and serves as national advisor of the MexicanPhilanthropic Institute. Mr. de Nicolás received a B.S. in Finance andAdministration from Universidad Panamericana, in Mexico City.

 

**Luis Alberto Harvey MacKissack**, is co-founding partner and seniormanaging director of Nexxus Capital, S.A.  He has approximately 20 yearsof experience in investment banking and private equity.  Before foundingNexxus, Mr. Harvey held positions at Grupo Bursátil Mexicano, Fonlyser,Operadora de Bolsa, and Servicios Industriales Peñoles, S.A. de C.V.  Hisexperience includes several private and public equity transactions and initialpublic offerings of several major Mexican corporations on the Mexican StockExchange (BMV) and international capital markets.  Mr. Harvey is amember of the boards of directors of Nexxus Capital, S.A., Grupo Sports World,S.A. de C.V., Genomma Lab Internacional, S.A.B. de C.V., Harmon Hall Holding,S.D.R.L. de C.V. and Crédito Real S.A. de C.V. SOFOM, E.N.R.  Mr. Harvey is also member of theinvestment committees of ZN Mexico Trust, ZN Mexico II, L.P. and Nexxus CapitalPrivate Equity Fund III.  Mr. Harvey received a B.S. in economicsfrom Instituto Tecnológico Autónomo de México (ITAM) and an MBA with aconcentration in finance from the University of Texas at Austin.

 

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**Z. Jamie Behar** is Managing Director, RealEstate & Alternative Investments, for Promark GlobalInvestors, Inc. (Prormark, formerly Asset Management Corp.). She managesPromark clients’ real estate investment portfolios, including private marketand publicly-traded securities investments, as well as their alternativeinvestment portfolios, totaling $8.0 billion. Ms. Behar is a member of theboard of directors of Sunstone Hotel Investors, Inc., a publicly listedhotel company operating in the United States, the Pension Real EstateAssociation (PREA), and serves on the advisory boards of several domestic andinternational private real estate investment entities.

 

**WilfridoCastillo Sánchez-Mejorada** is CFO of Qualitas Cía. deSeguros, S.A.B de C.V., or Qualitas, a Mexican insurance company. Previously he served as CEO of CastilloMiranda, Contadores Públicos, a public accounting firm, and he has held seniorpositions in several brokerage firms. Mr. Castillo is a member ofthe board of directors of Quálitas Compañía de Seguros, S.A.B. de C.V , Uniónde Esfuerzo para el Campo, A.C. and Grupo Financiero Aserta, S.A. de C.V.

 

**Edward Lowenthal**is president of Ackerman Management LLC,an investment management and advisory company with particular focus on realestate and other asset-based investments. Previously, Mr. Lowenthalfounded and was president of Wellsford Real Properties, Inc., or WRP, apublicly-owned real estate merchant banking company that has merged withReis, Inc., a real estate market information and analytics provider. Healso founded and was trustee and president of Wellsford Residential PropertyTrust, a publicly-owned multi-family real estate investment trust that wasmerged into Equity Residential Properties Trust. Mr. Lowenthal is a memberof the board of directors of several companies, including, Reis, Inc.,Omega Healthcare Investors, Inc., a healthcare real estate investmenttrust and American Campus Communities, a publicly traded Real Estate InvestmentTrust which focuses solely on student housing in the United States. Healso serves as non-executive Chairman of Tiburon Lockers, Inc., aprivately held owner-operator of rental storage lockers for transportation,entertainment, sports and other venues.

 

**Rafael Matute Labrador** is Executive Vice-President and ChiefFinancial Officer of Wal-Mart de Mexico. He has been a member of the Board ofDirectors and the Executive Committee of the Board of Directors for Wal-Mart deMexico, S.A.B. de C.V. since 1998. In addition, Mr. Labrador is a memberof the Board of Directors for Banco Wal-Mart de Mexico. He has also been memberof Consultative Boards for Nacional Financiera (NAFIN), Banorte y BancoNacional de México (Banamex/Citibank). He has an MBA from theInstituto de Estudios Superiores de la Empresa (IESE), in Barcelona, Spain. He has attended upper management coursesat IMD in Lausanne, Switzerland and at the University of Chicago Booth Schoolof Business (GSB).

 

**Dennis G. Lopez** is Chief Investment Officer for AXA RealEstate, the leading Real Estate Investment Manager in Europe with €39.5 billionof property assets under management. Mr. Lopez is responsible for all ofAXA Real Estate’s Fund Management activities, overseeing a team of 95 fundmanagement professionals. The funds comprise a broad range of real estateinvestment strategies including: opportunistic, value added, core-plus, core,development properties, listed funds, regulated funds and separateaccounts.  Mr. Lopez became a boardmember effective April 30, 2010. Mr. Lopez received a MBA fromUniversity of California Los Angeles (UCLA). He also received a B.S. inBusiness from California State University Long Beach.

 

Until April 30, 2010, Mathew M. Zell was a memberof our board of directors.  However,Mr. Zell declined to stand for reelection to the board and effectiveApril 30, 2010, he is no longer a board member.

 

**Secretary**

 

The secretary of the board of directors is JaimeCortés Rocha, who is not a member of the board of directors.

 

**Audit Committee**

 

Our Audit Committee consists of Wilfrido CastilloSánchez-Mejorada (Chairman), Edward Lowenthal and Z. Jamie Behar. EffectiveApril 30, 2010, Mr. Matthew Zell is no longer a member of our auditcommittee. Our board of directors has determined that Mr. Castillo has theattributes of an “audit committee financial expert” as defined by the SEC andthat each member of the Audit Committee satisfies the financial literacyrequirements of the New York Stock Exchange. Our statutory auditor may attendAudit Committee meetings, although he does not have the right to vote. Amongother duties and responsibilities, the committee issues opinions to the boardof directors regarding related party transactions; where if it deemsappropriate, it recommends that independent experts be retained to renderfairness opinions in connection with related party transactions and tenderoffers; reviews the critical accounting policies adopted by us and advises theboard of directors on changes to such policies; assists the board of directorswith planning and conducting internal audits; and prepares a yearly activityreport for submission to the board of directors. The committee is alsoresponsible for the appointment, retention, and oversight of the externalauditing firm.

 

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**Executive Committee**

 

Our Executive Committee consists of Eustaquio Tomás deNicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Edward Lowenthal, Luis AlbertoHarvey MacKissack and Rafael Matute Labrador. Among other duties andresponsibilities, the committee acts on general planning and financial mattersnot reserved exclusively for action by the board of directors, includingappointing and removing our CEO, members of management, and any of ouremployees; entering into credit agreements on our behalf; and conveningshareholders’ meetings.

 

**Corporate Governance and CompensationCommittee**

 

Our Corporate Governance and Compensation Committeeconsists of Luis Alberto Harvey Mackissack and Edward Lowenthal. Among otherduties and responsibilities, the committee identifies individuals qualified tobecome Board Members and makes recommendations to the board of directors andshareholders regarding director nominees; develops and recommends to the boardof directors a set of corporate governance principles applicable to thecompany; and oversees the evaluation of the Board and management. The committeealso reviews and approves corporate goals and objectives relevant to CEO compensation;evaluates the CEO’s performance in light of those goals and objectives;determines and approves the CEO’s compensation level based on this evaluation;and makes recommendations to the Board with respect to non-CEO compensation,incentive-compensation plans and equity-based plans.

 

**Risk Management Committee**

 

Our Risk Management Committee consists of EustaquioTomás de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Edward Lowenthal,Luis Alberto Harvey MacKissack, Rafael Matute Labrador, and Wilfrido CastilloSánchez-Mejorada. The committee reviews and approves the Company’s activitiesrelated to entering into hedging instruments. The committee also identifies andassesses other business risks associated with the Company’s operations.

 

**Disclosure Committee**

 

Our disclosure committee as approved by the board ofdirectors is comprised of the Company’s top executives. This committee ischaired by the Investor Relations Officer and is comprised of the ChiefExecutive Officer, the Chief Financial Officer, the Manager of FinancialReporting, and the Administrative and Accounting Officer and the GeneralCounsel. Among other duties and responsibilities, the committee establishes thecriteria to identify relevant information and reviews before publishing all documentsthat are to be presented to the general public as well as to market analysts.

 

**Ethics Committee**

 

Our ethics committee, as approved by the board ofdirectors is comprised of the Company’s top executives. This committee iscomprised of the Chief Executive Officer, the Executive Director of HumanResources and Corporate Responsibility, the General Counsel, the ExecutiveDirector of Internal Control and an external counsel. Among other functions,the committee acts to ensure that the Company complies with its code of ethicsand determines the sanctions if certain actions are considered to be not incompliance therewith. The Committee also receives and processes complaints fromthe Company’s personnel.

 

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**Senior Management**

 

As of the date of this annual report, our seniormanagement is as follows:

 
| **Name**                                             | ** ** | **Born** | ** ** | **Position**                                                 |
|------------------------------------------------------|------------|----------|------------|--------------------------------------------------------------|
| Eustaquio Tomás de Nicolás  Gutiérrez |       | 1961     |       | Chairman                                                     |
| Gerardo de Nicolás Gutiérrez               |       | 1968     |       | Chief Executive Officer                                      |
| Carlos Moctezuma Velasco                             |       | 1965     |       | Chief Financial Officer                                      |
| Ramón Lafarga Bátiz                        |       | 1960     |       | Administrative and Accounting Officer                        |
| Mónica Lafaire Cruz                             |       | 1964     |       | Vice President of Human Resources and Social  Responsibility |
| Rubén Izábal González                 |       | 1968     |       | Vice President—Construction                             |
| Alberto Menchaca Valenzuela                          |       | 1969     |       | Vice President—Mexico Division                          |
| Daniel Leal Díaz-Conti                          |       | 1952     |       | Vice President—Sales and Marketing                      |
| Alberto Urquiza Quiroz                               |       | 1962     |       | Vice President—International Division                   |
| Fernando Ventura Peña                           |       | 1969     |       | Vice President—Tourism Division                         |

 

**Eustaquio Tomás de Nicolás Gutiérrez******is Chairman of the board of directors. Beforeco-founding our predecessor in 1989, Mr. de Nicolás founded and managedDENIVE, a clothing manufacturing company. Mr. de Nicolás has been a BoardMember of the Mexican Stock Exchange since 2005, and has served as regionalChairman and regional Vice Chairman of the Mexican Chamber of IndustrialHousing Promoters and Development, or CANADEVI (Cámara Nacional de la Industriade Desarrollo y Promoción de Vivienda) and as a member of the regional advisoryboard of financial institutions such as BBVA Bancomer and HSBC (formerlyBITAL). Currently, Mr. de Nicolás oversees our main operations, focusingon land acquisition and developing new geographical markets. Mr. deNicolás received a B.S. in Business from Universidad Panamericana in MexicoCity.

 

**Gerardo de Nicolás Gutiérrez**is the Company’sChief Executive Officer. Mr. de Nicolás served as Chief Strategic Officerand head of the Executive Committee from October 2006 to June 5,2007. Mr. de Nicolás also served as the CEO of the Company from 1997 toSeptember 2006. Prior to his appointment as CEO, Mr. de Nicolás servedas regional manager, systems manager, and construction manager supervisor. Heholds an undergraduate degree in industrial engineering from UniversidadPanamericana, in Mexico City and an MBA from Instituto Tecnológico y deEstudios Superiores de Monterrey in Guadalajara.

 

**Carlos MoctezumaVelasco** is Homex ́s Chief Financial Officer.Mr. Moctezuma had served as Investor Relations Officer since April, 2004.Mr. Moctezuma was appointed Director of Strategic Planning for the Companyin December of 2007. Prior to joining Homex, Mr. Moctezuma served asSenior Manager of Finance and Investor Relations Officer in Grupo Iusacell,S.A. de C.V., a publicly traded Mexican wireless telecommunications companythat was formerly a subsidiary of Verizon Communications.  From 1993 to 1999, Mr. Moctezuma heldvarious finance-related positions in Tubos de Acero de Mexico, S.A., includingManager of Investor Relations. Mr. Moctezuma is former President and co-founder of the MexicanInvestor Relations Association (AMERI), having held various positions there from2002 through 2008.

 

**Ramón Lafarga Bátiz**has been the Administrative andAccounting Officer of Homex since June 2007. Prior to this position,Mr. Lafarga served as Administrative Vice President from 1993 to 2006. Hisprior experience includes serving as CEO and partner in Lafarga Bátiz,Contadores Públicos, a public accounting firm, and partner and CEO of a privatecompany specializing in computer equipment.

 

**Mónica Lafaire Cruz** is the Vice President of HumanDevelopment and Social Responsibility and President of Homex Foundation.Mónica Lafaire has served as director of Homex’s regional offices andmanager of the trust Homex—Nafin.  She was also responsible forimplementing the supply chain program with NAFIN. Besides her work at Homex, shetaught finance, philosophy and management at the Universidad Panamericana.  Mónica Lafaire has a degree in businessadministration from La Salle University.

 

**Rubén Izábal González**has served as Vice President—Constructionsince 1997. Prior to joining Homex, Mr. Izabal served at differentconstruction companies, including Gomez y Gonzales Constructores, Provisur S.A.de C.V., Promotoria de Vivienda del Pacifico, S.A. de C.V., and ConstructorGiza, S.A. de C.V. Currently, Mr. Izabal oversees our construction operations,with a focus on 

 

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the homebuilding process. Mr. Izabal earned anundergraduate degree in architecture from Instituto Tecnológico y de EstudiosSuperiores del Occidente in Guadalajara, Jalisco. Mr. Izabal also earnedan associate degree in Business Management from Instituto Tecnológico deEstudios Superiores de Monterrey.

 

**Alberto Menchaca Valenzuela** has served as Vice President—MexicoDivision since January 2010. Prior to becoming Vice President—MexicoDivision, Mr. Menchaca served as Vice President—Affordable Entry-Leveldivision and as Chief Operations Officer from 2007 to 2009, as VicePresident—Operations from 2000 to 2006 and as finance manager from 1996 to2000. His prior experience includes work at Banco Mexicano, InverMexicoand Banca Confia. Mr. Menchaca earned an undergraduate degree inagricultural engineering from Universidad Autónoma Agraria Antonio Narro inSaltillo, Coahuila.

 

**Daniel Leal Díaz-Conti** has served as Vice President—Sales andMarketing since January 2007. Mr. Leal joined Homex from HipotecariaNacional, where he served as Deputy General Director of Sales and Marketing.Mr. Leal was also President of the mortgage chapter of the MexicanAssociation of Banks until February 2007. Mr. Leal has anundergraduate degree in economics from Universidad Veracruzana.

 

**AlbertoUrquiza Quiroz**serves as VicePresident—International Division. Mr. Urquiza also served as Vice president ofNAFIN (Nacional Financiera), a Mexican development bank for five years, wherehe held several positions including Government Banking VP, Business DevelopmentVP and Mexico City Metropolitan Area VP. Prior thereto Mr. Alberto workedin Bancomer, one of the biggest banks in Mexico, for more than 15 years asGovernment Banking VP, Corporate Banking VP and Finance Engineer. He also ownsa software company. He holds an undergraduate degree in business administrationfrom Universidad Iberoamericana in Mexico City, an MBA from IPADE BusinessSchool and a postgraduate in Finance from Instituto Tecnológico Autónomo deMéxico (ITAM).

 

**Fernando Ventura Peña** serves as Vice President––TourismDivision.  Mr. Ventura has served asTourism Division Project Director since October 2008.  Prior to joining Homex, Mr. Ventura served asDirector and Project Manager of architecture and interior design in prestigiousarchitectural firms, such as Grupo GIA, Grupo MAC, Grupo Architech, GrupoAcción, ALESI Arquitectos and Gosselin Ingenieros Arquitectos Consultores,among others. Mr. Ventura has a degree in Engineering and Architecture fromInstituto Politécnico Nacional.

 

**Compensation of Directors and SeniorManagement**

 

Each member of the board of directors is paid a fee ofUS$12,500 for each board meeting that he or she attends, subject to an annualcap of US$50,000. In addition, members of the audit committee are also paid anannual compensation fee of US$25,000 (the chairman of the audit committee’s annualcompensation is US$35,000 and members of the executive, corporate governanceand compensation committees are paid an annual fee of US$5,000).

 

For 2009, the aggregate amount of compensation net oftaxes paid to all directors, alternate directors and committee members wasapproximately US$510,482, which includes US$58,493 of variable compensation fordirectors paid during the second quarter of 2009.

 

For 2009, no compensation was paid to executiveofficers through the Long Term Executives Stock Option Plan.

 

We offer a bonus plan to our directors and seniormanagement that is based on individual performance and our results ofoperations. This variable compensation can range from 30% to 50% of annual basecompensation, depending on the employee’s level.

 

Since late 2007, we offer a stock option plan as anincentive to key executives of the Company. The shares for the stock optionplan for executives (999,200 shares) were repurchased by the Company, through atrust especially created for this purpose. In 2007, 978,298 stock options weregranted to the key executives at an exercise price of greater than the marketvalue at the grant date of Ps.98.08. During 2008, a total of 29,929 optionswere exercised, and 335,853 options were cancelled upon departure of therelated employees. In addition, during 2009 the Company increased the stockoption plan by approving the issuance of 73,232 additional stock options andgranted 321,549 options at an exercise price of 43.54 Mexican pesos. None ofour executives own more than 1% of stock.

 

The executives have the right to exercise one-third oftheir total options granted per year. The right to exercise the option expiredafter one year from the grant date or, in some cases, after 180 days from thedeparture of the executive from the Company. Given the condition of the equitymarkets in 2008 and 2009, the Company’s Compensation Committee authorized themodification of the terms of the awards. Specifically, the duration of theprogram for options that were granted up to December 31, 2008 was extended

 

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whereby the exercise of awards if not made in thepreviously specified period, could be exercised on year following but not laterthan December 31, 2010.

 

On October 27, 2009, certain modifications to theplan were made, as a result, the plan changed from a cash settled award to anequity settlement award.

 

The average fair value ofall the stock options granted was Ps.15.63, Ps.6.02 and Ps.18.42 Mexican pesosper stock option, as of December 31, 2009, 2008 and 2007, respectively.

 

Compensation cost related to vested stock optionawards was Ps.10,638 thousand at December 31, 2009. Total compensationcost related to vested stock option awards not yet recognized was Ps.3,687thousand and Ps.18,019 thousand at December 31, 2008 and 2007,respectively.

 

**EMPLOYEES**

 

As of December 31, 2009 we had a total ofapproximately 12,295 employees, of whom 11,854 were employed in Mexico, 19 wereemployed in India and 422 in Brazil. Our total employees for the years ended2008 and 2007 were 17,280 and 15,127, respectively. For the year endedDecember 31, 2008, we had 29 employees in India. Of our total employees asof December 31, 2009, approximately 42% were white-collar and 58% were blue-collar.

 

**Share Ownership**

 

The following table sets forth the beneficialownership of our capital stock by our directors and senior management as of thedate of this annual report. The table includes only those individuals who holdmore than one percent of the outstanding shares of our capital stock.

 
| **Name**                                            | ** ** | **Number of  Common Shares  Owned** | ** ** | **Percentage of  Common Shares  Outstanding** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| Eustaquio Tomás de Nicolás Gutiérrez |       | 36,640,369                                    |       | 10.91                                                   | %          |
| Gerardo de Nicolás  Gutiérrez             |       | 34,808,351                                    |       | 10.36                                                   | %          |
| José Ignacio de Nicolás Gutiérrez    |       | 8,363,326                                     |       | 2.49                                                    | %          |
| Julián de Nicolás  Gutiérrez         |       | 27,480,277                                    |       | 8.18                                                    | %          |

 

**ITEM7.       Major Shareholders and Related PartyTransactions.**

 

**MAJORSHAREHOLDERS**

 

As of December 31, 2009, there were 335,681,683common shares issued and outstanding, with 169,680,498 shares held in theUnited States in the form of American Depositary Shares by six record holders.The remaining shares were held through Mexican custodians. Because certain ofthe shares are held by nominees, the number of record holders may not berepresentative of the number of beneficial holders.

 

On January 24, 2006, the Company completed asuccessful non-dilutive secondary public offering of approximately 45.6 millionshares of its common stock by a group of investors controlled byMr. Carlos Romano, the former majority investor of Beta, who sold hisposition in Homex as part of his overall financial strategy. EquityInternational Properties also sold approximately 33.0% of its position.Consequently, the public float of the Company was increased to 46.0% of thetotal equity of Homex.

 

On May 15, 2007, Mr. José Ignacio de NicolasGutierrez, a member of the Homex board of directors, sold a significant portionof his interest in Homex through the Mexican Stock Exchange, decreasing thepercentage of shares owned by the de Nicolás family and increasing the publicfloat of the Company to 54.0% of the total equity of Homex.

 

On July 26, 2007, Equity InternationalProperties, Ltd., a shareholder of the Company, sold approximately 8.6million common shares through the Mexican Stock Exchange. These sharesrepresented 20% of its ownership in the Company. The public float of theCompany was increased to 56.61% of the total equity of Homex.

 

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On November 8, 2007, the main shareholdersof Homex, led by Mr. Eustaquio de Nicolás Gutierrez, chairman of theboard of directors of Homex, acquired 6.7 million common shares ofHomex from EIP Investment Holdings L.L.C., an indirect subsidiary ofEIP, in a private transaction.

 

On February 5, 2008, the de Nicolás familyacquired 17,142,857 common shares of Homex from EIP in aprivate transaction. On April 25, 2008, pursuant to theinvestment policies of EIP’s investment fund, EIP sold approximately 11 millioncommon shares of Homex in a private transaction. As of March 31, 2009, EIPhad an ownership equivalent to 0.97% of the Company’s common shares. See “Item4.  Information on the Company—BusinessOverview—Our Relationship with Equity International Properties, Ltd.”

 

The de Nicolás family now holds 35.1% of Homex’scapital. The public float remains below 64.9%.

 

The table below sets forth information concerning thepercentage of our capital stock owned by any person known to us to be the ownerof 5% or more of any class of our voting securities, our directors and officersas a group and our other shareholders as of June 29, 2010. The Company’smajor shareholders do not have different or preferential voting rights withrespect to the shares they own.

 
| ** **                            | ** ** | **As of June 29, 2010** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| **Identity of Shareholder** | ** ** | **Number of Shares**              | ** ** | **% of Share Capital** | ** ** |
| de Nicolás family(1)             |       | 117,777,176                                 |       | 35.1 | % |
| Total(2)                              |       | 335,869,550                                 |       | 100.0 | % |

 
| (1)    | Held by Ixe Banco, S.A. as trustee of Trust  No. F/466 for the benefit of the de Nicolás family,  including Eustaquio Tomás de Nicolás Gutiérrez, José Ignacio de Nicolás  Gutiérrez, Gerardo de Nicolás Gutiérrez, Julián de Nicolás Gutiérrez and Ana  Luz de Nicolás Gutiérrez. Voting and dispositive control over these shares is  directed by a Technical Committee comprised of Eustaquio Tomás de Nicolás  Gutiérrez, José Ignacio de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez,  Julián de Nicolás Gutiérrez and Juan Carlos Torres Cisneros. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | Includes public shareholders that in the aggregate  hold 64.9% of our share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**RELATEDPARTY TRANSACTIONS**

 

We have engaged, and in the future may engage, intransactions with our shareholders and companies affiliated with ourshareholders. We believe that the transactions in which we have engaged withthese parties have been made on terms that are no less favorable to us thanthose that could be obtained from unrelated third parties. We currently requirethat transactions with our shareholders and companies affiliated with ourshareholders be approved by our board of directors after considering therecommendation of our audit committee or our corporate governance andcompensation committee and, in certain cases, after an independent fairness opinion,as required by the Mexican Securities Market Law and other applicable laws.

 

The Company was a partyto an administrative service agreement with two entities whose principal ownersare officers of the Company (Serviasesorías and Administradores de la Empresaen Equipo), for which PICSA paid a 5% fee based on total expenses. The amountspaid under this agreement totaled Ps. 55,389 thousand in 2007. No amounts werepaid in 2009 and 2008. As of April 1, 2007, these companies entered in aliquidation process and the employees were transferred to subsidiaries of theCompany.

 

**Financing to Related Parties**

 

No related party transactions were reported in 2009and 2008.

 

**Land Purchases from Related Parties**

 

No related party transactions were reported in 2009 and2008.

 

**ITEM8.       Financial Information.**

 

See “Item 18. Financial Statements.”  Forinformation on our dividend policy, see “Item 3. KeyInformation—Dividends.” For information on legal proceedings related to us, see“—Legal Proceedings.”

 

**LEGALPROCEEDINGS**

 

As of the date of this annual report, we are involvedin certain legal proceedings incidental to the normal operation of ourbusiness. We do not believe that liabilities resulting from these proceedingsare likely to have a material adverse effect on our financial condition, cashflow, or results of operations.

 

In July 2007, the Company entered into a Quotaholders’ Agreement with Empreendimentos Imobiliarios Limitada (“E.O.M”),pursuant to which the Company agreed to contribute 67% and E.O.M. agreed tocontribute 33% of the projected 4.0 million Brazilian Reals capital stock ofHomex Brasil Incorporacoes and Construcoes Imobiliarios Limitada. Followingdisagreements with E.O.M., the Company exercised its right to withdraw from theQuota holders’ Agreement.

 

In November 2008, the Company reached anagreement (“Brazilian settlement”) to end the Quota holders’ Agreement enteredinto with E.O.M. in July 2007, and terminate all litigation that had beentaking place in the previous months. The settlement of the dispute included thepurchase of the 33% interest of Khafif family’s in Homex Brasil, throughE.O.M., for BR$8,352,941, equivalent to approximately Ps.48,536 thousand, ofwhich BR$5.2 million (Ps.25,030 thousand) has been paid as of December 31,2009 (Ps.11,730 thousand was paid as of December 31, 2008). The remainingbalance will be paid in two equal payments in the months of April andOctober of 2010. The Company has treated the step acquisition of thisnon-controlling interest as a transaction between entities under commoncontrol, as is appropriate under MFRS. Because E.O.M. had negligibleidentifiable tangible or intangible assets as of the date of the transaction,the Company has recognized the entire amount of this transaction as a settlementexpense (other expense) in the statement of income for 2008 (See Note 21 to theconsolidated financial statements).

 

The Company now operates in Brazil through its100%-owned subsidiary.

 

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**ITEM9.       The Offer and Listing.**

 

Our common shares have been traded on the MexicanStock Exchange (*Bolsa Mexicana de Valores,S.A. de C.V.*) since June 29, 2004. The ADSs, eachrepresenting six common shares, have been trading on the New York StockExchange since June 29, 2004. On December 31, 2009, therewere 335,681,683 outstanding common shares (of which 169,680,498 wererepresented by 28,280,083 ADSs held by six holders of record in the UnitedStates).

 

The following table sets forth, for the periodsindicated, the quarterly and monthly high and low closing sale prices of ourcommon shares and ADSs as reported by the Mexican Stock Exchange and the NewYork Stock Exchange, respectively.

 
| ** **       | ** ** | **Mexican Stock Exchange** | ** ** | **NYSE**                                                                                      | ** ** |
|------------------|------------|--------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **       | ** ** | **High**                             | ** ** | **Low**                                                                                       | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **       | ** ** | **(Ps.per share)**              | ** ** | **(U.S. $ per ADS)********(one ADS=********six common shares)** | ** ** |
| **2005**         |       |                                 |       |                                                                                          |       |   |   |   |   |
| 1st Quarter |       | 62.66                                |       | 43.54                                                                                         |       | 33.62 |   | 22.89 |   |
| 2nd Quarter |       | 49.20                                |       | 39.86                                                                                         |       | 27.60 |   | 21.70 |   |
| 3rd Quarter |       | 56.34                                |       | 48.68                                                                                         |       | 31.97 |   | 26.98 |   |
| 4th Quarter |       | 58.77                                |       | 49.18                                                                                         |       | 32.80 |   | 27.21 |   |
|             |       |                                 |       |                                                                                          |       |   |   |   |   |
| **2006**         |       |                                 |       |                                                                                          |       |   |   |   |   |
| 1st Quarter |       | 66.85                                |       | 54.80                                                                                         |       | 38.21 |   | 30.68 |   |
| 2nd Quarter |       | 71.26                                |       | 51.90                                                                                         |       | 38.98 |   | 27.11 |   |
| 3rd Quarter |       | 70.97                                |       | 56.37                                                                                         |       | 39.45 |   | 30.85 |   |
| 4th Quarter |       | 108.16                               |       | 68.23                                                                                         |       | 59.90 |   | 36.97 |   |
|             |       |                                 |       |                                                                                          |       |   |   |   |   |
| **2007**         |       |                                 |       |                                                                                          |       |   |   |   |   |
| 1st Quarter |       | 117.20                               |       | 93.71                                                                                         |       | 64.14 |   | 50.03 |   |
| 2nd Quarter |       | 115.35                               |       | 104.62                                                                                        |       | 63.16 |   | 57.13 |   |
| 3rd Quarter |       | 112.02                               |       | 89.89                                                                                         |       | 62.37 |   | 49.59 |   |
| 4th Quarter |       | 105.18                               |       | 82.47                                                                                         |       | 57.90 |   | 44.97 |   |
|             |       |                                 |       |                                                                                          |       |   |   |   |   |
| **2008**         |       |                                 |       |                                                                                          |       |   |   |   |   |
| 1st Quarter |       | 112.90                               |       | 84.11                                                                                         |       | 62.80 |   | 45.99 |   |
| 2nd Quarter |       | 120.10                               |       | 100.49                                                                                        |       | 69.85 |   | 58.58 |   |
| 3rd Quarter |       | 103.04                               |       | 74.92                                                                                         |       | 60.84 |   | 41.41 |   |
| 4th Quarter |       | 77.60                                |       | 27.17                                                                                         |       | 42.51 |   | 12.05 |   |
|             |       |                                 |       |                                                                                          |       |   |   |   |   |
| **2009**         |       |                                 |       |                                                                                          |       |   |   |   |   |
| 1st Quarter |       | 56.78                                |       | 26.06                                                                                         |       | 25.55 |   | 10.05 |   |
| 2nd Quarter |       | 65.83                                |       | 33.58                                                                                         |       | 29.21 |   | 14.54 |   |
| 3rd Quarter |       | 89.75                                |       | 60.23                                                                                         |       | 40.39 |   | 26.69 |   |
| 4th Quarter |       | 95.59                                |       | 69.29                                                                                         |       | 43.81 |   | 31.65 |   |
|             |       |                                 |       |                                                                                          |       |   |   |   |   |
| **2010**         |       |                                 |       |                                                                                          |       |   |   |   | ** ** |
| January          |       | 77.51                                |       | 66.82                                                                                         |       | 36.63 |   | 30.65 |   |
| February         |       | 67.55                                |       | 56.88                                                                                         |       | 31.43 |   | 26.82 |   |
| March            |       | 59.36                                |       | 54.13                                                                                         |       | 27.94 |   | 26.08 |   |
| April            |       | 64.70                                |       | 58.58                                                                                         |       | 31.83 |   | 28.77 |   |
| May              |       | 60.66                                |       | 53.35                                                                                         |       | 29.75 |   | 24.50 |   |
| June             |       | 57.49                                |       | 54.37                                                                                         |       | 26.86 |   | 25.31 |   |

 

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On June 29, 2010  , the last reported sale price of thecommon shares on the Mexican Stock Exchange was Ps.54.85 per common share andthe last reported sale price of the ADSs on the New York Stock Exchange was US$25.63per ADS.

 

**MEXICANSTOCK EXCHANGE**

 

The Mexican Stock Exchange, located in Mexico City, isthe only stock exchange in Mexico. Operating continuously since 1907, theMexican Stock Exchange is organized as a corporation (*sociedad anónima bursátil de capital variable*).Securities are traded on the Mexican Stock Exchange each business day from8:30 a.m. to 3:00 p.m., Mexico City time.

 

Since January 1999, all trading on the MexicanStock Exchange has been effected electronically. The Mexican Stock Exchange mayimpose a number of measures to promote an orderly and transparent trading priceof securities, including the operation of a system of automatic suspension oftrading in shares of a particular issuer when price fluctuation exceeds certainlimits. The Mexican Stock Exchange may also suspend trading in shares of aparticular issuer as a result of:

 

·                    non-disclosure of material events; or

 

·                    changes in the offer or demand, volumetraded, or prevailing share price, that are inconsistent with the shares’historical performance and cannot be explained through publicly availableinformation.

 

The Mexican Stock Exchange may reinstate trading insuspended shares when it deems that the material events have been adequatelydisclosed to public investors or when it deems that the issuer has adequatelyexplained the reasons for the changes in offer and demand, volume traded, orprevailing share price. Under current regulations, the Mexican Stock Exchangemay consider the measures adopted by other stock exchanges in order to suspendand/or resume trading in an issuer’s shares in cases where the relevantsecurities are simultaneously traded on a stock exchange outside Mexico.

 

Settlement on the Mexican Stock Exchange is effectedtwo business days after a share transaction. Deferred settlement is notpermitted without the approval of the CNBV, even where mutually agreed. Mostsecurities traded on the Mexican Stock Exchange are on deposit with the MexicanSecurities Depository, or INDEVAL (*S.D.Indeval, S.A. de C.V., Institución para el Depósito de Valores, S.A. deC.V.*), a privately owned securities depositary that acts as aclearinghouse, depositary, and custodian, as well as a settlement, transfer,and registration agent for Mexican Stock Exchange transactions, eliminating theneed for physical transfer of securities.

 

Although the Mexican Securities Market Law (*Ley del Mercado de Valores*) provides forthe existence of an over-the-counter market, no such market for securities inMexico has developed.

 

***Market Regulationand Registration Standards***

 

In 1925, the Mexican Banking Commission (*Comisión Nacional Bancaria*) wasestablished to regulate banking activity and in 1946 the CNBV was establishedto regulate stock market activity. In 1995, these two entities were merged toform the CNBV. The Mexican Securities Market Law, which took effect in 1975,introduced important structural changes to the Mexican financial system,including the organization of brokerage firms as corporations (*sociedades anónimas*). The MexicanSecurities Market Law sets standards for authorizing companies to operate asbrokerage firms, which authorization is granted at the discretion of the CNBVby resolution of its board of governors. In addition to setting standards forbrokerage firms, the Mexican Securities Market Law authorizes the CNBV, amongother things, to regulate the public offering and trading of securities and toimpose sanctions for the illegal use of insider information and otherviolations of the Mexican Securities Market Law. The CNBV regulates the Mexicansecurities market, the Mexican Stock Exchange, and brokerage firms through aboard of governors composed of 13 members.

 

Effective June 28, 2006, the Mexican SecuritiesMarket Law requires issuers to increase the protections offered to minorityshareholders and to bring corporate governance practices in line withinternational standards. Such protections and corporate governance practiceshave been incorporated to our bylaws. See “Item 3. Key Information—Risk Factors— Risk Factors Related to Mexico — Minority shareholders have different rightsagainst us, our directors, or our controlling shareholders in Mexico.”

 

To offer securities to the public in Mexico, an issuermust meet specific qualitative and quantitative requirements. In addition, onlysecurities that have been registered with the Mexican Securities Registrypursuant to CNBV approval may be listed on the Mexican Stock Exchange. TheCNBV’s approval for registration does not imply any kind of certification orassurance related to the investment quality of the securities, the solvency ofthe issuer, or the accuracy or completeness of any information delivered to theCNBV.

 

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In March 2003, the CNBV issued certain generalregulations applicable to issuers and other securities market participants. Thegeneral regulations, which repealed several previously enacted CNBVregulations *(circulares*),now provide a single set of rules governing issuers and issuer activity,among other things. The CNBV general regulations were amended to conform to theMexican Securities Market Law by resolution of the CNBV published onSeptember 6, 2004, September 22, 2006, and were updated onSeptember 19, 2008, January 27, July 22 and December 29,2009.

 

The general regulations state that the Mexican StockExchange must adopt minimum requirements for issuers to list their securitiesin Mexico. These requirements relate to matters such as operating history,financial and capital structure, and distribution. The general regulations alsostate that the Mexican Stock Exchange must implement minimum requirements forissuers to maintain their listing in Mexico. These requirements relate tomatters such as financial condition, trading minimums, and capital structure,among others. The Mexican Stock Exchange will review compliance with theforegoing requirements and other requirements on an annual, semi-annual andquarterly basis. The Mexican Stock Exchange must inform the CNBV of the resultsof its review and this information must, in turn, be disclosed to investors. Ifan issuer fails to comply with any of the foregoing requirements, the MexicanStock Exchange will request that the issuer propose a plan to cure theviolation. If the issuer fails to propose a plan, or if the plan is notsatisfactory to the Mexican Stock Exchange, or if an issuer does not makesubstantial progress with respect to the corrective measures, trading of therelevant series of shares on the Mexican Stock Exchange will be temporarilysuspended. In addition, if an issuer fails to propose a plan or ceases tofollow the plan once proposed, the CNBV may suspend or cancel the registrationof the shares.

 

Issuers of listed securities are required to fileunaudited quarterly financial statements and audited annual financialstatements as well as various periodic reports with the CNBV and the MexicanStock Exchange. Mexican issuers must file the following reports with the CNBV:

 

·    an annual reportprepared in accordance with CNBV regulations by no later than June 30 ofeach year (analogous to reports filed with the SEC by U.S. issuers onForm 10-K and by foreign private issuers on Form 20-F);

 

·    quarterlyreports, within 20 days following the end of each of the first threequarters and 40 days following the end of the fourth quarter (analogous toreports filed with the SEC by U.S. issuers on Form 10-Q); and

 

·    current reportspromptly upon the occurrence of material events (analogous to reports filedwith the SEC by U.S. issuers on Form 8-K and by foreign private issuers onForm 6-K).

 

Pursuant to the CNBV’s general regulations, theinternal rules of the Mexican Stock Exchange were amended to implement anautomated electronic information transfer system, or SEDI (*Sistema Electrónico de Envío y Difusión deInformación*), for information required to be filed with the MexicanStock Exchange. Issuers of listed securities must prepare and disclose theirfinancial information via a Mexican Stock Exchange-approved electronicfinancial information system, or SIFIC (*Sistemade Información Financiera Computarizada*). Immediately upon itsreceipt, the Mexican Stock Exchange makes financial information prepared viaSIFIC available to the public.

 

The CNBV’s general regulations and the rules ofthe Mexican Stock Exchange require issuers of listed securities to fileinformation through SEDI that relates to any act, event, or circumstance thatcould influence an issuer’s share price. If listed securities experienceunusual price volatility, the Mexican Stock Exchange must immediately requestthat the issuer inform the public as to the causes of the volatility or, if theissuer is unaware of the causes, that the issuer make a statement to that effect.In addition, the Mexican Stock Exchange must immediately request that issuersdisclose any information relating to relevant material events, when it deemsthe information currently disclosed to be insufficient, as well as instructissuers to clarify the information when necessary. The Mexican Stock Exchangemay request issuers to confirm or deny any material events that have beendisclosed to the public by third parties when it deems that the material eventmay affect or influence the securities being traded. The Mexican Stock Exchangemust immediately inform the CNBV of any such requests. In addition, the CNBVmay also make any of these requests directly to issuers. An issuer may deferthe disclosure of material events under some circumstances, as long as:

 

·                    the issuer implements adequateconfidentiality measures;

 

·                    the information is related to incompletetransactions;

 

·                    there is no misleading public informationrelating to the material event; and

 

·                    no unusual price or volume fluctuationoccurs.

 

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The CNBV and the MexicanStock Exchange may suspend trading in an issuer’s securities:

 

·    if the issuer doesnot disclose a material event; or

 

·    upon price orvolume volatility or changes in the offer or demand in respect of the relevantsecurities that are not consistent with the historic performance of thesecurities and cannot be explained solely through information made publiclyavailable pursuant to the CNBV’s general regulations.

 

The Mexican Stock Exchange must immediately inform theCNBV and the general public of any such suspension. An issuer may request thatthe CNBV or the Mexican Stock Exchange resume trading, assuming the issuerdemonstrates that the causes triggering the suspension have been resolved andthat it is in full compliance with the periodic reporting requirements underthe applicable law. If the issuer’s request has been granted, the Mexican StockExchange will determine the appropriate mechanism to resume trading. If tradingin an issuer’s securities is suspended for more than 20 business days and theissuer is authorized to resume trading without conducting a public offering,the issuer must disclose via SEDI a description of the causes that resulted inthe suspension and reasons why it is now authorized to resume trading beforetrading may resume.

 

Similarly, if an issuer’s securities are traded onboth the Mexican Stock Exchange and a foreign securities exchange, the issuermust simultaneously file the information that it is required to file pursuantto the laws and regulations of the foreign jurisdiction with the CNBV and theMexican Stock Exchange.

 

Pursuant to the Mexican Securities Market Law:

 

·                    members of the board of directors andprincipal officers of a listed issuer;

 

·                    shareholders controlling 10% or more of alisted issuer’s outstanding share capital, and the directors and principalofficers of such shareholders;

 

·                    groups having significant influence on alisted issuer; and

 

·                    other insiders

 

must abstain from purchasing or selling securities ofthe issuer within 90 days from the most recent public tender of shares ofthe issuer for sale or purchase, respectively. Shareholders of issuers listedon the Mexican Stock Exchange must notify the Mexican Stock Exchange of anytransactions made in or outside the Mexican Stock Exchange that result in atransfer of 10% or more but less than 30% of an issuer’s share capital on theday following the respective transaction.

 

The Mexican Securities Market Law requires anyacquirer of more than 30% of an issuer’s outstanding share capital to make apublic tender offer.

 

Any intended acquisition of a public company’s sharesthat results in the acquirer obtaining control of the company requires thepotential acquirer to make a tender offer for 100% of the company’s outstandingshare capital. These tender offers must be made at the same price for alltendering shareholders. The board of directors must give an opinion on anytender offer within 10 days after the tender offer notice.

 

In addition, the Mexican Securities Market Lawrequires shareholders holding 10% or more of a listed issuer’s share capital tonotify the CNBV of any share transfer.

 

Pursuant to the January 27, 2009 CNBV regulationsupdate, the Company must notify the CNBV by June 30 of each year theindividual shareholdings by directors and executive officers of 1% or more ofthe Company’s share capital, or any other shareholdings of more than 5% of saidcapital.

 

***Mexican SecuritiesMarket Law***

 

The Mexican legislature issued an amended MexicanSecurities Market Law effective June 28, 2006. The amendments provide,among other things, that:

 

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·                   issuers must have a board of directorswith at least five and not more than 21 members, of which 25% must qualify as“independent directors” under Mexican law;

 

·                   issuers’ boards of directors must approverelated party transactions and material asset transactions;

 

·                   issuers must appoint and maintain anaudit committee and a corporate governance committee; and

 

·                   issuers must provide additionalprotections for minority shareholders.

 

The Mexican Securities Market Law permits issuers toinclude anti-takeover defenses in their bylaws and provides for specifiedminority rights and protections, among other things.

 

The Mexican Securities Market Law does not permitissuers to implement mechanisms where common shares and limited or non-votingshares are jointly traded or offered to public investors, unless the limited ornon-voting shares are convertible into common shares within a term of up tofive years. In addition, the aggregate amount of shares with limited ornon-voting rights may not exceed 25% of the aggregate amount of publicly-heldshares, unless approved by the CNBV.

 

**ITEM10.       Additional Information.**

 

**BYLAWS**

 

Set forth below is a brief summary of certain significantprovisions of (1) our bylaws, as amended by our shareholders in accordancewith the Mexican Securities Market Law and regulations, and (2) theMexican Companies Law. This description does not purport to be complete and isqualified by reference to our bylaws, which have previously been filed with theSEC.

 

**Organization and Register**

 

We are a corporation (*sociedadanónima bursátil de capital variable*) organized in Mexico under the*Ley General de Sociedades Mercantiles*, orthe Mexican Companies Law and the*Ley delMercado de Valores*, or the Mexican Securities Market Law. We wereincorporated on March 30, 1998 and the duration of our corporate life isindefinite. Our corporate purpose, as fully described in Article 2 of ourbylaws, is to act as a holding company. As such, our bylaws grant us the powerto engage in various activities, which allow us to function as a holdingcompany. These powers include, but are not limited to, the ability to(i) promote, establish, organize and administer all types of companies,mercantile or civil; (ii) acquire or dispose of stock or interests inother mercantile or civil companies, either by taking part in their formationor acquiring shares or interests in companies that are already in existence;(iii) receive from third parties and give to the companies of which it isa shareholder or partner or to any other third party, guidance or technicalconsulting services, including services in the fields of administration,accounting, merchandising or financing; (iv) obtain, acquire, utilize ordispose of any patent, brand or commercial name, franchise or rights inindustrial property in Mexico or abroad; (v) obtain any type of financingor loan, with or without a specific guarantee, and grant loans to mercantile orcivil companies or other persons in which the company has an interest or withothers with which it has a business relationship; (vi) grant any type ofguarantee and endorsement in respect to obligations or credit instruments, forthe benefit of mercantile or civil companies or other persons with which thecompany has an interest or with which it maintains a business relationship;(vii) issue, subscribe, draw, accept and endorse all types of creditinstruments, including obligations with or without a guarantee; (viii) acquire,rent, administer, sell, mortgage, pledge, encumber or dispose of goods, inwhatever form, being movable or immovable, as well as rights over the same;(ix) execute any kind of act and formalize any kind of labor, civil,mercantile or administrative agreement or contract permitted by Mexicanlegislation, with real and corporate personalities that are either public orprivate, obtaining from these, concessions, permits and authorizations relatingdirectly or indirectly to the company’s objectives as set forth in its bylaws,including, actively or passively entering into any agreement regarding any typeof services, consulting work, supervisory work and technical direction thatwould be necessary or proper for the aforementioned goals; (x) issue treasurystock in accordance with Article 81 of the Mexican Securities Market Law;(xi) establish agencies or representatives and act as broker, agent,representative, mercantile mediator or distributor; and (xii) perform anyacts necessary to accomplish the foregoing.

 

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**Directors**

 

Our bylaws provide that our board of directors willconsist of a minimum of five and a maximum of 21 members, as resolved by therelevant shareholders’ meeting. At least 25% of the members of our board ofdirectors must be independent pursuant to Mexican law. At each shareholders’meeting for the election of directors, holders of at least 10% of our outstandingshare capital are entitled to appoint one member of the board of directors.

 

Pursuant to Mexican law, any director who has aconflict of interest with us relating to a proposed transaction must disclosethe conflict and refrain from voting on the transaction or be liable fordamages. Directors receive compensation as determined at the ordinaryshareholders’ meetings.

 

**Authority of the board of directors**

 

The board of directors is our legal representative andis authorized to take any action in connection with our operations notexpressly reserved to our shareholders. Pursuant to the Mexican SecuritiesMarket Law, the board of directors must approve, among other things:

 

·                   strategic decisions for the Company andits subsidiaries;

 

·                   any transactions outside the ordinarycourse of business to be undertaken with related parties;

 

·                   significant asset transfers oracquisitions;

 

·                   credit policies;

 

·                   granting material guarantees orcollateral;

 

·                   designation of the Chief ExecutiveOfficer (or Director General); and

 

·                   any other important transactions.

 

Meetings of our board of directors are validlyconvened and held if a majority of its members are present. Resolutions passedat these meetings will be valid if approved by a majority of the disinterestedmembers of the board of directors present at the meeting. If required, thechairman of the board of directors may cast a tie-breaking vote.

 

**Voting Rights and Shareholders’Meetings**

 

Each common share entitles its holder to one vote atany meeting of our shareholders.

 

Under Mexican law and our bylaws, we may hold twotypes of shareholders’ meetings:  ordinary and extraordinary.

 

Ordinary shareholders’ meetings are those called todiscuss any issues not reserved for extraordinary shareholders’ meetings. Anannual ordinary shareholders’ meeting must be held within the first four monthsfollowing the end of each fiscal year to discuss, among other things:

 

·                   approving or modifying the report of theboard of directors including the audited year-end financial statements, as wellas the report of the Chief Executive Officer (or Director General);

 

·                   allocating profits, if applicable;

 

·                   appointing or ratifying the appointmentof members of the board of directors and the secretary, and determining theircompensation;

 

·                   appointing the chairman of the auditcommittee and of the corporate governance committee;

 

·                   designating the maximum amount that maybe allocated to share repurchases;

 

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·                   discussing the audit committee’s andcorporate governance committee’s annual reports to the board of directors; and

 

·                     approving transactions of the Company andsubsidiaries representing 20% or more of the consolidated assets of theCompany.

 

Extraordinary shareholders’ meetings may be called toconsider any of the following matters, among other things:

 

·                   extending the corporate duration of theCompany;

 

·                   dissolution;

 

·                   increases or reductions of our fixedshare capital;

 

·                   changes in the Company’s corporatepurpose or nationality;

 

·                   transformation or merger;

 

·                   issues of preferred shares;

 

·                   share redemptions;

 

·                   delisting of our shares with the MexicanSecurities Registry or with any stock exchange;

 

·                   any amendments to our bylaws; and

 

·                   any other matters for which applicableMexican law or the bylaws specifically require an extraordinary shareholders’meeting.

 

The board of directors, the audit committee and thecorporate governance committee may call any shareholders’ meeting. Anyshareholder or group of shareholders with voting rights representing at least10% of our share capital may request in writing that the board of directorscall a shareholders’ meeting to discuss the matters indicated in the writtenrequest. If the board of directors fails to call a meeting within 15 calendardays following the date of such written request, the shareholder or group ofshareholders may request that a competent court call the meeting. A single shareholdermay request a call for a shareholders’ meeting if no meeting has been held fortwo consecutive years or if matters to be dealt with at an ordinaryshareholders’ meeting have not been considered.

 

Holders of 20% of our outstanding shares may opposeany resolution adopted at a shareholders’ meeting and file a petition for acourt order to suspend the resolution temporarily within 15 days followingthe adjournment of the meeting at which the action was taken, provided that thechallenged resolution violates Mexican law or our bylaws and the opposingshareholders neither attended the meeting nor voted in favor of the challengedresolution. In order to obtain such a court order, the opposing shareholdermust deliver a bond to the court in order to secure payment of any damages thatwe may suffer as a result of suspending the resolution in the event that thecourt ultimately rules against the opposing shareholder. Shareholdersrepresenting at least 10% of the shares present at a shareholders’ meeting mayrequest to postpone a vote on a specific matter on which they considerthemselves to be insufficiently informed.

 

Notices of shareholders’ meetings must be published inthe official gazette of Sinaloa and in one newspaper of general circulation inthe country at least 15 calendar days prior to the date of the meeting. Eachnotice must set forth the place, date, and time of the meeting and the mattersto be addressed and must be signed by whomever convenes the meeting.Shareholders’ meetings will be deemed validly held and convened without a priornotice or publication whenever all the shares representing our capital are dulyrepresented. All relevant information relating to the shareholders’ meetingmust be made available to shareholders starting on the date the notice is published.

 

To be admitted to any shareholders’ meeting,shareholders must be registered in our share registry or provide evidence oftheir status as shareholders as provided in our bylaws (including throughcertificates provided by INDEVAL and INDEVAL participants). Shareholders mayappoint one or more attorneys-in-fact to represent them pursuant to general orspecial powers of attorney or by a proxy. Attorneys-in-fact may not bedirectors of Homex.

 

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At or prior to the time of the publication of anynotice of a shareholders’ meeting, we will provide copies of the notice to thedepositary for distribution to the ADS holders. ADS holders are entitled toinstruct the depositary as to the exercise of voting rights pertaining to thecommon shares.

 

**Quorum**

 

Ordinary shareholders’ meetings are legally convenedpursuant to a first notice when a majority of our share capital is present orduly represented. Any number of shares present or duly represented at anordinary meeting of shareholders convened pursuant to a second or subsequentnotice constitutes a quorum. Resolutions at ordinary shareholders’ meetings arevalid when approved by a majority of the shares present at the meeting.

 

Extraordinary shareholders’ meetings are regarded aslegally convened pursuant to a first notice when at least 75% of the shares ofour share capital are present or duly represented. A majority of shares must bepresent or duly represented at an extraordinary shareholders’ meeting calledpursuant to a second or subsequent notice to be considered legally convened.Resolutions at extraordinary shareholders’ meetings are valid when approved byone-half of our share capital.

 

**Registration and Transfer**

 

We have registered our common shares with the MexicanSecurities Registry maintained by the CNBV, as required under the MexicanSecurities Market Law and regulations issued by the CNBV. If we wish to cancelour registration, or if it is cancelled by the CNBV, our shareholders who aredeemed to have “control” at that time will be required to make a public offerto purchase all outstanding shares, prior to the cancellation.

 

Our shareholders may hold our common shares asphysical certificates or, upon registration, through institutions havingaccounts at INDEVAL. These accounts may be maintained by brokers, banks andother entities approved by the CNBV. In accordance with Mexican law, onlyholders listed in our share registry and those holding ownership certificatesissued by INDEVAL and INDEVAL participants are recognized as our shareholders.

 

**Changes in Share Capital andPre-emptive Rights**

 

Our minimum fixed share capital may be reduced orincreased by a resolution of an extraordinary shareholders’ meeting, subject tothe provisions of our bylaws, the Mexican General Business Corporations Law,the Mexican Securities Market Law and regulations issued thereunder. Ourvariable share capital may be reduced or increased by resolution of an ordinaryshareholders’ meeting in compliance with the voting requirements of our bylaws.

 

In the event of a share capital increase, ourshareholders will have a pre-emptive right to subscribe and pay for new stockissued as a result of the increase in proportion to their shareholder interestat that time, except if the new stock is issued for a public offering. Thispre-emptive right must be exercised by subscribing and paying for the relevantshares within the time period set forth in the resolution authorizing theincrease, which will be no less than 15 calendar days following the date ofpublication of the corresponding notice to our shareholders in the officialgazette of Sinaloa and in one newspaper of general circulation in Culiacán,Sinaloa.

 

**Share Repurchases**

 

Pursuant to the Mexican Securities Market Law and ourbylaws, we may repurchase our shares on the Mexican Stock Exchange at theprevailing market price. Repurchased shares cannot be represented at anyshareholders’ meeting. We are not required to create a special reserve for therepurchase of shares and we do not need the approval of our board of directorsto effect share repurchases. However, we are required to obtain shareholderapproval as described below. In addition, our board of directors must appointan individual or group of individuals responsible for effecting sharerepurchases. These repurchases must be made subject to the provisions of theMexican Securities Market Law, and carried out, reported, and disclosed in themanner established by the CNBV.

 

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If we intend to repurchasemore than 1% of our outstanding common shares at a single trading session, wemust inform the public of this intention at least 10 minutes before submittingour bid. If we intend to repurchase 3% or more of our outstanding common sharesduring a period of 20 trading days, we must conduct a public tender offer forthose common shares.

 

We may not submit bids forrepurchase during the first and the last 30 minutes of each trading session andwe must inform the Mexican Stock Exchange of the results of any sharerepurchase no later than the following business day.

 

The amount allocated toshare repurchases is determined annually by our shareholders at a generalordinary shareholders’ meeting and cannot exceed the aggregate amount of ournet profits, including retained profits.

 

**Delisting**

 

If we decide to cancel theregistration of our shares with the Mexican Securities Registry or if the CNBVorders such deregistration, we will be required to make a tender offer topurchase the shares held by minority shareholders prior to such cancellation.Shareholders deemed to have “control” will be secondarily responsible formaking such tender offer. The price of the offer to purchase will be the higherof:

 

·    the averagetrading price on the Mexican Stock Exchange during the last 30 days onwhich the shares were quoted prior to the date on which the tender offer ismade; and

 

·    the book valueof the shares as reflected in our latest quarterly report filed with the CNBVand the Mexican Stock Exchange.

 

In order to make therepurchase, we must form a trust and contribute to it the amount required tosecure payment of the purchase price offered pursuant to the tender offer toall of our shareholders that did not sell their shares pursuant to the tenderoffer. The trust must be in force for a period of at least six months from thedate of delisting.

 

No later than 10 businessdays following the commencement of an offering, our board of directors mustissue an opinion on the offering price reflecting the opinion of our auditcommittee and disclosing any potential conflicts of interest that any of theboard members may have. The board’s resolution may be accompanied by afairness opinion issued by an expert selected by us.

 

**Ownershipof Share Capital by Subsidiaries**

 

Our subsidiaries may not,directly or indirectly, purchase our shares.

 

**Redemption**

 

Pursuant to the MexicanSecurities Market Law, shareholders are entitled to the redemption of theirvariable common shares, pro rata, by resolution of the shareholders’ meeting.

 

**Liquidation**

 

Upon our dissolution, one ormore liquidators must be appointed at an extraordinary shareholders’ meeting towind-up our affairs. All shares will be entitled to participate equally in anydistribution upon liquidation.

 

**AppraisalRights and Other Minority Protections**

 

If shareholders approve achange in our corporate purpose, nationality, or corporate form, any votingshareholder who voted against these matters is entitled to the redemption ofits common shares at book value pursuant to the last financial statementsapproved by our shareholders at a shareholders’ meeting. These redemptionrights must be exercised within 15 days after the shareholders’ meeting atwhich the matter was approved.

 

Pursuant to the MexicanSecurities Market Law and the Mexican General Business Corporations Law, ourbylaws include a number of minority shareholder protections. These minorityprotections include provisions that permit:

 

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·    holders of atleast 5% of our outstanding share capital to bring an action for civilliabilities against our directors and members of our senior management,provided that any recovery is for our benefit and not the benefit of theplaintiffs;

 

·    holders of atleast 10% of our shares who are entitled to vote (including in a limited orrestricted manner) to request that a shareholders’ meeting be called in certainlimited situations;

 

·    holders of atleast 10% of our shares who are entitled to vote (including in a limited orrestricted manner) at any shareholders’ meeting to request that resolutionswith respect to any matter on which they were not sufficiently informed to bepostponed;

 

·    holders of atleast 10% of our outstanding share capital to appoint one member of our boardof directors; and

 

·    holders of atleast 20% of our outstanding share capital to contest and suspend anyshareholder resolution, subject to certain requirements under Mexican law.

 

In addition, pursuant to theMexican Securities Market Law, we are also subject to certain corporategovernance requirements, including the requirement to maintain an auditcommittee and a corporate governance committee and that at least 25% of ourdirectors qualify as independent.  The CNBV is empowered to verify theirindependence.

 

The protections afforded tominority shareholders under Mexican law are generally different from those inthe United States and other jurisdictions, although we believe the MexicanSecurities Market Law has introduced higher corporate governance standardsincluding director fiduciary duties with a comprehensive description of dutiesof care and loyalty. Mexican civil procedure does not provide for class-actionlawsuits.

 

Notwithstanding theforegoing, it is anticipated to be more difficult for our minority shareholdersto enforce rights against us or our directors or principal shareholders than itis for shareholders of a U.S. issuer.

 

**Informationto Shareholders**

 

The Mexican General BusinessCorporations Law establishes that companies, acting through their board ofdirectors, must annually present a report to shareholders at a shareholders’ meetingthat includes:

 

·    a report of thedirectors on the operations of the company and its subsidiaries during thepreceding year, as well as on the policies followed by the directors andmanagement;

 

·    an opinion onthe Chief Executive Officer’s report on the principal accounting andinformation policies and criteria followed in the preparation of the financialinformation;

 

·    a statement ofthe financial condition of the company at the end of the fiscal year;

 

·    a statementshowing the results of operations of the company during the preceding year, aswell as changes in the company’s financial condition and share capital duringthe preceding year; and

 

·    the notes whichare required to complete or clarify the above-mentioned information.

 

In addition, the MexicanSecurities Market Law requires that information relating to matters to bediscussed at shareholders’ meetings be made available to shareholders from thedate on which the notice for the relevant meeting is published.

 

**RestrictionsAffecting Non-Mexican Shareholders**

 

Foreign investment incapital stock of Mexican corporations is regulated by the 1993 ForeignInvestment Law and by the 1998 Foreign Investment Regulations to the extentthey are not inconsistent with the Foreign Investment Law. The Ministry of Economyand the National Foreign Investment Commission*(Comisión Nacional Reguladora de la Inversión Extranjera)* areresponsible for the administration of the Foreign Investment Law and theForeign Investment Regulations.

 

Our bylaws do not restrictthe participation of non-Mexican investors in our capital stock. However,approval of the National Foreign Investment Commission must be obtained forforeign investors to acquire a direct or indirect participation in excess 

 

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of 49% of the capital stockof a Mexican company that has an aggregate asset value that exceeds, at thetime of filing the corresponding notice of acquisition, an amount determinedannually by the National Foreign Investment Commission.

 

As required by Mexican law,our bylaws provide that non-Mexican shareholders agree to be considered Mexicancitizens with respect to:

 

·    shares held bythem;

 

·    propertyrights;

 

·    concessions;

 

·    participationsor interests we own; and

 

·    rights andobligations derived from any agreements we have with the Mexican government.

 

As required by Mexican law,our bylaws also provide that non-Mexican shareholders agree to refrain frominvoking the protection of their governments in matters relating to theirownership of our shares. Therefore, a non-Mexican shareholder may not ask itsgovernment to introduce a diplomatic claim against the government of Mexicowith respect to its rights as a shareholder. If the shareholder invokes suchgovernmental protection, its shares could be forfeited to the Mexicangovernment. Notwithstanding these provisions, shareholders do not forfeit any rightsthey may have under U.S. securities laws.

 

**Summary ofDifferences between Mexican and U.S. Corporate Law**

 

You should be aware that theMexican General Business Corporations Law and the Mexican Securities MarketLaw, which apply to us, differ in material respects from laws generallyapplicable to U.S. corporations and their shareholders. In order to highlightthese differences, set forth below is a summary of provisions applicable to us(including modifications adopted pursuant to our bylaws) which differ inmaterial respects from provisions of the corporate law of the State ofDelaware.

 

*Duties ofDirectors*

 

Under the Mexican SecuritiesMarket Law, directors now have fiduciary duties of care and loyalty specifiedtherein. The duties of directors of public companies are more extensive thanthe duties of directors of private companies. Actions against directors may beinitiated by holders of at least 5% of our outstanding share capital, althoughany damages recovered from directors are awarded solely to the company.

 

Under the Mexican SecuritiesMarket Law, the business and affairs of a corporation are managed by or underthe direction of its board of directors. In exercising their powers, directorsare charged with a fiduciary duty of care to protect the interests of thecorporation and a fiduciary duty of loyalty to act in the best interests of itsshareholders.

 

The duty of care requiresthat directors act in an informed and deliberate manner, and inform themselves,prior to making a business decision, of all relevant material informationreasonably available to them. The duty of care also requires that directorsexercise care in overseeing and investigating the conduct of corporateemployees. The duty of loyalty may be summarized as the duty to act in goodfaith, not out of self-interest, and in a manner which the director reasonablybelieves to be in the best interests of the shareholders.

 

Under the “business judgmentrule,” courts generally do not question the business judgment of directors andofficers. A party challenging the propriety of a decision of a board ofdirectors bears the burden of rebutting the presumption afforded to directorsby the business judgment rule. If the presumption is not rebutted, the businessjudgment rule attaches to protect the directors from liability for theirdecisions. Where, however, the presumption is rebutted, the directors bear theburden of demonstrating the fairness of the relevant transaction. However, whenthe board of directors takes defensive actions in response to a threat tocorporate control and approves a transaction resulting in a sale of control ofthe corporation, Delaware courts subject directors’ conduct to enhancedscrutiny.

 

Under the Mexican SecuritiesMarket Law, directors are exempted from liability for their decisions when theyact in good faith and in compliance with all legal and bylaw requirements, andbased on information provided by management, having selected 

 

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the best alternative,according to their best judgment and after considering the foreseeable negativeeffects. Mexican courts have not yet interpreted these new standards of conductfor directors.

 

*InterestedDirectors*

 

The Mexican SecuritiesMarket Law requires that our corporate governance committee issue an opinionwith regard to transactions and arrangements with related parties, includingdirectors. These transactions and arrangements must be approved by our board ofdirectors, except for immaterial transactions or transactions with affiliatesin the normal course of business and at market prices. Mexican law providesthat a member of the board of directors can be liable for failing to disclose aconflict of interest and for voting on a transaction in which he or she has aconflict of interest.

 

Under Delaware law, atransaction entered into with regard to which a director has an interest wouldnot be avoidable if:

 

·                    the material facts withrespect to such interested director’s relationship or interests are disclosedor are known to the board of directors, and the board of directors in goodfaith authorizes the transaction by the affirmative vote of a majority of thedisinterested directors;

 

·                    the material facts aredisclosed or are known to the shareholders entitled to vote on the transaction,and the transaction is specifically approved in good faith by vote of themajority of shares entitled to vote thereon; or

 

·                    the transaction is fair tothe corporation as of the time it is authorized, approved or ratified. UnderDelaware law, an interested director could be held liable for a transaction inwhich the director derived an improper personal benefit.

 

*Dividends*

 

Under Mexican law, prior topaying dividends a company must reserve at least 5% of its profits every yearuntil it establishes a legal reserve equal to 20% of its capital share.Dividends may only be paid from retained earnings and only if losses for prior fiscalyears have been paid. Dividends may also be subject to additional restrictionscontained in the company’s bylaws. The payment of dividends must be approved atan annual general shareholders’ meeting. We do not currently expect to paydividends.

 

Under Delaware law, subjectto any restrictions contained in the company’s certificate of incorporation, acompany may pay dividends out of surplus or, if there is no surplus, out of netprofits for the fiscal year in which the dividend is declared and for the precedingfiscal year. Delaware law also provides that dividends may not be paid out ofnet profits at any time when capital is less than the capital represented bythe outstanding stock of all classes having a preference upon the distributionof assets.

 

*Mergers,Consolidations, and Similar Arrangements*

 

A Mexican company may mergewith another company only if a majority of the shares representing itsoutstanding share capital approves the merger at a duly convened extraordinaryshareholders’ meeting. Dissenting shareholders are not entitled to appraisalrights. Creditors have 90 days to oppose a merger judicially, provided theyhave a legal interest to oppose the merger.

 

Under Delaware law, withcertain exceptions, a merger, consolidation, or sale of all or substantiallyall the assets of a corporation must be approved by the board of directors anda majority of the outstanding shares entitled to vote thereon. Under Delawarelaw, a shareholder of a corporation participating in certain major corporatetransactions may, under certain circumstances, be entitled to appraisal rightspursuant to which the shareholder may receive payment in the amount of the fairmarket value of the shares held by the shareholder (as determined by a court)in lieu of the consideration the shareholder would otherwise receive in thetransaction. Delaware law also provides that a parent corporation, byresolution of its board of directors and without any shareholder vote, maymerge with any subsidiary of which it owns at least 90% of each class ofcapital share. Upon any such merger, dissenting shareholders of the subsidiarywould have appraisal rights.

 

*Anti-TakeoverProvisions*

 

Our bylaws do not includeanti-takeover provisions. The Mexican Securities Market Law permits publiccompanies to include anti-takeover provisions in their bylaws that restrict theability of third parties to acquire control of the company; provided,however, that:

 

·    adoption ofsuch provisions is not opposed by holders of 5% or more of our share capital;

 

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·    no shareholderis excluded from the benefits that may derive from such provisions;

 

·    takeoverscannot be absolutely banned and any required approval from the company’s boardof directors must be subject to established criteria and a deadline not toexceed three months; and

 

·    takeoverprocedures conform to compulsory tender offering rules.

 

Under Delaware law,corporations can implement shareholder rights plans and other measures,including staggered terms for directors and super-majority voting requirements,to prevent takeover attempts. Delaware law also prohibits a publicly-heldDelaware corporation from engaging in a business combination with an interestedshareholder for a period of three years after the date of the transaction inwhich the shareholder became an interested shareholder unless:

 

·    prior to thedate of the transaction in which the shareholder became an interestedshareholder, the board of directors of the corporation approves either thebusiness combination or the transaction that resulted in the shareholderbecoming an interested shareholder;

 

·    uponconsummation of the transaction that resulted in the shareholder becoming aninterested shareholder, the interested shareholder owns at least 85% of thevoting stock of the corporation, excluding shares held by directors, officers,and employee stock plans; or

 

·    at or after thedate of the transaction in which the shareholder became an interestedshareholder, the business combination is approved by the board of directors andauthorized at a shareholders’ meeting by at least 66 2 / 3 % of the votingstock which is not owned by the interested shareholder.

 

*Transactionswith Significant Shareholders*

 

Under Mexican law, a company’sboard of directors must approve any potential transaction to be undertaken withany shareholders of the company or other companies affiliated with shareholdersof the company. The board of directors must take the recommendation of thecorporate governance committee into consideration in granting its approval andmay also require an independent fairness opinion. In addition, pursuant toMexican law, any shareholder who votes on a transaction in which theshareholder has a conflict of interest may be liable for damages if thetransaction would not have been approved without the shareholder’s vote.

 

As a Mexican company, we mayenter into business transactions with our significant shareholders, includingasset sales, in which the significant shareholder receives a greater financialbenefit than other shareholders with prior approval from our board of directors.Prior approval from our shareholders is not required for this kind oftransaction.

 

No similar provisionrelating to transactions with significant shareholders exists under Delawarelaw.

 

*Shareholders’Suits*

 

As mentioned above, holdersof at least 5% of our outstanding share capital may bring derivative actionsfor civil liabilities against our directors, members of the audit committee,and the corporate governance committee. However, the grounds for shareholderderivative actions under Mexican law are limited, which effectively bars mostof these suits in Mexico. In addition, subject to certain requirements, holdersof at least 20% of a company’s outstanding share capital may contest andsuspend any shareholder resolution that violates Mexican law or our bylaws.Class-action lawsuits are not permitted under Mexican law.

 

Class-actions and derivativeactions are generally available to shareholders under Delaware law for, amongother things, breach of fiduciary duty, corporate waste and actions not takenin accordance with applicable law. In these kinds of actions, the courtgenerally has discretion to permit the winning party to recover attorneys’ feesincurred in connection with the action.

 

*Indemnificationof Directors and Officers*

 

Under Mexican law, a companymay indemnify directors or members of any committee of the board of directors,for actions taken within the scope of their duties, against expenses (includingattorneys’ fees), judgments, fines and settlement amounts, reasonably incurredin defense of an action, suit or proceeding, except for breach of the duty ofloyalty or unlawful acts.

 

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Under Delaware law, acorporation may indemnify a director or officer of the corporation againstexpenses (including attorneys’ fees), judgments, fines and amounts paid insettlement actually and reasonably incurred in defense of an action, suit orproceeding by reason of a director’s or officer’s position if:

 

·                     the director or officeracted in good faith and in a manner the director or officer reasonably believedto be in or not opposed to the best interests of the corporation; and

 

·                     with respect to any criminalaction or proceeding, the director or officer had no reasonable cause tobelieve his or her conduct was unlawful.

 

*Inspectionof Corporate Records*

 

Under Mexican law, at thetime that a notice of shareholders’ meeting is published, shareholders areentitled to all information related to the matters to be discussed at themeeting.

 

Delaware law permits anyshareholder to inspect or obtain copies of a corporation’s shareholder list andits other books and records for any purpose reasonably related to a person’sinterest as a shareholder.

 

*ShareholderProposals*

 

Under Mexican law and ourbylaws, holders of at least 10% of our outstanding share capital are entitledto appoint one member of our board of directors.

 

Delaware law does notinclude a provision restricting the manner in which nominations for directorsmay be made by shareholders or the manner in which business may be broughtbefore a meeting.

 

*Calling ofSpecial Shareholders’ Meetings*

 

Under Mexican law and ourbylaws, a shareholders’ meeting may be called by the board of directors, thechairman of the board of directors or of the audit committee or the corporategovernance committee. Any shareholder or group of shareholders with votingrights representing at least 10% of our share capital may request in writingthat the board of directors call a shareholders’ meeting to discuss the mattersindicated in the written request. If the board of directors fails to call ameeting within 15 calendar days following the date of the written request, theshareholder or group of shareholders may request that a competent court callthe meeting. A single shareholder may call a shareholders’ meeting if nomeeting has been held for two consecutive years or if matters to be dealt withat an ordinary shareholders’ meeting have not been considered.

 

Delaware law permits theboard of directors or any person who is authorized under a corporation’scertificate of incorporation or bylaws to call a special meeting ofshareholders.

 

*CumulativeVoting*

 

Under Mexican law,cumulative voting for the election of directors is not permitted.

 

Under Delaware law,cumulative voting for the election of directors is permitted only if expresslyauthorized in the certificate of incorporation.

 

*Approvalof Corporate Matters by Written Consent*

 

Mexican law permitsshareholders to take action by unanimous written consent of the holders of allshares entitled to vote. These resolutions have the same legal effect as thoseadopted in a general or special shareholders’ meeting. The board of directorsmay also approve matters by unanimous written consent.

 

Delaware law permitsshareholders to take action by written consent of holders of outstanding shareshaving more than the minimum number of votes necessary to take the action at ashareholders’ meeting at which all voting shares were present and voted.

 

*Amendmentof Certificate of Incorporation*

 

Under Mexican law, it is notpossible to amend a company’s certificate of incorporation (*acta constitutiva*). However, theprovisions that govern a Mexican company are contained in its bylaws, which maybe amended as described below.

 

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Under Delaware law, amendinga company’s certificate of incorporation, which is equivalent to a memorandumof association, must be made by a resolution of the board of directors settingforth the amendment, declaring its advisability, and either calling a specialmeeting of the shareholders entitled to vote or directing that the amendmentproposed be considered at the next annual meeting of the shareholders. Delawarelaw requires that, unless a different percentage is provided for in thecertificate of incorporation, a majority of the outstanding shares entitled tovote thereon is required to approve the amendment of the certificate ofincorporation at the shareholders’ meeting. If the amendment would alter thenumber of authorized shares or otherwise adversely affect the rights orpreference of any class of a company’s stock, Delaware law provides that theholders of the outstanding shares of such affected class should be entitled tovote as a class upon the proposed amendment, regardless of whether such holdersare entitled to vote by the certificate of incorporation. However, the numberof authorized shares of any class may be increased or decreased, to the extentnot falling below the number of shares then outstanding, by the affirmativevote of the holders of a majority of the stock entitled to vote, if so providedin the company’s certificate of incorporation or any amendment that createdsuch class or was adopted prior to the issuance of such class or that wasauthorized by the affirmative vote of the holders of a majority of such classof stock.

 

*Amendmentof Bylaws*

 

Under Mexican law, amendinga company’s bylaws requires shareholder approval at an extraordinaryshareholders’ meeting. Mexican law requires that at least 75% of the sharesrepresenting a company’s outstanding share capital be present at the meetingupon the first call (unless the bylaws require a higher threshold) and that theresolutions be approved by shares representing one-half of the company’soutstanding capital share.

 

Under Delaware law, holdersof a majority of the voting rights of a corporation and, if so provided in thecertificate of incorporation, the directors of the corporation, have the powerto adopt, amend and repeal the bylaws of a corporation.

 

*Staggered boardof directors*

 

Mexican law does not permitcompanies to have a staggered board of directors.

 

Delaware law permitscorporations to have a staggered board of directors.

 

**MATERIAL CONTRACTS**

 

For further discussion ofour material contracts, see “Item 7. Major Shareholders and Related PartyTransactions.”

 

**EXCHANGE CONTROLS**

 

Mexican law does notrestrict our ability to remit dividends and interest payments, if any, tonon-Mexican holders of our securities. Payments of dividends to equity holders,to the extent made, generally will not be subject to Mexican withholding tax.Mexico has had a free market for foreign exchange since 1991, and thegovernment has allowed the peso to float freely against the U.S. dollar sinceDecember 1994.

 

**TAXATION**

 

The following summarycontains a description of:

 

·                   the material anticipatedMexican federal income tax consequences of the purchase, ownership anddisposition of the ADSs or common shares by non-resident holders, or holdersthat

 

·                    are not residents of Mexicofor tax purposes; and

 

·                    will not hold the ADSs orcommon shares or a beneficial interest therein in connection with the conductof a trade or business through a permanent establishment, for tax purposes, inMexico; and

 

·                   the material anticipatedU.S. federal income tax consequences of the purchase, ownership, and dispositionof the ADSs or common shares by non-resident holders that are U.S. holders, orholders that

 

·                    are citizens or residents ofthe United States;

 

·                    are corporations organizedunder the laws of the United States or any state thereof or the District ofColumbia; or

 

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·                    that otherwise will besubject to U.S. federal income tax on a net income basis in respect of the ADSsor common shares.

 

For purposes of Mexicantaxation:

 

·                   individuals are residents ofMexico if they have established their principal place of residence in Mexicoor, if they have established their principal place of residence outside Mexico,if their core of vital interests (*centro deintereses vitales*) is located in Mexico. An individual’s core ofvital interests will be deemed to be located in Mexico if, among other things,

 

·                    at least 50% of theindividual’s aggregate annual income derives from Mexican sources, or

 

·                    the individual’s principalcenter of professional activities is located in Mexico;

 

·                   individuals are residents ofMexico if they are state employees, regardless of the location of theindividual’s core of vital interests; and

 

·                     legal entities are residentsof Mexico if they maintain their principal place of business or their place ofeffective management in Mexico.

 

If non-residents of Mexicoare deemed to have a permanent establishment in Mexico for tax purposes, allincome attributable to the permanent establishment will be subject to Mexicantaxes, in accordance with applicable Mexican tax law.

 

In general, for U.S. federalincome tax purposes, holders of ADSs will be treated as the beneficial ownersof the common shares represented by those ADSs.

 

The following summary doesnot purport to be a comprehensive description of all of the tax considerationsthat may be relevant to a decision to purchase the ADSs or common shares. Inparticular, the summary of U.S. federal income tax consequences only addressesU.S. holders that will hold the ADSs or common shares as capital assets anddoes not address the tax treatment of U.S. holders that own or are treated asowning 10% or more of our outstanding voting shares. Further, this summary doesnot discuss all aspects of U.S. federal income taxation that may be relevant toa particular investor or applicable to certain categories of U.S. holders suchas banks, dealers, traders who elect to mark-to-market, tax-exempt entities,insurance companies, regulated investment companies, real estate investmenttrusts, dealers in securities or currencies, expatriates, persons who hold theADSs as part of a hedge, straddle, synthetic security, conversion or integratedtransaction, U.S. holders who have a functional currency other than the U.S.dollar, or U.S. holders liable for the alternative minimum tax.  PotentialU.S. holders should realize that the tax consequences for persons described inthe preceding sentence may differ materially from those applicable to otherU.S. holders. Finally, the summary does not address any U.S. or Mexican stateor local tax considerations that may be relevant to non-resident holders and toU.S. holders.

 

The discussion of U.S.federal income tax considerations below assumes that we are not a passiveforeign investment company, or PFIC. Based on our audited financial statementsand relevant market and shareholder data, we believe that we were not treatedas a PFIC for U.S. federal income tax purposes with respect to our 2009 taxableyear.  Furthermore, based on our audited financial statements and ourcurrent expectations regarding the value and nature of our assets, the sourcesand nature of our income and relevant market and shareholder data, we do notanticipate being a PFIC for our 2010 taxable year.  However, thisdetermination is made annually and it is possible that our status could change.

 

This summary is based uponthe federal income tax laws of the U.S. and Mexico as in effect on the date ofthis annual report and the provisions of the income tax treaty between the U.S.and Mexico and the protocol thereto (the “Tax Treaty”), all of which aresubject to change, possibly with retroactive effect. However, this summary doesnot address all aspects of the federal income tax laws of the U.S. and Mexico.Prospective investors in the ADSs or common shares should consult their own taxadvisors as to the U.S., Mexican, or other tax consequences of the purchase,ownership, and disposition of the ADSs or common shares, including, in particular,the effect of any foreign, state or local tax laws and their entitlement to thebenefits, if any, afforded by the Tax Treaty.

 

**Taxation ofDividends**

 

*MexicanTax Considerations*

 

Under the provisions of theMexican Income Tax Law (*Ley del Impuesto Sobrela Renta*), dividends paid to non-resident holders with respect tothe common shares or the ADSs will not be subject to Mexican withholding tax.

 

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Dividends paid fromdistributable earnings that have not been subject to corporate income tax aresubject to a corporate-level dividend tax at a rate of 38.89% (gross-up of28%). According to the tax reform bill approved on December, 7 2009, during2010, 2011 and 2012 the rate will be 42.86% (gross-up of 30%) and during 2013,40.85% (gross-up of 29%). From 2014 going forward, the rate will be 38.89%again. The corporate-level dividend tax on the distribution of earnings is notfinal and may be credited against income tax payable during the fiscal year inwhich the dividend tax was paid and for the following two years. Dividends paidfrom distributable earnings, after corporate income tax has been paid withrespect to these earnings, are not subject to this corporate-level dividendtax.

 

*U.S.Federal Income Tax Considerations*

 

The gross amount of anydividend distributions paid with respect to the common shares represented bythe ADSs, to the extent paid out of our current or accumulated earnings andprofits, as determined for U.S. federal income tax purposes, generally will beincludible in the gross income of a U.S. holder as ordinary income on the dateon which the distributions are received by the depositary and will not beeligible for the dividends received deduction allowed to certain corporationsunder the U.S. Internal Revenue Code of 1986, as amended (the “Code”). To theextent that a distribution exceeds our current and accumulated earnings andprofits, it will be treated as a non-taxable return of basis to the extentthereof, and thereafter as capital gain from the sale of ADSs or common shares.

 

Distributions, which will bemade in pesos, will be includible in the income of a U.S. holder in a U.S.dollar amount calculated by reference to the exchange rate in effect on thedate they are received by the depositary, whether or not they are convertedinto U.S. dollars. U.S. holders should consult their own tax advisors regardingthe treatment of foreign currency gain or loss, if any, on any pesos receivedthat are converted into U.S. dollars on a date subsequent to receipt. Dividendincome generally will constitute foreign source “passive income” or, “general”category income (depending on whether the U.S. holder is predominantly engagedin the active conduct of a banking, insurance, financing or similar business)for U.S. foreign tax credit purposes.

 

In the event that Mexicantaxes are withheld from dividend distributions, any such withheld taxes wouldbe treated as part of the gross amount of the dividend includible in income fora U.S. holder for U.S. federal income tax purposes (to the extent of current oraccumulated earnings and profits). U.S. holders may be entitled to credit suchtaxes against their U.S. federal income tax liability or, for those U.S.holders who so elect, to deduct such Mexican taxes in computing taxableincome.  The calculation of foreign tax credits and, in the case of U.S.holders that elect to deduct foreign taxes, the availability of deductions, aresubject to generally applicable limitations under U.S. federal income taxregulations and involve the application of rules that depend on U.S.holders’ particular circumstances.  U.S. holders should consult their owntax advisors regarding the potential availability of foreign tax credits anddeductions.

 

Distributions of additionalcommon shares to holders of ADSs with respect to their ADSs that are made aspart of a pro rata distribution to all our shareholders generally will not besubject to U.S. federal income tax.

 

Currently the maximum rateof tax imposed on certain dividends received by U.S. shareholders that areindividuals is 15%, provided that certain holding period requirements are met.This reduced rate applies to dividends received before December 31, 2010from “qualified foreign corporations.” We believe we are a “qualified foreigncorporation” with respect to our ADSs because our ADSs are listed on the NewYork Stock Exchange. Therefore, we believe that dividends paid on our ADSs willconstitute “qualified dividend income” and therefore qualify for the reducedrate. It is possible, however, that we will not continue to be considered a “qualifiedforeign corporation” and that our dividends will not continue to be eligiblefor this rate. Notwithstanding the previous rule, the term “qualified dividendincome” will not include, among other dividends, any (i) dividends on anyshare of stock or ADS which is held by a taxpayer for 60 days or less duringthe 120-day period beginning on the date which is 60 days before the date onwhich such share or shares backing the ADS become ex-dividend with respect tosuch dividends (as measured under section 246(c) of the Code); or(ii) dividends to the extent that the taxpayer is under an obligation(whether pursuant to a short sale or otherwise) to make related payments withrespect to positions in substantially similar or related property. U.S. holdersshould consult their own advisors regarding the applicability of the 15%dividend rate in their particular circumstances.

 

**Taxation ofDispositions of Shares or ADSs**

 

*MexicanTax Considerations*

 

Gain on the sale or otherdisposition of ADSs by a non-resident holder will generally not be subject toMexican tax. Deposits and withdrawals of common shares in exchange for ADSswill not give rise to Mexican tax or transfer duties.

 

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Gain on the sale of thecommon shares by a non-resident holder will not be subject to any Mexican taxif the transaction is carried out through the Mexican Stock Exchange or otherstock exchange or securities markets approved by the Mexican Ministry ofFinance and Public Credit. The exemption is not available when a person or agroup of people control a company or own 10% or more of the capital stock of acompany and sell 10% or more of the company’s stock in a period of 24 months inone or more transactions involving such shares.

 

Gain on sales or otherdispositions of the common shares made by non-Mexican residents in othercircumstances generally would be subject to Mexican tax at a rate of 25% basedon the total amount of the transaction or, subject to certain requirementsapplicable to the seller, at a rate of 28% (30% in 2010, 2011 and 2012 and 29%in 2013) on gains realized from the disposition, regardless of the nationalityor residence of the transferor, provided that the transferor is not a residentof a country with a preferential or territorial tax regime.

 

Under the Tax Treaty, aholder that is eligible to claim the benefits of the Tax Treaty will be exemptfrom Mexican tax on gains realized on a sale or other disposition of the commonshares, in a transaction that is not carried out through the Mexican StockExchange or such other approved securities markets, so long as the holder didnot own, directly or indirectly, 25% or more of our share capital (includingADSs) during the twelve-month period preceding the sale or other disposition.

 

*U.S.Federal Income Tax Considerations*

 

Upon the sale or otherdisposition of the ADSs or common shares, a U.S. holder generally willrecognize gain or loss in an amount equal to the difference between the amountrealized on the sale or other disposition and such U.S. holder’s tax basis inthe ADSs or common shares. Gain or loss recognized by a U.S. holder on suchsale or other disposition generally will be long-term capital gain or loss if,at the time of the sale or other disposition, the ADSs or common shares havebeen held for more than one year. Currently, the top individual tax rate onadjusted net capital gains for sales and exchanges of capital assets beforeJanuary 1, 2011 is 15%. The deduction of a capital loss is subject tolimitations for U.S. federal income tax purposes. Gain or loss generally willbe treated as U.S. source gain or loss and a U.S. holder may be unable tocredit any Mexican taxes imposed on these gains unless it has certain otherincome from foreign sources. Deposits and withdrawals of common shares by U.S.holders in exchange for ADSs will not result in the realization of gain or lossfor U.S. federal income tax purposes.

 

**Other MexicanTaxes**

 

There are no Mexicaninheritance, gift, succession or value-added taxes applicable to the purchase,ownership or disposition of the ADSs or common shares by non-resident holders.However, gratuitous transfers of the ADSs or common shares may result in aMexican federal tax obligation for the recipient in certain circumstances.

 

There are no Mexican stamp,issue, registration or similar taxes or duties payable by non-resident holdersof the ADSs or common shares.

 

**U.S. BackupWithholding Tax and Information Reporting Requirements**

 

A U.S. holder may, undercertain circumstances, be subject to “backup withholding” with respect to somepayments to the U.S. holder, such as dividends or the proceeds of a sale orother disposition of the ADSs, unless the holder:

 

·                   is a corporation or comeswithin certain exempt categories, and demonstrates this fact when so required;or

 

·                   provides a correct taxpayeridentification number, certifies that it is not subject to backup withholdingand otherwise complies with applicable requirements of the backup withholdingrules.

 

Any amount withheld underthese rules will be creditable against the U.S. holder’s federal incometax liability.

 

Recently enacted legislationrequires individual U.S. holders with an interest in any “specified foreignfinancial asset” to file a report to the IRS with information relating to theasset and the maximum value thereof during the taxable for any year in whichthe aggregate value of all such assets is greater than $50,000 (or such higherdollar amount as prescribed by Treasury regulations).  Shares and ADSs would be treated as foreignfinancial assets unless held at a U.S. financial institution.  Depending on the aggregate value of a U,S,holders investment in all categories of specified foreign financial assets, theU.S. Holder may be obligated to file an annual report under thisprovision.  The requirement to file areport is effective for taxable years beginning after March 18, 2010.  Penalties apply to any failure to file arequired report.  Additionally, in theevent a U.S. holder does not file the information report relating to disclosureof specified foreign financial assets, the statute of limitations on theassessment and collection of U.S. federal income taxes

 

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of such U.S. holder for therelated tax year will not close before such information is filed.  U.S. holders should consult their own taxadvisor as to the possible application of this information reportingrequirement and related statute of limitations tolling provision.

 

**DOCUMENTS ON DISPLAY**

 

We are subject to theinformation requirements of the Exchange Act and, in accordance therewith, weare required to file reports and other information with the SEC. Thesematerials, including this Form 20-F and the exhibits thereto, may beinspected and copied at the SEC’s Public Reference Room at 450 FifthStreet, NW, Washington, D.C. 20549.

 

**ITEM 11.      Quantitative and Qualitative Disclosures about Market Risk.**

 

**InterestRate Risk**

 

In connection with ourbusiness activities, we have issued and hold financial instruments thatcurrently expose us to market risks related to changes in interest rates.Interest rate risk exists principally with respect to our indebtedness thatbears interest at floating rates. At December 31, 2009, we had outstandingindebtedness of Ps.10,093.9 million, the majority of which bore interest atfixed interest rates. The interest rate on our variable rate debt is determinedprimarily by reference to the 28-day Mexican Interbank Rate, or TIIE *(Tasa de Interés Interbancaria de Equilibrio).*TIIE increases would, consequently, increase our interest payments.

 

The following table setsforth principal cash flows by scheduled maturity, average interest rates, andestimated fair market value of our debt obligation as of December 31,2009. Fair value is estimated using discounted cash flow analyses, based on theCompany’s current incremental borrowing rates for similar types of borrowingarrangements.

 
| ** **               | ** ** | **Expected Maturity Dates as of December 31, (millions  of dollars equivalent)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------|------------|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | **2010**                                                                              | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013** | ** ** | **2014** | ** ** | **After********2015** | ** ** | **Total** | ** ** | **Fair Value******** Dec. 31,  ‘09** | ** ** |
| **Long-term debt**       |       |                                                                                  |       |       |       |       |       |   | ** ** | ** ** |   |   |   |   |   |   |   |
| Fixed  rate *            |       | —                                                                                |       | —     |       | —     |       | — |   | — |   | 500 |   | 500 |   | 500 |   |
| Average  interest rate** |       | 8.5                                                                                   | %          | 8.5        | %          | 8.5        | %          | 8.5 |   | 8.5 | % | 8.5 | % |   |   |   |   |
| Variable  rate (Ps.)     |       | 7                                                                                     |       | 8          |       | 7          |       | 230 |   | 0 |   | 0 |   | 253 |   | 253 |   |
| Average  interest rate   |       | 7.2                                                                                   | %          | 7.2        | %          | 7.2        | %          | 7.2 | % | 6.4 | % | 0 | % |   |   |   |   |

 

----

*  Until July 5,2008 our outstanding US$250 million Senior Guaranteed Notes included theprincipal-only swap effect, whereby at maturity date we were to pay pesos at acontractual fixed exchange rate of  Ps.10.83 per dollar and receive U.S. dollars equivalent to the notionalamount of US$250 million. This principal-only swap was cancelled on theaforementioned date.

 

** The average interest rateis calculated by the 7.5% interest rate related to the Senior Guaranteed Notesdue 2015 and the 9.5% interest rate related to the Senior Guaranteed Notes due2019.

 

A hypothetical,instantaneous, and unfavorable change of 100 basis points in the averageinterest rate applicable to floating-rate liabilities held at December 31,2009 would have increased our interest expense in 2009 by approximatelyPs.33 million, over a twelve-month period.

 

Together with the issuanceof the US$250 million long-term U.S. dollar-denominated Senior Guaranteed Notesdue 2015, Homex entered into a principal-only swap in an attempt to hedge andcover the economic and cash flow principal U.S. dollar exposure bearing asix-month weighted fixed rate of 2.92% exposed to U.S. dollar currencyfluctuations. The underlying notes bear interest at a rate of 7.5% payablesemi-annually and are exposed to U.S. dollar currency fluctuations. The Company accountedfor this swap at fair value in its consolidated financial statements. Becausethe agreement did not meet the requirements for hedge accounting, periodicmark-to-market measurement was made through the income statement. This principal-onlyswap was cancelled on July 5, 2008. In 

 

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addition, the Companyentered into an interest-only swap to hedge the foreign exchange risk inrespect of the interest payable on this debt at an average rate of Ps.13.95 perU.S. dollar through 2012.

 

Together with the issuanceof the US$250 million long-term U.S. dollar-denominated Senior Guaranteed Notesdue 2019, Homex entered into a principal-only swap in an attempt to hedge andcover the economic and cash flow principal U.S. dollar exposure bearing asix-month weighted fixed rate in Mexican pesos of 3.87% exposed to U.S. dollarcurrency fluctuations.  The underlyingnotes bear interest at a rate of 9.5% payable semi-annually and are exposed toU.S. dollar currency fluctuations. The Company accounted for this swap atfair value in its consolidated financial statements. Because the agreement metthe requirements for hedge accounting, periodic mark-to-market measurement wasmade through the equity. In addition, on the same date the Company entered intoan interest-only swap to hedge the foreign exchange risk in respect of theinterest payable on the first six interest payments on this debt.

 

We manage our exposure tochanges in interest rates by efficiently timing construction and delivery ofour homes and payments to our suppliers, thereby allowing us to reduce ourborrowing needs for working capital. Our capital expenditures are financedeither through our own resources or leveraging their return through operatingleases.

 

**ForeignCurrency Risk**

 

Because substantially all ofour revenues are and will continue to be denominated in pesos, if the value ofthe peso decreases against the U.S. dollar, our cost of financing willincrease. Severe depreciation of the peso may also result in disruption of theinternational foreign exchange markets. This may limit our ability to transferor convert pesos into U.S. dollars and other currencies for the purpose ofmaking timely payments of interest and principal on our securities and any U.S.dollar-denominated debt that we may incur in the future.

 

The exchange rates in effectat December 31, 2009, 2008 and 2007 were Ps.13.0437, Ps.13.7738 andPs.10.9185, respectively, per U.S. dollar.

 

**ITEM 12.      Description of Securities other than Equity Securities.**

 

**Fees andCharges Our ADS Holders May Have to Pay**

 

The JPMorgan Chase Bank,N.A. (“JPMorgan”), the depositary of our ADS program, collects fees directlyfrom investors (or brokers or other intermediaries acting on behalf ofinvestors) for depositing shares or surrendering ADSs for the purpose ofwithdrawal.  The depositary also collectsfees for making distributions to investors, by deducting those fees from theamounts distributed or by selling a portion of distributable property to paythe fees.  In addition, the depositarycollects an annual fee for depositary services, by deducting from cash distributions,by directly billing investors, or by charging the book-entry system accounts ofinvestors (or brokers or other intermediaries acting on behalf ofinvestors).  The depositary may generallyrefuse to provide services until its fees for those services are paid, and maysell securities or other property to pay any such fees.  The following table summarizes the fees andcharges that a holder of our ADSs may have to pay, directly or indirectly,pursuant to the Deposit Agreement, which was filed with the SEC as an exhibitto our Registration Statement on Form F-6 filed on June 8, 2004:

 
| **Fee**                                                                                                                                                             | ** ** | **Service**                                                                                                                                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| $5.00 per 100 ADSs (or  portion thereof)                                                                                                                            |       | · Issuance of  ADSs, including issuances resulting from a distribution of shares or rights  or other property

· Cancellation  of ADSs for the purpose of withdrawal, including if the Deposit Agreement is  terminated |
|                                                                                                                                                                |       |                                                                                                                                                                                                                              |
| $0.02 per ADS (or portion  thereof)                                                                                                                                 |       | Any cash distribution to  registered ADS holders                                                                                                                                                                                  |
|                                                                                                                                                                |       |                                                                                                                                                                                                                              |
| $1.50 per ADR (or portion  thereof)                                                                                                                                 |       | Permitted transfers of  ADRs pursuant to the Deposit Agreement                                                                                                                                                                    |
|                                                                                                                                                                |       |                                                                                                                                                                                                                              |
| A fee equivalent to the  fee that would be payable if securities distributed to the holder had been  shares and the shares had been deposited for issuance of ADSs. |       | Distribution of securities  distributed to holders of deposited securities which are distributed by the  depositary to registered ADS holders                                                                                     |

 

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| A fee as incurred by the  depositary                                                                                                                                                       |   | Delivery of ADSs or fees  otherwise incurred by the Depositary in compliance with applicable law,  rule or regulation                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                       |   |                                                                                                                                                       |
| Registration or transfer  fees                                                                                                                                                             |   | · Cable, telex  and facsimile transmissions (when expressly provided in the deposit  agreement) 

· Converting  foreign currency to U.S. dollars |
|                                                                                                                                                                                       |   |                                                                                                                                                       |
| Taxes and other  governmental charges the depositary or the custodian may have to pay on any  ADS or share underlying an ADS, e.g., stock transfer taxes, stamp duty or  withholding taxes |   | As necessary                                                                                                                                               |

 

From January 1, 2009 toJune 30, 2010, we received no fees from JPMorgan related to our ADRfacility.

 

**PART II**

 

**ITEM 13.       Defaults,Dividend Arrearages and Delinquencies.**

 

Not applicable.

 

**ITEM 14.       MaterialModifications to the Rights of Security Holders and Use of Proceeds.**

 

Not applicable.

 

**ITEM 15.       Controlsand Procedures.**

 

(a) *Disclosure controls and procedures.*

 

We carried out an evaluationunder the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures as of December 31,2009.

 

There are inherentlimitations to the effectiveness of any system of disclosure controls andprocedures, including the possibility of human error and the circumvention oroverriding of the controls and procedures. Accordingly, even effectivedisclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based upon our evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the applicable rules and forms, andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

 

(b) *Management’s annual report on internal controls overfinancial reporting.*

 

Our management isresponsible for establishing and maintaining adequate internal controls overfinancial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended. Under thesupervision and with the participation of our management, including our boardof directors, Chief Executive Officer, Chief Financial Officer and otherpersonnel, we conducted an evaluation of the effectiveness of our internalcontrols over financial reporting based on the framework governing InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Our internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with Mexican FinancialReporting Standards, including the reconciliation to U.S. GAAP in accordancewith Item 18 of Form 20-F. Our internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with Mexican FRS, and that our receipts andexpenditures are being made only in accordance with authorizations of ourmanagement and directors; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof our assets that could have a material effect on our financial 

 

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statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Based on our evaluationunder the framework in Internal Control—Integrated Framework, our managementconcluded that our internal control over financial reporting was effective asof December 31, 2009.

 

Mancera, S.C., a memberpractice of Ernst & Young Global, an independent registered publicaccounting firm, our independent auditor, issued an attestation report on ourinternal control over financial reporting on June 30, 2010.

 

(c) *AttestationReport of the registered public accounting firm*.

 

TheBoard of Directors and Shareholders of

Desarrolladora Homex, S.A.B. de C.V.

 

We have audited Desarrolladora Homex, S.A.B. de C.V.and subsidiaries’ internal control over financial reporting as of December 31,2009, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria).

 

Desarrolladora Homex, S.A.B. de C.V. and subsidiaries’management is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sAnnual Report on Internal Control over Financial Reporting. Our responsibilityis to express an opinion on the company’s internal control over financialreporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with Mexican Financial Reporting Standards, includingthe reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with Mexican Financial Reporting Standards,including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F,and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and(3) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

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In our opinion, Desarrolladora Homex, S.A.B. de C.V.and subsidiaries maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2009, based on theCOSO criteria.

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial position of Desarrolladora Homex, S.A.B. de C.V. andsubsidiaries at December 31, 2009 and 2008, and the consolidated resultsof their operations and changes in stockholders’ equity for each of the threeyears ended December 31, 2009, the consolidated cash flows for each of thetwo years ended December 31, 2009, and the consolidated changes infinancial position for the year ended December 31,2007, and our report dated June 30, 2010,expressed an unqualified opinion thereon.

 
|   | Mancera, S.C.                    |
|--------|----------------------------------|
|   | A member practice of             |
|   | Ernst &  Young Global   |
|   |                             |
|   | C.P.C.  Alejandro Valdez Mendoza |

 

Culiacán, Sinaloa, México

June 30, 2010

 

(d) *Changes in internal control over financial reporting.*

 

There has been no change in our internalcontrol over financial reporting during 2009 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

**ITEM 16.      (Reserved)**

 

**ITEM 16A.       AuditCommittee Financial Expert**

 

Our audit committee consistsof Wilfrido Castillo Sánchez-Mejorada (Chairman), Z. Jamie Behar and EdwardLowenthal.  Effective April 30,2010, Mr. Matthew Zell is no longer a member of our audit committee.  Our board of directors has determined thatMr. Castillo has the attributes of an “audit committee financial expert”as defined by the SEC and that each member of the audit committee satisfies thefinancial literacy requirements of the New York Stock Exchange. Our board ofdirectors has also determined that Mr. Castillo is independent, as thatterm is defined in the listing rules of the New York Stock Exchange.

 

**ITEM 16B.       Code ofEthics**

 

We have adopted a code ofethics, as defined in Item 16B of Form 20-F under the SecuritiesExchange Act of 1934, as amended. Our code of ethics applies to our ChiefExecutive Officer, Chief Financial Officer and persons performing similarfunctions, as well as to our directors and other officers and employees. Ourcode of ethics is available on our web site at www.homex.com.mx. If we amendthe provisions of our code of ethics that apply to our Chief Executive Officer,Chief Financial Officer and persons performing similar functions, or if wegrant any waiver of such provisions, we will disclose such amendment or waiveron our web site at the same address.

 

**ITEM 16C.      Principal Accountant Fees and Services**

 

**Audit andNon-Audit Fees**

 

For the fiscal years endedDecember 31, 2009 and 2008, our auditors continued to be Mancera, S.C., amember practice of Ernst & Young Global.

 

The following tablesummarizes the aggregate fees billed to us by Mancera, S.C., a member practiceof Ernst & Young Global, during the fiscal years endedDecember 31, 2009 and 2008, respectively:

 
| ** **          | ** ** | **Years ended December 31,**             | ** ** |
|---------------------|------------|---------------------------------------------------------|------------|
| ** **          | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| ** **          | ** ** | **(in thousands of Mexican pesos)** | ** ** |
| Audit  fees         |       | Ps.                                                     | 16,972     |   | Ps. | 17,296 |   |
| Audit-related  fees |       | 3,807                                                   |       | — |   |
| Tax  fees           |       | 21                                                      |       | 2,247 |   |
| Total  fees         |       | Ps.                                                     | 20,800     |   | Ps. | 19,543 |   |

 

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*Audit fees*. Audit fees inthe above table are the aggregate fees billed by Mancera, S.C. in connectionwith the audit of our annual financial statements and statutory and regulatoryaudits. This caption also includes Sarbanes-Oxley Section 404 attestationservices.  

 

*Audit-relatedfees.*  Audit-related fees in the above table are fees billed byMancera, S.C. for work performed in connection with the offering of the US$250million bond maturing in 2019 and filing of a shelf registration statement.

 

*Tax fees*.  Taxfees in the above table include the aggregate fees billed by Mancera, S.C. forthe review of 2008’s reports on our transfer pricing study and fees paid toMancera, S.C. and other Ernst & Young affiliated firms forinternational tax services.

 

**AuditCommittee Pre-Approval Policies and Procedures**

 

We have adopted pre-approvalpolicies and procedures under which all audit and non-audit services providedby our external auditors must be pre-approved by the audit committee. Anyservice proposals submitted by external auditors need to be discussed andapproved by the audit committee during its meetings, which take place at leastfour times a year. Once the proposed service is approved, we or oursubsidiaries formalize the engagement of services. The approval of any auditand non-audit services to be provided by our external auditors is specified inthe minutes of our audit committee. In addition, the members of our board ofdirectors are briefed on matters discussed in the meetings of the auditcommittee.

 

**ITEM 16D.      Exemptions from the Listing Standards for Audit Committees.**

 

Not applicable.

 

**ITEM 16E.      Purchases of Equity Securities by the Issuer and Affiliated Purchasers.**

 

Thefollowing table sets out certain information concerning purchases of our sharesby us and affiliated purchasers in 2009:

 

**Issuer Purchases of EquitySecurities**

**(for the fiscal year endedDecember 31, 2009)**

 
| **Period** | ** ** | **Total Number of  Shares (or Units)  Purchased** | ** ** | **Average Price Paid  per Share (or Unit)** | ** ** | **Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares (or  Units) that May Yet be  Purchased Under the  Plans or Programs** | ** ** |
|------------|------------|---------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| January    |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| February   |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| March      |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| April      |       | 49,500                                            |       | Ps.                                         | 28.23      |                                                                                                     | 49,500     |                                                                                                                                  | US$        | 201,486,363 |   |
| May        |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| June       |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| July       |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| August     |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| September  |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| October    |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| November   |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| December   |       | —                                            |       | —                                      |       | —                                                                                                   |       | —                                                                                                                                |       |
| Total      |       | 49,500                                            |       | Ps.                                         | 28.23      |                                                                                                     | 49,500     |                                                                                                                                  | US$        | 201,486,363 |   |

 

**ITEM 16F.       Changein Registrant’s Certifying Accountant**

 

Not applicable.

 

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**ITEM 16G.      Corporate Governance**

 

As a foreign private issuerwith shares listed on the NYSE, we are subject to different corporategovernance requirements than a U.S. company under the NYSE listing standards.Pursuant to Rule 303.A11 of the NYSE-listed company manual, we arerequired to provide a summary of the significant ways in which our corporategovernance practices differ from those required for U.S. companies under theNYSE listing standard.

 

It is our intention,however, to follow NYSE corporate governance standards to the extent we deemappropriate given the different regulatory framework to which we are subject inMexico and in the United States and the different business environment in whichwe operate. Compliance with these higher standards of governance is notmandatory for us; however, we believe we are in substantial compliance with themajority of these requirements, thereby demonstrating our commitment to highstandards of governance.

 

We are a Mexican corporationwith shares listed on the*Bolsa Mexicana deValores*, or Mexican Stock Exchange. Our corporate governancepractices are governed by our bylaws, the Mexican Securities Market Law, andthe general dispositions issued by the CNBV and the Mexican Stock Exchange.Although compliance is not mandatory, we also substantially comply with theMexican Code of Best Corporate Practices (*Códigode Mejores Prácticas Corporativas*), as amended in 2006.

 

The table below sets forth adescription of the significant differences between corporate governancepractices required for U.S. companies under the NYSE listing standards and ourregulations:

 
| **NYSE Rules**                                                                                                                                             | ** ** | **Mexican Rules**                                                                                                                                                                                                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                |
| Listed companies must have  a majority of independent directors.                                                                                                |       | While not required under  Mexican law, a majority of our directors are independent as defined under  NYSE standards.                                                                                                                                                                                                                                      |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Listed companies must have  a nominating/corporate governance committee composed entirely of independent  directors.                                            |       | Pursuant to Mexican law,  we have a nominating/corporate governance committee composed entirely of  independent directors.                                                                                                                                                                                                                                |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Listed companies must have  a compensation committee composed entirely of independent directors.                                                                |       | Under Mexican law, we are  not required to have a compensation committee. However, we have a  compensation committee composed entirely of independent directors. Our  compensation committee does not issue a compensation report as contemplated  by the NYSE standards, as we operate in Mexico where this practice is neither  required nor customary. |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Listed companies must have  an audit committee with a minimum of three members who are independent  directors.                                                  |       | Under Mexican law, we are  required to have an audit committee with independent members within the  meaning of the NYSE standards with a charter that complies with applicable  Mexican statutes, and substantially complies with the NYSE standards  applicable to domestic companies where appropriate for us.                                          |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Audit committees are  required to prepare an audit committee report as required by the SEC to be  included in the listed company’s annual proxy statement. |       | As a foreign private  issuer, we are not required by the SEC to prepare and file proxy statements.  In this regard, we are subject to Mexican securities law requirements. We  have chosen to follow Mexican law and practice in this regard.                                                                                                             |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Non-management directors  must meet at executive sessions without management.                                                                                   |       | Our non-management  directors meet at executive sessions. This is not required by either Mexican  law or the Mexican Code of Best Corporate Practices.                                                                                                                                                                                                    |

 

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| Listed companies must  adopt and disclose a code of business conduct and ethics for directors,  officers and employees, and promptly disclose any waivers of the code for  directors or executive officers. |   | Companies listed on the  Mexican Stock Exchange are not required to adopt a code of ethics. However,  we have adopted a code of ethics. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

 

**PART III**

 

**ITEM 17.       FinancialStatements.**

 

Not applicable.

 

**ITEM 18.       FinancialStatements.**

 

See pages F-1 throughF-80, incorporated herein by reference.

 

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**ITEM 19.       Exhibits.**

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                                                                                              |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1(1)                 |       | Our articles of  incorporation*(estatutos sociales)*  as amended through March 30, 1998, together with an English  translation.*                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 1(2)                 |       | Our bylaws*(estatutos sociales)* as amended through  April 26, 2006, together with an English translation. +                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(a)(1)              |       | Form of Deposit  Agreement, as amended, by and among us, JPMorgan Chase Bank as Depositary and  the Holders and Beneficial Holders from time to time of American Depositary  Shares evidenced by American Depositary Receipts issued thereunder, including  form of American Depositary Receipt.** |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(1)              |       | Indenture relating to  7.50% Senior Guaranteed Notes, dated September 28, 2005 by and between  us, as Issuer, and the Bank of New York, as Trustee. ***                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(2)              |       | Form of First  Supplemental Indenture to the Indenture Relating to the 7.50% Senior  Guaranteed Exchange Notes, by and between us, as Issuer, and the Bank of New  York, as Trustee. ****                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(3)              |       | Form of 7.50% Senior  Guaranteed Exchange Note. ****                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(4)              |       | Registration Rights  Agreement dated September 28, 2005 by and among us, Credit Suisse First  Boston LLC and certain financial institutions named therein. ***                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(5)              |       | Indenture relating to 9.5%  Senior Guaranteed Notes dated December 8, 2009 by and between us, as  Issuer, and the Bank of New York, as Trustee                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 8                    |       | List of Principal  Subsidiaries.                                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 12(a)(1)             |       | CEO Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 30,  2010.                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 12(a)(2)             |       | CFO Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 30,  2010.                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 13                   |       | Officer Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated  June 30, 2010.                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 14(1)                |       | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                              |

 

----

|  * | Previously filed in  Registration Statement on Form F-1/A (File  No. 333-116257), originally filed with the SEC on June 23,  2004. Incorporated herein by reference. |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                     |
| **      | Previously filed in  Registration Statement on Form F-6 (File No. 333-116278),  originally filed with the SEC on June 8, 2004. Incorporated herein by  reference.         |
|    |                                                                                                                                                                                     |
| ***     | Previously filed in  Registration Statement on Form F-4 (File No. 333-129100),  originally filed with the SEC on October 18, 2005. Incorporated herein  by reference.     |
|    |                                                                                                                                                                                     |
| ****    | Previously filed in  Registration Statement on Form F-4/A (File No. 333-129100),  originally filed with the SEC on November 25, 2005. Incorporated herein  by reference.  |
|    |                                                                                                                                                                                     |
| +       | Previously filed in the  report on Form 20-F (File No. 001-32229), originally filed with the  SEC on June 29, 2006. Incorporated herein by reference.                     |

 

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**SIGNATURE**

 

The registrant,Desarrolladora Homex, S.A.B. de C.V., hereby certifies that it meets all of therequirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 
|                      | DESARROLLADORA HOMEX, S.A.B.                     |
|---------------------------|--------------------------------------------------|
|                      |                                             |
|                      | DE  C.V.                                         |
|                      |                                             |
|                      | /s/ Carlos Moctezuma  Velasco                    |
|                      | Name: Carlos Moctezuma  Velasco                  |
|                      | Title:   Chief  Financial Officer |
|                      |                                             |
| Dated: June 30, 2010 |                                             |

 

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** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of

Desarrolladora Homex,S.A.B. de C.V.

 

We have audited the accompanying consolidated balancesheets of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries as of December 31,2009 and 2008, and the related consolidated statements of income and changes instockholders’ equity for each of the three years ended December 31, 2009, the related consolidated statements of cash flows for each of the twoyears ended December 31, 2009, and the related consolidated statement ofchanges in financial position forthe year ended December 31, 2007.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries at December 31,2009 and 2008, and the consolidated results of their operations and changes instockholders’ equity for each of the three years ended December 31, 2009,the consolidated cash flows for each of the two years ended December 31,2009, and the consolidated changes in financial position for the year ended December 31, 2007, inconformity with Mexican Financial Reporting Standards which differ in certainrespects from accounting principles generally accepted in the United States ofAmerica (see Notes 28 and 29 to the consolidated financial statements).

 

As disclosed in Note 3 to the accompanyingconsolidated financial statements, during 2008, the Company adopted MexicanFinancial Reporting Standard (“MFRS”) B-2 *Statementof Cash Flows*, MFRS B-10 *Effectsof Inflation,*MFRS D-3*Employee Benefits,*and certainother*MFRS.  *As is also disclosed in Note 3 to the accompanyingconsolidated financial statements, during 2007, the Company adopted theprovisions of MFRS D-6 *Capitalization of thecomprehensive financing cost. *The application of all of thesestandards were prospective in nature.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States),Desarrolladora Homex, S.A.B. de C.V.’s internal control over financial reportingas of December 31, 2009, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated June 302010, expressed an unqualified opinion on the effectiveness of internal controlover financial reporting.

 
|   | Mancera, S.C.                    |
|--------|----------------------------------|
|   | A member practice of             |
|   | Ernst &  Young Global   |
|   |                             |
|   | C.P.C.  Alejandro Valdez Mendoza |

 

Culiacán, Sinaloa,México

June 30, 2010

 

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**DESARROLLADORAHOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

**Consolidated balance sheets**

(Figures in thousands of Mexican pesos (Ps.))

 
| ** **                                                    | ** ** | **2009**        | ** **    | ** **                  | ** ** | ** **     | ** ** |
|---------------------------------------------------------------|------------|-----------------|---------------|-----------------------------|------------|----------------|------------|
| ** **                                                    | ** ** | **Convenience** | ** **    | ** **                  | ** ** | ** **     | ** ** |
| ** **                                                    | ** ** | **translation** | ** **    | **As of December 31,** | ** ** |
| ** **                                                    | ** ** | **(Note 2a)**   | ** **    | **2009**                    | ** ** | **2008**       | ** ** |
| **Assets**                                                    |       |            |          |                        |       |           |       |
| Current assets:                                               |       |            |          |                        |       |           |       |
| Cash and cash equivalents  (Note 4)                           | ** ** | **$**           | **239,355**   | ** **                  | **Ps.**    | **3,122,074**  |       | Ps. | 1,140,140 |   |
| Restricted cash (Note 4)                                      | ** ** | **9,916**       | ** **    | **129,342**                 |       | 128,045        |       |
| Trade accounts receivable,  net (Note 5)                      | ** ** | **999,579**     | ** **    | **13,038,211**              |       | 11,845,530     |       |
| Inventories (Note 6)                                          | ** ** | **307,227**     | ** **    | **4,007,374**               |       | 5,090,904      |       |
| Prepaid expenses and other  current assets, net (Note 7)      | ** ** | **41,805**      | ** **    | **545,298**                 |       | 443,166        |       |
| Total current assets                                          | ** ** | **1,597,882**   | ** **    | **20,842,299**              |       | 18,647,785     |       |
|                                                          |       |            |          |                        |       |           |       |
| Land held for future  development (Note 6)                    | ** ** | **836,602**     | ** **    | **10,912,389**              |       | 9,254,469      |       |
| Property and equipment,  net (Note 8)                         | ** ** | **85,143**      | ** **    | **1,110,582**               |       | 1,402,928      |       |
| Goodwill (Note 3j)                                            | ** ** | **56,108**      | ** **    | **731,861**                 |       | 731,861        |       |
| Other assets, net (Note 9)                                    | ** ** | **24,872**      | ** **    | **324,393**                 |       | 468,369        |       |
| Deferred income taxes (Note 23)                               | ** ** | **49,345**      | ** **    | **643,640**                 |       | 328,598        |       |
| Total assets                                                  | ** ** | **$**           | **2,649,952** | ** **                  | **Ps.**    | **34,565,164** |       | Ps. | 30,834,010 |   |
|                                                          |       |            |          |                        |       |           |       |
| **Liabilities and stockholders’ equity**                 | ** ** |            | ** **    |                        | ** ** |           | ** ** |
| Current liabilities:                                          |       |            |          |                        |       |           |       |
| Current debt and current  portion of long-term debt (Note 10) | ** ** | **$**           | **20,745**    | ** **                  | **Ps.**    | **270,595**    |       | Ps. | 1,417,404 |   |
| Current portion of leases  (Note 12)                          | ** ** | **8,313**       | ** **    | **108,437**                 |       | 89,255         |       |
| Trade accounts payable (Note 14)                              | ** ** | **171,231**     | ** **    | **2,233,481**               |       | 4,005,853      |       |
| Land suppliers (Note 15)                                      | ** ** | **102,596**     | ** **    | **1,338,226**               |       | 2,326,036      |       |
| Advances from customers                                       | ** ** | **97,964**      | ** **    | **1,277,810**               |       | 365,962        |       |
| Taxes other than income  taxes                                | ** ** | **57,099**      | ** **    | **744,780**                 |       | 357,821        |       |
| Income taxes                                                  | ** ** | **11,034**      | ** **    | **143,920**                 |       | 26,172         |       |
| Employee statutory profit-sharing                             | ** ** | **1,302**       | ** **    | **16,989**                  |       | 70,445         |       |
| Provision for uncertain  tax positions (Note 23f)             | ** ** | **19,073**      | ** **    | **248,781**                 |       | 102,969        |       |
| Total current liabilities                                     | ** ** | **489,357**     | ** **    | **6,383,019**               |       | 8,761,917      |       |
|                                                          |       |            |          |                        |       |           |       |
| Long-term debt (Note 10)                                      | ** ** | **725,267**     | ** **    | **9,460,163**               |       | 5,990,119      |       |
| Long-term leases (Note 12)                                    | ** ** | **19,525**      | ** **    | **254,679**                 |       | 314,639        |       |
| Financial instruments (Note 11)                               | ** ** | **9,130**       | ** **    | **119,084**                 |       | —         |       |
| Other long-term liabilities  (Note 25)                        | ** ** | **—**      | ** **    | **—**                  |       | 18,403         |       |
| Long-term land suppliers  (Note 15)                           | ** ** | **5,724**       | ** **    | **74,659**                  |       | 405,426        |       |
| Employee benefits obligations (Note 13)                       | ** ** | **7,528**       | ** **    | **98,187**                  |       | 85,150         |       |
| Deferred income taxes (Note 23)                               | ** ** | **379,678**     | ** **    | **4,952,410**               |       | 3,741,099      |       |
| Total liabilities                                             | ** ** | **1,636,209**   | ** **    | **21,342,201**              |       | 19,316,753     |       |
|                                                          |       |            |          |                        |       |           |       |
| Stockholders’ equity (Note 16):                          | ** ** |            | ** **    |                        |       |           |       |
| Common stock                                                  | ** ** | **40,480**      | ** **    | **528,011**                 |       | 528,011        |       |
| Additional paid-in capital                                    | ** ** | **252,295**     | ** **    | **3,290,861**               |       | 3,280,223      |       |
| Shares repurchased for  employee stock option plan, at cost   | ** ** | **(7,968**      | **)**         | **(103,928**                | **)**      | (99,342        | )          |
| Retained earnings                                             | ** ** | **716,821**     | ** **    | **9,349,993**               |       | 7,508,715      |       |
| Derivative instruments (Note 11)                              | ** ** | **(6,737**      | **)**         | **(87,872**                 | **)**      | **—**     | ** ** |
| Other stockholders’ equity accounts                      | ** ** | **836**         | ** **    | **10,906**                  |       | 53,307         |       |
| Stockholders’ equity of  controlling interest            | ** ** | **995,727**     | ** **    | **12,987,971**              |       | 11,270,914     |       |
| Non-controlling interest  in consolidated subsidiaries        | ** ** | **18,016**      | ** **    | **234,992**                 |       | 246,343        |       |
| Total stockholders’ equity                               | ** ** | **1,013,743**   | ** **    | **13,222,963**              |       | 11,517,257     |       |
| Total liabilities and  stockholders’ equity              | ** ** | **$**           | **2,649,952** | ** **                  | **Ps.**    | **34,565,164** |       | Ps. | 30,834,010 |   |

 

See accompanying notes to these consolidated financialstatements.

 

F-2

----

Table of Contents

 

**DESARROLLADORAHOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated statements ofincome**

 

(Figures in thousands of Mexican pesos (Ps.)except earnings per share)

 
| ** **                                                    | ** ** | **2009**        | ** **    | ** **                                 | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|-----------------|---------------|--------------------------------------------|------------|----------------|------------|------------|------------|
| ** **                                                    | ** ** | **Convenience** | ** **    | ** **                                 | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **translation** | ** **    | **For the years ended  December 31,** | ** ** |
| ** **                                                    | ** ** | **(Note 2a)**   | ** **    | **2009**                                   | ** ** | **2008**       | ** ** | **2007**   | ** ** |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Revenues (Note 3b)                                            | ** ** | **$**           | **1,489,239** | ** **                                 | **Ps.**    | **19,425,182** |       | Ps.        | 18,850,496 |   | Ps. | 16,222,524 |   |
| Cost of sales (Note 3b)                                       | ** ** | **1,054,027**   | ** **    | **13,748,416**                             |       | 13,473,257     |       | 11,041,456 |       |
| Gross profit                                                  | ** ** | **435,212**     | ** **    | **5,676,766**                              |       | 5,377,239      |       | 5,181,068  |       |
| Operating expenses (Note 20)                                  | ** ** | **192,181**     | ** **    | **2,506,756**                              |       | 2,377,646      |       | 1,798,429  |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Income from operations                                        | ** ** | **243,031**     | ** **    | **3,170,010**                              |       | 2,999,593      |       | 3,382,639  |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Other (expenses) income,  net (Note 21)                       | ** ** | **3,793**       | ** **    | **49,475**                                 |       | (109,926       | )          | 209,223    |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Net comprehensive  financing cost (Note 6):                   | ** ** |            | ** **    |                                       |       |           |       |       |       |
| Interest expense (Note 22)                                    | ** ** | **29,421**      | ** **    | **383,765**                                |       | 237,033        |       | 344,928    |       |
| Interest income                                               | ** ** | **(14,117**     | **)**         | **(184,140**                               | **)**      | (157,351       | )          | (140,202   | )          |
| Exchange loss                                                 | ** ** | **(4,562**      | **)**         | **(59,510**                                | **)**      | 164,841        |       | 26,782     |       |
| Valuation effects of  derivative instruments (Note 11)        | ** ** | **5,094**       | ** **    | **66,451**                                 |       | 313,962        |       | (147,977   | )          |
| Monetary position loss  (Note 3a)                             | ** ** | **—**      | ** **    | **—**                                 |       | —         |       | 195,373    |       |
|                                                          | ** ** | **15,836**      | ** **    | **206,566**                                |       | 558,485        |       | 278,904    |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Income before income tax                                      | ** ** | **230,988**     | ** **    | **3,012,919**                              |       | 2,331,182      |       | 3,312,958  |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Income tax (Note 23)                                          | ** ** | **90,695**      | ** **    | **1,182,992**                              |       | 712,175        |       | 951,280    |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Consolidated net income                                       | ** ** | **$**           | **140,293**   | ** **                                 | **Ps.**    | **1,829,927**  |       | Ps.        | 1,619,007  |   | Ps. | 2,361,678 |   |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Net income of controlling  interest                           | ** ** | **$**           | **141,163**   | ** **                                 | **Ps.**    | **1,841,278**  |       | Ps.        | 1,580,876  |   | Ps. | 2,233,066 |   |
| Net (loss) income of  non-controlling interest                | ** ** | **(870**        | **)**         | **(11,351**                                | **)**      | 38,131         |       | 128,612    |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Consolidated net income                                       | ** ** | **$**           | **140,293**   | ** **                                 | **Ps.**    | **1,829,927**  |       | Ps.        | 1,619,007  |   | Ps. | 2,361,678 |   |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Weighted average shares  outstanding (in thousands)           | ** ** | **334,830**     | ** **    | **334,830**                                |       | 334,870        |       | 335,688    |       |
|                                                          |       |            |          |                                       |       |           |       |       |       |
| Basic and diluted earnings  per share of controlling interest | ** ** | **$**           | **0.42**      | ** **                                 | **Ps.**    | **5.50**       |       | Ps.        | 4.72       |   | Ps. |  6.65 |   |

 

See accompanying notes to these consolidated financialstatements.

 

F-3

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Table of Contents

 

**DESARROLLADORAHOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated statements ofchanges in stockholders’ equity**

 

For the years ended December 31, 2009,2008 and 2007

 

(Figures in thousands of Mexican pesos (Ps.))

 
| ** **                                                                              | ** ** | **Common  stock** | ** **  | **Additional  paid-in  capital** | ** ** | **Treasury stock, at  cost (Note 16)** | ** ** | **Retained  earnings** | ** **   | **Derivative  instruments** | ** ** | **Other  stockholders’  equity  accounts** | ** ** | **Stockholders’ equity  of controlling  interest** | ** **  | **Stockholders’  equity  of non-controlling  interest** | ** ** | **Total  stockholders’  equity  (Note 16)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------|-------------|----------------------------------|------------|------------------------------------------------------------|------------|------------------------|--------------|-----------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------|-------------|-------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Balances  as of January 1, 2007                                                    |       | Ps.               | 528,011     |                             | Ps.        | 3,280,223                                                  |       |                   |         | Ps.                         | 3,348,132  |                                            | Ps.        | —                                                            |        | Ps.                                                               | 347,405    |                                                  | Ps.        | 7,503,771 |   | Ps. | 88,733 |   | Ps. | 7,592,504 |   |
| Comprehensive  income                                                                   |       |              |        |                             |       |                                                       |       | 2,233,066              |         | —                      |       | (4,577                                          | )          | 2,228,489                                                         |        | 128,612                                                           |       | 2,357,101                                             |       |
| Shares  repurchased for employee stock option plan                                      |       |              |        |                             |       | Ps.                                                        | (99,342)   |                   |         |                        |       |                                            |       |                                                              | (99,342     | )                                                                 |       |                                                  | (99,342    | ) |
| Dividends  paid by consolidated subsidiary (Note 16f)                                   |       |              |        |                             |       |                                                       |       |                   |         |                        |       |                                            |       |                                                              |        | (9,133                                                            | )          | (9,133                                                | )          |
| Balances  as of December 31, 2007                                                  |       | 528,011           |        | 3,280,223                        |       | (99,342                                                    | )          | 5,581,198              |         | —                      |       | 342,828                                         |       | 9,632,918                                                         |        | 208,212                                                           |       | 9,841,130                                             |       |
| Reclassification  to retained earnings from the accumulated monetary position (Note 3a) |       |              |        |                             |       |                                                       |       | 346,641                |         |                        |       | (346,641                                        | )          |                                                              |        |                                                              | ** ** | ** **                                            | ** ** |
| Initial  adoption of MFRS D-3 Employee benefits (Notes 3a and 13)                       |       |              |        |                             |       |                                                       |       |                   |         |                        |       | 33,764                                          |       | 33,764                                                            |        |                                                              |       | 33,764                                                |       |
| Comprehensive  income                                                                   |       |              |        |                             |       |                                                       |       | 1,580,876              |         |                        |       | 23,356                                          |       | 1,604,232                                                         |        | 38,131                                                            |       | 1,642,363                                             |       |
| Balances  as of December 31, 2008                                                  |       | 528,011           |        | 3,280,223                        |       | (99,342                                                    | )          | 7,508,715              |         | —                      |       | 53,307                                          |       | 11,270,914                                                        |        | 246,343                                                           |       | 11,517,257                                            |       |
| Shares repurchased for employee stock option plan                                       |       |              |        |                             |       | (3,188                                                     | )          |                   |         |                        |       |                                            |       | (3,188                                                            | )           |                                                              |       | (3,188                                                | )          |
| Shares repurchased (Note 16g)                                                           |       |              |        |                             |       | (1,398                                                     | )          |                   |         |                        |       |                                            |       | (1,398                                                            | )           |                                                              |       | (1,398                                                | )          |
| Share-based compensation transactions (Note 16g)                                        |       |              |        | 10,638                           |       |                                                       |       |                   |         |                        |       |                                            |       | 10,638                                                            |        |                                                              |       | 10,638                                                |       |
| Changes in fair value of derivative instruments, net  of deferred taxes (Note 11)       |       |              |        |                             |       |                                                       |       |                   |         | (87,872                     | )          |                                            |       | (87,872                                                           | )           |                                                              |       | (87,872                                               | )          |
| Comprehensive income                                                                    |       |              |        |                             |       |                                                       |       | 1,841,278              |         | —                      |       | (42,401                                         | )          | 1,798,877                                                         |        | (11,351                                                           | )          | 1,787,526                                             |       |
| **Balances as of December 31, 2009**                                               | ** ** | **Ps.**           | **528,011** | ** **                       | **Ps.**    | **3,290,861**                                              | ** ** | **Ps.**                | **(103,928** | **)**                       | **Ps.**    | **9,349,993**                                   | ** ** | **Ps.**                                                           | **(87,872** | **)**                                                             | **Ps.**    | **10,906**                                            | ** ** | **Ps.** | **12,987,971** | ** ** | **Ps.** | **234,992** | ** ** | **Ps.** | **13,222,963** | ** ** |

 

See accompanying notes to these consolidated financial statements.

 

F-4

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Table of Contents

 

**DESARROLLADORAHOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated statements ofcash flows**

 

(In thousands of Mexican pesos (Ps.))

 
| ** **                                                                       | ** ** | **For the years ended December 31,**                  | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                                                                       | ** ** | **2009 Convenience  translation (Note 2a)** | ** **  | **2009** | ** ** | **2008** | ** ** |
| **Cash flows generated by (used in)  operating activities**                      |       |                                                       |        |   |   |   |   |
| Income before income tax                                                         | ** ** | **$**                                                      | **230,988** | ** ** | **Ps.** | **3,012,919** |   | Ps. | 2,331,182 |   |
| Items related to investing activities:                                           |       |                                                       |        |   |   |   |   |
| Depreciation and amortization                                                    | ** ** | **37,061**                                                 | ** **  | **483,409** |   | 425,021 |   |
| Loss (gain) on sale of property and equipment                                    | ** ** | **2,047**                                                  | ** **  | **26,706** |   | (8,771 | ) |
| Interest income                                                                  | ** ** | **(14,117**                                                | **)**       | **(184,140** | **)** | (157,351 | ) |
| Gain on sale of other investment                                                 | ** ** | **(895**                                                   | **)**       | **(11,676** | **)** | — |   |
| Items related to financing activities:                                           |       |                                                       |        |   |   |   |   |
| Interest                                                                         | ** ** | **67,937**                                                 | ** **  | **886,149** |   | 663,765 |   |
| Share-based payment transactions                                                 | ** ** | **816**                                                    | ** **  | **10,638** |   | — |   |
| Valuation effects of derivative instruments                                      | ** ** | **5,094**                                                  | ** **  | **66,451** |   | 313,962 |   |
| Deferred profit-sharing                                                          | ** ** | **2,040**                                                  | ** **  | **26,606** |   | 3,061 |   |
| Exchange (gain) loss                                                             | ** ** | **(14,133**                                                | **)**       | **(184,346** | **)** | 715,500 |   |
| ** **                                                                       | ** ** | **316,838**                                                |        | **4,132,716** |   | 4,286,369 |   |
|                                                                             |       |                                                       |        |   |   |   |   |
| Increase in trade accounts receivable                                            | ** ** | **(91,437**                                                | **)**       | **(1,192,681** | **)** | (4,296,272 | ) |
| Increase in inventories and land held for future  developments                   | ** ** | **(44,036**                                                | **)**       | **(574,390** | **)** | (2,878,188 | ) |
| (Increase) decrease in prepaid expenses and other  assets                        | ** ** | **(16,929**                                                | **)**       | **(220,817** | **)** | 92,611 |   |
| Interest income collected                                                        | ** ** | **14,117**                                                 | ** **  | **184,140** |   | 157,351 |   |
| (Decrease) increase in trade accounts payable                                    | ** ** | **(126,640**                                               | **)**       | **(1,651,851** | **)** | 429,063 |   |
| Decrease in accounts payable to land suppliers                                   | ** ** | **(101,089**                                               | **)**       | **(1,318,577** | **)** | (1,016,245 | ) |
| Increase in other liabilities                                                    | ** ** | **95,567**                                                 | ** **  | **1,246,549** |   | 418,151 |   |
| Increase in employee benefits obligations                                        | ** ** | **999**                                                    | ** **  | **13,037** |   | 40,242 |   |
| Payments of derivative instruments                                               | ** ** | **(9,451**                                                 | **)**       | **(123,271** | **)** | (340,912 | ) |
| Income tax recovered (paid)                                                      | ** ** | **3,317**                                                  | ** **  | **43,272** |   | (123,531 | ) |
| Net cash flows from operating activities                                         | ** ** | **41,256**                                                 | ** **  | **538,127** |   | (3,231,361 | ) |
|                                                                             |       |                                                       |        |   |   |   |   |
| **Cash flows generated by (used in)  investing activities**                      |       |                                                       |        |   |   |   |   |
| Increase in the investment in associate                                          | ** ** | **—**                                                 | ** **  | **—** |   | (27,727 | ) |
| Acquisition of property and equipment                                            | ** ** | **(6,850**                                                 | **)**       | **(89,352** | **)** | (563,723 | ) |
| Proceeds from sale of property and equipment                                     | ** ** | **2,348**                                                  | ** **  | **30,625** |   | 98,720 |   |
| Net cash flows from investing activities                                         | ** ** | **(4,502**                                                 | **)**       | **(58,727** | **)** | (492,730 | ) |
|                                                                             |       |                                                       |        |   |   |   |   |
| **Cash flows generated by (used in)  financing activities**                      |       |                                                       |        |   |   |   |   |
| Proceeds from new borrowings                                                     | ** ** | **1,207,414**                                              | ** **  | **15,749,151** |   | 9,145,280 |   |
| Payments of notes payable                                                        | ** ** | **(1,022,553**                                             | **)**       | **(13,337,871** | **)** | (5,861,061 | ) |
| Interest paid                                                                    | ** ** | **(67,075**                                                | **)**       | **(874,911** | **)** | (665,807 | ) |
| Shares repurchased                                                               | ** ** | **(352**                                                   | **)**       | **(4,586** | **)** | — |   |
| Net cash flows from financing activities                                         | ** ** | **117,434**                                                | ** **  | **1,531,783** |   | 2,618,412 |   |
| Net increase (decrease) of cash and cash  equivalents                            | ** ** | **154,188**                                                | ** **  | **2,011,183** |   | (1,105,679 | ) |
| Translation adjustment                                                           | ** ** | **(2,143**                                                 | **)**       | **(27,952** | **)** | 10,940 |   |
| Cash, cash equivalents and restricted cash at the  beginning of the year **(1)** | ** ** | **97,226**                                                 | ** **  | **1,268,185** |   | 2,362,924 |   |
| Cash, cash equivalents and restricted cash at the  end of the year **(1)**       | ** ** | **$**                                                      | **249,271** | ** ** | **Ps.** | **3,251,416** |   | Ps. | 1,268,185 |   |

 

----

**(1)**         This balance is composed of Ps. 3,122,074and Ps. 1,140,140 of cash and cash equivalents and Ps. 129,342 and Ps. 128,045of restricted cash as of December 31, 2009 and 2008, respectively.

 

See accompanying notes to these consolidated financialstatements.

 

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**DESARROLLADORAHOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated statement ofchanges in financial position**

 

(In thousands of Mexican pesos (Ps.))

 
| ** **                                             | ** ** | **For the years  ended  December 31,2007** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Operating activities**                               |       |                                            |       |
| Consolidated net income                                |       | Ps.                                             | 2,361,678  |   |
| Add items that did not  require the uses of resources: |       |                                            |       |
| Depreciation                                           |       | 196,307                                         |       |
| Amortization of intangibles                            |       | 105,410                                         |       |
| Labor obligations                                      |       | 18,416                                          |       |
| Deferred income taxes, net  of inflation               |       | 818,407                                         |       |
|                                                   |       | 3,500,218                                       |       |
| Changes in operating  assets and liabilities:          |       |                                            |       |
| (Increase) decrease in:                                |       |                                            |       |
| Trade accounts receivable                              |       | (2,008,172                                      | )          |
| Inventories and land held  for future development      |       | (2,090,087                                      | )          |
| Other assets                                           |       | (124,375                                        | )          |
| Increase (decrease) in:                                |       |                                            |       |
| Trade accounts payable                                 |       | 1,321,131                                       |       |
| Land suppliers                                         |       | 245,812                                         |       |
| Taxes payable                                          |       | (154,829                                        | )          |
| Other liabilities                                      |       | (29,529                                         | )          |
| Net resources generated by  operating activities       |       | 660,169                                         |       |
|                                                   |       |                                            |       |
| **Financing activities**                               |       |                                            |       |
| Proceeds from new borrowings                           |       | 2,647,276                                       |       |
| Payments of notes payable                              |       | (2,408,739                                      | )          |
| Changes in fair value of  financial instrument         |       | (147,976                                        | )          |
| Debt issuance costs                                    |       | —                                          |       |
| Share repurchase for  employee stock option plan       |       | (99,342                                         | )          |
| Dividends paid by  subsidiary company                  |       | (9,133                                          | )          |
| Net resources used in  financing activities            |       | (17,914                                         | )          |
| **Investing activities**                               |       |                                            |       |
| Restricted cash                                        |       | (118,493                                        | )          |
| Investment in associates                               |       | (17,869                                         | )          |
| Acquisition of property  and equipment, net            |       | (680,748                                        | )          |
| Net resources used in  investing activities            |       | (817,110                                        | )          |
|                                                   |       |                                            |       |
| Cash and cash equivalents:                             |       |                                            |       |
| Net (decrease) increase                                |       | (174,855                                        | )          |
| Balance at beginning of  year                          |       | 2,381,689                                       |       |
| Balance at end of year                                 |       | Ps.                                             | 2,206,834  |   |

 

See accompanying notes to these consolidated financialstatements.

 

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**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

 

**Notes toconsolidated financial statements**

 

For the years endedDecember 31, 2009 and 2008

 

(Figures in thousands ofMexican pesos (Ps.),except as otherwise indicated)

 

**1. Nature of business**

 

Desarrolladora Homex, S.A.B. de C.V. and itssubsidiaries (the “Company”) is comprised of a group of companies engagedmainly in the promotion, design, development, construction and sale ofaffordable entry level and middle income residential housing. Substantially allsales are made in Mexico.

 

To carry out its activities, the Company engages inland acquisition, obtaining permits and licenses, designing, constructing, marketingand selling homes, obtaining individual financing for its customers anddeveloping communities to satisfy housing needs in Mexico.

 

The Company participates in housing supply offers fromthe main housing funds in Mexico, such as the National Workers’ Housing Fund,or Instituto Nacional del Fondo de Ahorro para la Vivienda de los Trabajadores(“INFONAVIT”), the Social Security and Services Institute Public-SegmentWorkers’ Housing Fund, or Fondo de la Vivienda del Instituto de Seguridad yServicios Sociales de los Trabajadores del Estado (“FOVISSSTE”) and thegovernmental mortgage providers such as the Federal Mortgage Society, orSociedad Hipotecaria Federal (“SHF”). Additionally, the Company participates inthe market, where mortgage financing is provided by commercial banks and cashtransactions.

 

For the years ended December 31, 2009, 2008 and2007, revenues obtained through INFONAVIT mortgage financing accounted for 76%,76% and 75% respectively, of the Company’s total revenues, with other sourcesaccounting for 24%, 24% and 25%, respectively.

 

Homex’s operations include 140 developments in 34cities located in 21 Mexican states, which states represent 76.5% of Mexico’spopulation, according to the Mexican Institute of Statistics, Geography and ComputerSciences, or INEGI (Instituto Nacional de Estadistica, Geografia eInformatica). In 2009, 21% of Homex’s revenues originated in the Mexico CityMetropolitan Area, the largest city in Mexico, and 25% in Guadalajara, thesecond largest city. The remaining revenues were originated throughout 32cities.

 

The Company’s operations are on a seasonal basis:normally, the highest volume of sales takes place in the second half of theyear. Construction times of real-estate developments vary depending on the typeof housing: entry-level, middle-income or upper-income; accordingly,construction revenues are recognized in different fiscal years, and therevenues from work completed and generation of accounts receivable fluctuatedepending on the date of the beginning of the project and that of itscompletion.

 

On April 27, 2010, the Financial Director (CFO),Carlos Moctezuma Velasco, and the Administrative and Accounting Officer, RamónLafarga Bátiz, authorized the issuance of the Company’s consolidated MexicanFinancial Reporting Standards (Mexican FRS) financial statements and notes asof December 31, 2009 and 2008 and for each of the three years in theperiod ended December 31, 2009. Those consolidated financial statementshave been approved by the Audit Committee and the Board of Directors onMay 13, 2010, and by the Company’s stockholders at its meeting held onApril 29, 2010.

 

The accompanying consolidated financial statementswhich consist of those Mexican FRS consolidated financial statements and notes,as supplemented by the accompanying US GAAP disclosures presented in Notes28 and 29, were authorized for issuance herein by Gerardo de Nicolás (CEO), theCFO and the Controlling Director on June 30, 2010 with subsequent eventshaving been considered through such date.

 

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**2. Basis of preparation**

 

**a) Convenience translation**

 

The consolidated financial statements are stated inMexican pesos, the currency of the country in which the Company is incorporatedand operates. The statements’ translations of Mexican pesos into US dollaramounts are included solely for the convenience of readers in the United Statesof America and have been made at the rate of Ps.13.0437 per one US dollar. Suchtranslations should not be construed as representations that the Mexican pesoamounts have been, could have been, or could in the future be, converted intoUS dollars at this or any other exchange rate.

 

**b) Consolidation of financialstatements**

 

The consolidated financial statements include those ofDesarrolladora Homex, S.AB. de C.V. and its subsidiaries, whose shareholdingpercentage in their capital stock is shown below:

 
| ** **                                                                  | ** ** | **Ownership percentage** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|------------|
| **Company**                                                                 | ** ** | **2009**                 | ** ** | **2008**   | ** ** | **Activity** |
| Proyectos Inmobiliarios de  Culiacán, S.A. de C.V. (“PICSA”) | ** ** | **100**                  | **%**      | 100        | % | Promotion, design, construction and sale of  entry-level, middle-income and upper-income housing |
| Nacional Financiera, S.N.C.  Fid.del Fideicomiso AAA Homex 80284            | ** ** | **100**                  | **%**      | 100        | % | Financial services |
| Administradora Picsa, S.A. de  C.V.                                         | ** ** | **100**                  | **%**      | 100        | % | Administrative services and promotion related to  construction industry |
| Altos Mandos de Negocios, S.A.  de C.V.                                     | ** ** | **100**                  | **%**      | 100        | % | Administrative services |
| Aerohomex, S.A. de C.V.                                                     | ** ** | **100**                  | **%**      | 100        | % | Air transportation and lease services |
| Desarrolladora de Casas del  Noroeste, S.A. de C.V. (DECANO)                | ** ** | **100**                  | **%**      | 100        | % | Construction and development of housing complexes |
| Homex Atizapán, S.A. de C.V.                                           | ** ** | **67**                   | **%**      | 67         | % | Promotion, design, construction and sale of  entry-level and middle-income |
| Casas Beta del Centro, S. de  R.L. de C.V. (1)                         | ** ** | **100**                  | **%**      | 100        | % | Promotion, design, construction and sale of  entry-level and middle-income |
| Casas Beta del Norte, S. de  R.L. de C.V.                                   | ** ** | **100**                  | **%**      | 100        | % | Promotion, design, construction and sale of  entry-level |
| Casas Beta del Noroeste, S. de  R.L. de C.V.                                | ** ** | **100**                  | **%**      | 100        | % | Promotion, design, construction and sale of  entry-level |
| Hogares del Noroeste, S.A. de  C.V. (2)                                     | ** ** | **50**                   | **%**      | 50         | % | Promotion, design, construction and sale of entry-level  and middle-income housing. |
| Opción Homex, S.A. de C.V. (4)                                         | ** ** | **100**                  | **%**      | 100        | % | Sale, lease and acquisition of properties |
| Homex Amuéblate, S.A. de C.V.  (4)                                     | ** ** | **100**                  | **%**      | 100        | % | Sale of housing related products |
| Homex Global, S.A. de C.V. (3)                                              | ** ** | **100**                  | **%**      | 100        | % | Holding company for foreign investments |
| Sofhomex, S.A. de C.V. S.F.O.M. E.R.                                        | ** ** | **100**                  | **%**      | 100        | % | Financial services |
| Nacional Financiera, S.N.C.  Fid.del Fideicomiso Homex 80584                | ** ** | **100**                  | **%**      | 100        | % | Employee stock option plan administration |
| HXMTD, S.A. de C.V. (5)                                                     | ** ** | **100**                  | **%**      | 100        | % | Promotion, design, construction and sale of  upper-income tourism housing |
| Homex Central Marcaria, S.A. de  C.V. (5)                                   | ** ** | **100**                  | **%**      | 100        | % | Administration of industrial and intellectual  property |

 

Significant intercompany balances and transactionshave been eliminated during the consolidation of these entities.

 

----

(1)       Casas Beta del Centro, S. de R.L. de C.V. (CBC) owns100% of the outstanding stock of Super Abastos Centrales y Comerciales, S.A. deC.V. and 50% of the outstanding stock of Promotora Residencial Huehuetoca, S.A.de C.V. (Huehuetoca), which are engaged in the promotion, design, constructionand sale 

 

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of entry-level housing. Huehuetoca is fullyconsolidated in accordance MFRS B-8 *Consolidatedor Combined Financial Statements*, since the Company has control overthis subsidiary. Through October 20, 2009, CBC owned 100% of theoutstanding stock of Comercializadora Cántaros, S.A. de C.V. That company wassold to a third party on that date.

 

(2)       Hogares del Noroeste, S. A. de C.V. is a 50% owned andcontrolled subsidiary of Desarrolladora Homex, S.A.B. de C.V., which is engagedin the promotion, design, construction and sale of entry-level andmiddle-income housing. This entity is fully consolidated in accordance withMFRS B-8, since the Company has control over this subsidiary.

 

(3)       Homex Global, S.A. de C.V, (Homex Global) owns theoutstanding stock of the following companies:

 

(a)       Effective March 2008, Homex Global owns 100% ofthe outstanding stock of Homex India Private Limited, a subsidiary located inIndia and that is to perform the construction and development of entry-leveland middle-income housing in India. This company had no significant operationsduring 2008 and 2009.

 

(b)       Effective September 2007, Homex Global owned 15%of the outstanding stock of Orascom Housing Communities “S.A.E.”, a companylocated in Cairo, Egypt that performs the construction and development ofentry-level and middle-income housing in Egypt. Pursuant the application ofMFRS C-7, *Investments in Associates andOther Permanent Investments*, effective January 1, 2009, thiscompany was no longer considered an associated but an other permanent investment.On December 31, 2009 the Company sold its total investment in this companyto a third party (see Note 9).

 

(c)       Effective February 2008, Homex Global owns 100%of the outstanding stock of Desarrolladora de Sudamérica, S.A. de C.V., aMexican company that had no operations during 2008 and 2009.

 

(d)       Effective November 2008, Homex Global owns 100%of the outstanding common stock of Homex Brasil Incorporacoes a ConstrucoesLimitada (Homex Brasil), through its subsidiaries Éxito Construcoes eParticipacoes Limitada and HMX Empreendimentos Imobiliarios Limitada. Througheight subsidiaries, Homex Brasil performs construction and development ofentry-level housing in Sao Paulo, Brasil. During 2009, Homex Brasil startedoperations in Brazil with a 1,300-unit affordable entry-level development inSan Jose dos Campos, northeast of Sao Paulo. As of December 31, 2009 theCompany had recognized revenues of Ps. 62,178 from its Brazilian operations.

 

(4)       These companies were incorporated in 2007; however,they had no significant operations during 2007, 2008 and 2009.

 

(5)       These companies were incorporated in 2008; however,they had no significant operations during 2008 and 2009.

 

**3. Summary of significant accountingpolicies**

 

The accompanying consolidated financial statementswere prepared in conformity with Mexican Financial Reporting Standards (MFRS).

 

**a) New accounting standards**

 

**Effective in 2009:**

 

The most relevant standards that came into force in2009 are described below:

 

**MFRS B-7, Business Acquisitions**

 

This MFRS substitutes Bulletin B-7 *Business Acquisitions* and was issued bythe Consejo Mexicano para la Investigación y Desarrollo de Normas de laInformación Financiera, A.C. (Mexican Financial Information Standards ResearchDevelopment Board or “CINIF” to replace Mexican accounting Bulletin B-7 *Business Acquisitions*. This 

 

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standard establishes general rules for the initialrecognition of net assets, non-controlling interests and other items, as of theacquisition date.

 

According to this statement, purchase andrestructuring expenses resulting from acquisition process, should not be partof the consideration, because these expenses are not an amount being shared bythe business acquired.

 

In addition, MFRS B-7 requires a company to recognizenon-controlling interests in the acquiree at fair value as of the acquisitiondate.

 

MFRS B-7 is effective for future acquisitions and didnot have any effect on the Company’s consolidated financial statements as noacquisitions were made in 2009.

 

**MFRS B-8, Consolidated or CombinedFinancial Statements**

 

The CINIF issued in December 2008, MFRS B-8 *Consolidated or Combined Financial Statements*which replaces Mexican Bulletin B-8 *ConsolidatedFinancial Statements* and describes general rules for thepreparation, presentation and disclosure of consolidated and combined financialstatements.

 

The main changes of this MFRS are as follows:(a) this rule defines “Specific-Purpose Entity” (SPE), establishesthe cases in which an entity has control over a SPE, and when a company shouldconsolidate this type of entity; (b) addresses that potential votingrights should be analyzed when evaluating the existence of control over anentity; and, (c) set new terms for “controlling interest” instead of“majority interest,” and “non-controlling interest” instead of “minorityinterest.”

 

The adoption of this MFRS did not have any effect onthe Company’s consolidated financial statements.

 

**MFRS C-7, Investments inAssociates and Other Permanent Investments**

 

MFRS C-7 was issued by CINIF in December 2008 anddescribes the accounting treatment for investments in associates and otherpermanent investments, which were previously treated within Bulletin B-8 *Consolidated Financial Statements*. ThisMFRS requires the recognition of a Specific-Purpose Entity, through equitymethod. Also, this MFRS establishes that potential voting rights should beconsidered when analyzing the existence of significant influence.

 

In addition, this rule defines a procedure and alimit for the recognition of losses in an associate.

 

The adoption of this MFRS required the Company toconsider the associate in Egypt as other permanent investment effectiveJanuary 1, 2009, and no longer as an associate, and therefore to stoprecognizing the equity method over this company.

 

**MFRS C-8, Intangible Assets**

 

This rule substitutes Bulletin C-8 *Intangible Assets*. The newrule defines intangible assets as non-monetary items and broadens thecriteria of identification, indicating that an intangible asset must beseparable; this means that such asset could be sold, transferred, or used bythe entity. In addition, intangible asset arises from legal or contractualrights, whether those rights are transferable or separable from the entity.

 

On the other hand, this standard establishes thatpreoperative costs should be eliminated from the capitalized balance, affectingretained earnings, and without restating prior financial statements.

 

This amount should be presented as an accountingchange in consolidated financial statements.

 

The adoption of this MFRS did not have any effect onthe Company’s consolidated financial statements.

 

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**MFRS D-8, Share-Based Payments**

 

MFRS D-8 establishes the recognition of share-basedtransactions. When an entity purchases goods or pay services throughshare-based transactions, the entity is required to recognize those goods orservices at fair value and the corresponding increase in equity. According withMFRS D-8, if share-based payments cannot be settled with equity instruments,they have to be settled using an indirect method considering MFRS D-8parameters, and thus recorded as a liability.

 

The adoption of this MFRS did not have material effecton the Company’s consolidated financial statements.

 

**IMFRS 18, Effects on Recognition fromthe 2010 Tax Reform Bill in Income Taxes**

 

On December 15, 2009 the CINIF published theInterpretation 18 of Mexican Financial Reporting Standards (IMFRS) with theobjective to provide guidance in regards to the 2010 Tax Reform Bill about theaccounting recognition that should be completed in the companies’ financialstatements.

 

This IMFRS establishes certain parameters for therecognition of changes to the new Tax Reform, mainly in regards to Income Taxrates changes, changes to the consolidation regime (fundamentally related totax losses), losses on stock transfers, special consolidation terms,distributed dividends not from Net Tax Profit Account (CUFIN), consolidationtax benefits and differences between CUFIN. The effects of the application ofIMFRS 18 are disclosed in Note 23.

 

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**Effective in 2008:**

 

The most relevant standards that came into force in2008 are described below:

 

**MFRS B-2, Statement of Cash Flows**

 

In November 2007, MFRS B-2 was issued by theCINIF to replace Mexican accounting Bulletin B-12, *Statement of Changes in Financial Position*. This standardestablishes that the statement of changes in financial position is substitutedby a statement of cash flows as part of the basic financial statements. Themain differences between both statements lie in the fact that the statement ofcash flows shows the entity’s cash receipts and disbursements for the period,while the statement of changes in financial position showed the changes in theentity’s financial structure rather than its cash flows. In an inflationaryenvironment, the amounts of both financial statements are expressed in constantMexican pesos. However, in preparing the statement of cash flows, the entitymust first eliminate the effects of inflation for the period and, accordingly,determine cash flows at constant Mexican pesos, while in the statement ofchanges in financial position, the effects of inflation for the period were noteliminated.

 

MFRS B-2 establishes that in the statement of cashflows, the entity must first present cash flows derived from operatingactivities, then from investing activities, the sum of these activities and finallycash flows derived from financing activities. The statement of changes infinancial position first shows the entity’s operating activities, thenfinancing activities and finally its investing activities. Under this newstandard, the statement of cash flows may be determined by applying the director indirect method.

 

The transitory rules of MFRS B-2 establish thatthe application of this standard is prospective. Therefore, the financialstatements for 2007 include the statement of changes in financial position, aspreviously established by Mexican accounting Bulletin B-12.

 

**MFRS B-10, Effects of Inflation**

 

In July 2007, the CINIF issued MFRS B-10, *Effects of Inflation*. MFRS B-10 definesthe two economic environments in Mexico that will determine whether or notentities must recognize the effects of inflation on financial information: i)inflationary, when inflation is equal to or higher than 26%; accumulated in thepreceding three fiscal years (an 8% annual average); and ii) non-inflationary,when accumulated inflation for the preceding three fiscal years is less thanthe aforementioned accumulated 26%. Based on these definitions, the effects ofinflation on financial information must be recognized only when entitiesoperate in an inflationary environment.

 

This standard also establishes the accountingrules applicable whenever the economy changes from any type of environmentto another. When the economy changes from an inflationary environment to anon-inflationary one, the entity must maintain in its financial statements theeffects of inflation recognized through the immediate prior year, since theamounts of prior periods are taken as the base amounts of the financialstatements for the period of change and subsequent periods. Whenever theeconomy changes from a non-inflationary environment to an inflationary one, theeffects of inflation on the financial information are recognizedretrospectively, meaning that all information for prior periods must beadjusted to recognize the accumulated effects of inflation of the periods inwhich the economic environment was considered non-inflationary.

 

This standard also abolishes the use of thespecific-indexation method for the valuation of imported fixed assets and thereplacement-cost method for the valuation of inventories, thus eliminating theresult from holding non-monetary assets.

 

The Interpretation 9 of MFRS establishes thatcomparative financial statements for years prior to 2008 must be expressed inMexican pesos with purchasing power at December 31, 2007, which was thelast date on which the effects of inflation were recognized.

 

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The realized result from holding non-monetary assetsmust be reclassified to retained earnings, while the unrealized portion must bemaintained as such within stockholders’ equity, and reclassified to results ofoperations when the asset giving rise to it is realized. Whenever it is deemedimpractical to separate the realized from the unrealized result from holdingnon-monetary assets, the full amount of this item may be reclassified to theretained earnings.

 

The effect of the adoption of this standard on theCompany’s 2008 financial statements is the Company’s ceasing to recognize theeffects of inflation on its financial information; therefore no monetary resultwas determined. The accumulated monetary position as of December 31, 2007that was Ps. 346,641 was reclassified to the retained earnings.

 

**MFRS B-15, Foreign CurrencyTranslation**

 

MFRS B-15 incorporates the concepts of recordingcurrency, functional currency and reporting currency, and establishes themethodology to translate financial information of a foreign entity, based on thoseterms. Additionally, this rule is aligned with NIF B-10, which definestranslation procedures of financial information from subsidiaries that operatein inflationary and non-inflationary environments. Prior to the application ofthis rule, translation of financial information from foreign subsidiaries wasaccording to inflationary environments methodology.

 

The Company’s foreign operations are insignificant atthis time and thus the impact of the adoption of this MFRS on the Company’sconsolidated financial statements was also insignificant.

 

**MFRS D-3, Employee Benefits**

 

MFRS D-3, *EmployeeBenefits* replaces the previous MFRS accounting Bulletin D-3, *Labor Obligations*. The most significantchanges contained in MFRS D-3 are as follows:

 

i) shorter periods for the amortization of unamortizeditems such as transition obligations, with the option to credit or chargeactuarial gains or losses directly to results of operations, as they accrue. Asfurther disclosed in Note 13, during 2008 the Company prospectively changed theamortization periods for its transition liability from those of 10-22 yearperiods in prior years, to a four year period starting in 2008, resulting inPs. 5,559 in additional labor costs being recognized in its 2008 statement ofincome as compared to prior periods;

 

ii) elimination of the recognition of an additionalliability and resulting recognition of an intangible asset and comprehensiveincome item. As further disclosed in Note 13, upon the adoption of MFRS D-3 theCompany reversed its intangible asset of Ps. 30,092 and additional liability ofPs. 34,189 resulting in a credit to shareholders equity of Ps. 4,097 in 2008;

 

iii) accounting treatment of current-year and deferredemployee profit-sharing, requiring that deferred employee profit-sharing berecognized using the asset and liability method established under MFRS D-4. TheCompany recorded a deferred profit sharing asset of Ps. 29,667 upon adoption ofMFRS D-3. That asset has been adjusted to a value of Ps. 26,606 as of December 31,2008. As of December 31, 2009 there was no deferred profit sharing.

 

iv) current-year and deferred employee profit-sharingexpense is to be presented as an ordinary expense in the income statementrather than as part of taxes on profits.

 

The impact of the adoption of MFRS D-3 is as indicatedabove.

 

**MFRS D-4, Taxes on Profit**

 

The CINIF also issued Mexican FRS D-4, *Taxes on Profits* which replaces Mexicanaccounting Bulletin D-4 *Accounting forIncome Taxes, asset Tax and Employee Profit-sharing*. The most significantchanges attributable to MFRS D-4 are as follows:

 

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i)                 the concept of permanent differences iseliminated. The asset and liability method requires the recognition of deferredtaxes on all differences in balance sheet accounts for financial and taxreporting purposes, regardless of whether they are permanent or temporary;

ii)              because current and deferred employeeprofit-sharing is now considered as an ordinary expense under MFRS D-3, it isexcluded from this standard;

iii)           asset taxes are required to be recognizedas a tax credit and, consequently, as a deferred income tax asset only in thosecases in which there is certainty as to its future realization; and

iv)          the cumulative effect of adopting Mexicanaccounting Bulletin D-4 is to be reclassified to retained earnings, unless itis identified with comprehensive items in stockholders’ equity not yet taken toincome.

 

The application of this standard is prospective innature; therefore the comparative financial statements from prior years werenot modified. The adoption of this MFRS did not have any effect on theCompany’s consolidated financial statements.

 

**Effective in 2007:**

 

The most relevant standard that came into force in2007 is described below:

 

**MFRS D-6, Capitalization of theComprehensive Financing Cost**

 

MFRS D-6 establishes that entities must capitalizecomprehensive financing cost (CFC), which had been optional, under Mexicanaccounting Bulletin C-6, *Property, Plant andEquipment*.

 

Capitalized CFC is defined as the amount attributableto qualifying assets that could have been avoided if its acquisition had nottaken place, which in the case of Mexican peso denominated financing, includesits interest and the net monetary position, and in the case of foreign currencydenominated financing, it also includes any exchange gain or losses. Qualifyingassets are defined as those assets acquired by an entity requiring a prolongedperiod of time to carryout the activities to get them ready for their intendeduse, that are to be sold or leased, that require a prolonged period to beacquired or readied for its sale or lease including inventories that require aperiod of time to take possession or to get them in conditions for their sale.The capitalization of the comprehensive result of financing starts andcontinues while investments for its acquisition are being made, the activitiesrequired for conditioning the asset for sale or use are underway and interestis being accrued.

 

MFRS D-6 establishes that the amount of capitalizedCFC will be determined based on the loans that were specifically used toacquire the qualifying assets, or if such identification cannot be made, byapplying the weighted average capitalization rate for financing to the weightedaverage number of investments in qualifying assets made during the acquisitionperiod. Financing with imputed interest cost may be capitalized against thecost of acquired assets, since the financing is recognized at its presentvalue.

 

The application of MFRS D-6 for the years endedDecember 31, 2009, 2008 and 2007 represented a decrease in CFC of Ps.563,154, Ps. 1,250,080 and Ps. 179,304, respectively, although Ps. 670,127 (ofwhich Ps. 419,338 is related to the current year CFC and Ps. 250,789 is relatedto prior years) in 2009, Ps. 976,707 (of which Ps. 931,682 is related to thecurrent year CFC and Ps. 45,025 is related to prior years) in 2008 and Ps.119,286 in 2007 were ultimately charged to cost of sales as the underlyingprojects were sold.

 

**b) Revenue and cost recognition**

 

Revenues from the Company’s activities as a developerare recorded pursuant to the percentage-of-completion method, measured by thepercentage of actual costs incurred to total estimated costs for eachdevelopment and each project. Under this method, the estimated revenue for eachdevelopment and project is multiplied by such percentage to determine theamount of revenue to be recognized. Management periodically evaluates thefairness of estimates used to determine the percentage of completion. If, as aresult of such evaluation, it becomes apparent that estimated costs onuncompleted projects exceed expected revenues, a provision for estimated costsis recorded in the period in which such costs are determined. The Companybegins applying the percentage-of-completion method when the 

 

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followingconditions have been met:

 

·                                the homebuyer has submitted all requireddocuments in order to obtain the financing from the mortgage lender;

·                                the Company established that thehomebuyer will obtain the required financing from the mortgage lender;

·                                the homebuyer has signed a purchase applicationfor the processing and granting of a loan to buy a property to be used ashousing; and

·                                the homebuyer has made a down payment,where down payments are required.

 

The cost of sales represents the cost incurred in thedevelopment of housing revenues by the Company during the year. These costsinclude land, direct materials, labor and all the indirect costs related to thedevelopment of the project such as indirect labor, equipment, repairs,depreciation and the capitalization of the comprehensive financing costs.

 

Refer to Note 26 for a discussion of Interpretation 14to MFRS which will significantly change the Company’s accounting for revenueand cost recognition beginning in 2010.

 

**c) Recognition of the effects ofinflation**

 

Effective January 1, 2008 the Company adoptedMFRS B-10, *Effects of Inflation*.Based on this Standard, the Company did not recognize the effects of inflationin the financial information for the years ended December 31, 2009 and2008. However, for prior period’s information of 2007 presented for comparativepurposes, it is stated in pesos of purchasing power as of December 31,2007, last date that the inflation was recognized.

 

Cumulative inflation in Mexico over 2007, 2008 and2009 is less than 26% and therefore, in conformity with MFRS B-10, Mexico’scurrent economic environment is considered non-inflationary. Furthermore, thethree year cumulative inflation in both of the Company’s foreign locations(Brazil and India) is also less than 26% through December 31, 2009. Accordingly,the Company’s financial information for 2009 and 2008 was prepared withoutrecognizing the effects of inflation. Interpretation 9 of MFRS establishes thatcomparative financial statements for years prior to 2008 must be expressed inMexican pesos with purchasing power at December 31, 2007, which was thelast date on which the effects of inflation were recognized. Therefore amountsas of December 31, 2009 and 2008 do not include inflation effects, and thecomparative figures as of December 31, 2007, are stated in thousands ofpesos as of December 31, 2007.

 

**d) Useof estimates**

 

In conformity with MFRS, the preparation of financialstatements requires the use of estimates and assumptions in certain areas.  Actual results could differ from theseestimates.

 

**e) Cashand cash equivalents**

 

Cash and cash equivalents consist basically of bankdeposits and highly liquid investments with purchased maturities of less than90 days. These investments are stated at cost plus accrued interest, which issimilar to their market value.

 

**f)Allowance for doubtful accounts**

 

The Company’s policy is to provide for doubtfulaccounts based on balances of uncollected accounts receivable, applying severalpercentages based on their aging status.

 

**g) Inventories and costs of sales**

 

Construction-in-process, construction materials andland for development and future development are recorded at acquisition cost.Cost of sales for the year ended December 31, 2007, was restated using theNCPI (see Note 3c). 

 

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The balance ofthis account is similar to its market value.

 

Land for future developments refers to land reservesto be developed by the Company.

 

MFRS D-6 establishes the determination of the amountfrom the comprehensive financing cost (CFC) that shall be capitalized. The landunder development inventories and construction-in-process include thecapitalized CFC. The Company capitalizes the CFC that results from theapplication of the weighted average rate of the debt to the weighted average ofthe construction-in-process investment and the land under development duringthe acquisition period. In regards to debt in foreign currency, the capitalizedCFC includes the corresponding exchange gains and losses (see Note 6).

 

The Company has land trusts agreements for thehomebuilding development sites, in where each one of the trustees participatesin the income generated by these developments in percentages that vary between9% and 14% for lands not urbanized and 32% for urbanized lands. As per theagreements the Company recognizes the land as inventory when the constructionstarts (but only for the portion of land used).

 

**h) Property and equipment**

 

Property and equipment is recorded at acquisitioncost. Depreciation is calculated using the straight-line method based on theremaining useful lives of the related assets, as follows:

 

| ** **                     | ** ** | **Years** |
|--------------------------------|------------|-----------|
| Buildings                      |       | 20        |
| Machinery and equipment        |       | 4 and 10  |
| Transportation equipment       |       | 4         |
| Air transportation equipment   |       | 10        |
| Office furniture and equipment |       | 10        |
| Computers                      |       | 4         |
| Communication equipment        |       | 4         |

 

The value of property and equipment is reviewedwhenever there are indications of impairment. When the recovery value of anasset, which is the greater of its selling price and value in use (the presentvalue of future cash flows), is lower than its net carrying value, thedifference is recognized as an impairment loss.   At December 31, 2009 and 2008, noimpairment losses have been recognized with respect to the Company’s propertyand equipment.

 

**i) Leases**

 

The Company classifies agreements to lease propertyand equipment as operating or capital, in conformity with the guidelines ofBulletin D-5, *Leases*.

 

Lease arrangements are recognized as capital leases ifthey meet at least one of the following conditions:

 

a) Under the agreement,the ownership of the leased asset is transferred to the lessee upon terminationof the lease.

 

b) The agreement includesan option to purchase the asset at a reduced price.

 

c) The term of the leaseis basically the same as the remaining useful life of the leased asset.

 

d) The present value ofminimum lease payments is basically the same as the market value of the leasedasset, net of any benefit or scrap value.

 

When the lessor retains the risks or benefits inherentto the ownership of the leased asset, the agreements are 

 

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classified asoperating leases and rent is charged to results of operations.

 

**j)Goodwill**

 

Goodwill represents the difference between thepurchase price and the fair value of the net assets acquired at the date ofpurchase in accordance with the purchase method of accounting.

 

Goodwill is recorded initially at acquisition cost anduntil December 31, 2007 was restated using adjustment factors derived fromthe NCPI.

 

Goodwill is not amortized; however, it is subject toannual impairment tests, and is adjusted for any impairment losses. Goodwill isallocated to the affordable entry-level segment.

 

Goodwill as of December 31, 2009 and 2008 was Ps.731,861.

 

**k) Impairment of indefinite livedassets**

 

The Company reviews the carrying amounts of assetswith indefinite useful life annually or earlier when an impairment indicatorsuggests that such amounts might not be recoverable, considering the greater ofthe present value of future net cash flows using an appropriate discount rate,or the net sales price upon disposal. Impairment is recorded when the carryingamounts exceed the greater of the amounts mentioned above. The impairmentindicators considered for these purposes are, among others, the operatinglosses or negative cash flows in the period if they are combined with a historyor projection of losses; depreciation and amortization charged to results,which in percentage terms in relation to revenues are substantially higher thanthat of previous years; obsolescence; reduction in the demand for the productsmanufactured; competition; and other legal and economic factors.

 

As of December 31, 2009 and 2008, no impairmenthas been recognized with respect to the Company’s assets with indefinite lives.

 

**l) Other assets**

 

Expenses related to the placement of the variousborrowings disclosed in Note 10 are recorded at cost. These amounts will beamortized under the straight-line method over the respective loan terms. Thevalue assigned to the BETA trademark is amortized under the straight-line methodover five years, which is the estimated useful life.

 

**m) Employee retirement obligations**

 

The Company grants seniority premiums and terminationpay, covering all its employees. The related calculations are based on theprovisions of the Mexican Federal Labor Law (FLL).  Under FLL, workers are entitled to certainbenefits at the time of their separation from the Company under certaincircumstances. Seniority premiums and termination payments are recognizedperiodically using the projected unit-credit method and financial assumptions(2007 net of inflation).

 

As disclosed in Note 13, effective January 1,2008 the Company adopted MFRS D-3. As a result of this adoption, the transitionliability of labor obligations is now being amortized over a four-year period.Prior to 2008, this liability was amortized on a straight-line basis over thelabor life of our covered employees.

 

**n) Derivative financial instruments**

 

Derivative financial instruments are used for hedgingpurposes. At December 31, 2009 and 2008, all derivative instrumentswere recognized in the balance sheet at fair value, initially represented bythe amount of consideration agreed (both assets and liabilities). Transactioncosts and cash flow received or delivered to adjust these instruments to fair valueat the beginning of the transaction, not related to premiums on options, areamortized during the respective term. The changes in the fair value ofderivative financial instruments that do not qualify as hedging instruments arerecognized in income in valuation effects of derivative instruments caption.Financial instruments 

 

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that qualify ashedging instruments are recognized in stockholders’ equity as part of othercomprehensive income.

 

**o)Liabilities, provisions, contingent assets and liabilities and commitments**

 

Liability provisions are recognized whenever(i) the Company has current obligations (legal or assumed) derived frompast events, (ii) the liability will probably give rise to a future cashdisbursement for its settlement and (iii) the liability can be reasonablyestimated.

 

Contingent liabilities are recognized when they willprobably likely give rise to a future cash disbursement for their settlement.Contingent assets, if any, are only subject to disclosure, unless they can bedefinitely realized. Also, commitments are only recognized when they generate aloss.

 

**p) Deferred taxes**

 

The Company recognizes deferred taxes using the assetand liability method.  Under this method,deferred taxes are recognized on all temporary differences between the book andtax values of assets and liabilities, using the enacted income tax or flat ratebusiness tax (IETU) rate at the time the financial statements are issued, whichis the enacted rate that will be in effect at the time the temporarydifferences giving rise to deferred tax assets and liabilities are expected tobe recovered or settled.

 

Deferred tax assets are evaluated periodically inorder to determine their recoverability.

 

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**q) Deferred employee statutory profitsharing**

 

Beginning January 1, 2008 the Company uses MFRSD-3, *Employee Benefits* thatconsiders the accounting treatment for Employee Statutory Profit-Sharing. ThisStandard establishes the Companies to use the asset and liability method tocompute and recognize the deferred liability or asset for profit-sharing, in asimilar manner as the deferred income tax computation, and establishes theinitial recognition of the deferred profit-sharing, if any, to be reclassifiedto retained earnings, unless it is identified with comprehensive items instockholders’ equity not yet taken to income.

 

Until December 31, 2007 deferred employee profitsharing was recognized only on temporary differences determined in thereconciliation of current year net income and the income base determined foremployee profit-sharing purposes, only when there is no indication that theresulting liability or asset will not be realized in the future.

 

Current-year and deferred employee profit-sharingexpense is to be presented as an ordinary expense in the income statementrather than as part of taxes on profits.

 

During the year ended December 31, 2008, thedeferred profit-sharing amounted Ps. 26,606 (see Note 9). The initialrecognition of the deferred profit-sharing under MFRS D-3 amounts Ps. 29,667that was recorded in the other stockholders’ equity account. The deferred asseteffect generated during 2008 amounts to Ps. 127,305, of which the Companycreated a valuation allowance of Ps. 100,699, which according with theCompany’s projections were more likely than not to not be recovered. Thedeferred asset effect generated during 2009 for Ps. 52,392. The Company createda valuation allowance of Ps. 78,998 (Ps. 26,606 of 2008 and Ps. 52,392 of2009), which according with the Company’s projections were more likely than notto not be recovered.

 

**r) Foreign currency balances andtransactions**

 

As mentioned in Note 3a beginning January 1, 2008the Company adopted MFRS B-15 *ForeignCurrency Translation*, Standard that replaces Bulletin B-15 *Transactions in Foreign Currency and Translation ofFinancial Statements of Foreign Operations*. This Standard isapplicable for the recognition of transactions and amounts in foreign currency.

 

Foreign currency transactions are recorded at theapplicable exchange rate in effect at the transaction date. Monetary assets andliabilities denominated in foreign currency are translated into Mexican pesosat the applicable exchange rate in effect at the balance sheet date. Exchangefluctuations are recorded as a component of net comprehensive financing cost(income) in the consolidated statements of income.

 

See Note 17 for the Company’s consolidated foreigncurrency position at the end of each year and the exchange rates used totranslate foreign currency denominated balances.

 

**s) Stock option plan**

 

In November 2007, the Company implemented a planthrough which certain of its executives and company officials receiveremuneration in the form of share-based payment transactions, whereby theseindividuals render services as consideration for equity instruments.

 

Given the settlement feature contained within theplan, the awards were treated as “Liability Awards” from its implementation andthrough December 31, 2008. Compensation cost was measured by reference tothe fair value of the awards at each balance sheet date. During 2009 and as aresult of certain modifications made to the plan, the awards were modified soas to become equity-settled. The fair value of share based compensation isdetermined using an appropriate pricing model (see Note 16e).

 

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**t)Earnings per share**

 

Earnings per shareare calculated by dividing net income of controlling interest by the weightedaverage number of shares outstanding during the year. The Company does not haveany dilutive securities beyond the stock options disclosed in Note 16e, theeffects of which were immaterial in all periods. Accordingly basic and dilutedearnings per share presented were the same during such periods.

 

**u) Comprehensive income**

 

Comprehensive income is represented by net income, theeffects of labor obligations (until December 31, 2007), the effect of thetranslation of the financial statements of the subsidiaries and foreignassociated company and the effect of the change in the fair value of financialinstruments that meet the criteria of hedge accounting.

 

**v)Statement of income presentation**

 

The costs and expenses reflected in the statement ofincome are presented according to their function, since this classificationallows an adequate analysis of gross profits and operating margins. TheCompany’s operating income is presented because it is an important indicator ofits overall performance and results, and includes ordinary income, operatingcosts and expenses. Other ordinary income (expenses) is therefore excluded.

 

**w) Reclassifications**

 

Certain amounts in the 2008 consolidated balance sheethave been reclassified in order to conform with 2009 presentations. The effectsof these reclassifications were recognized with retrospective application, inaccordance with MFRS B-1, *Accounting changesand error corrections*.

 
| ** **                             | ** ** | **Original amounts** | ** ** | **Reclassified amounts** | ** ** |
|----------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2008**                  | ** ** | **2008**                      | ** ** |
| Deferred income taxes, liability       |       | Ps.                       | (3,412,501 | )                             | Ps.        | (3,741,099 | ) |
| Deferred income taxes,  asset          |       | —                    |       | 328,598                       |       |
| Deferred income taxes,  net            |       | Ps.                       | (3,412,501 | )                             | Ps.        | (3,412,501 | ) |
|                                   |       |                      |       |                          |       |   |   |
| Income taxes                           |       | Ps.                       | 129,141    |                          | Ps.        | 26,172 |   |
| Provision for uncertain  tax positions |       |                      | —     |                          |       | 102,969 |   |
|                                   |       | Ps.                       | 129,141    |                          | Ps.        | 129,141 |   |

 

**x) Segment reporting**

 

Segment reporting is presented in accordance with theinformation prepared for the internal decision making process. The informationis presented according to the type of housing on sale by the Company.

 

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**4.Cash and cash equivalents**

 
| ** **       | ** ** | **2009**   | ** **    | **2008** | ** ** |
|------------------|------------|------------|---------------|----------|------------|
| Cash             | ** ** | **Ps.**    | **143,851**   |     | Ps.        | 225,669 |   |
| Cash equivalents | ** ** | ** ** | **2,978,223** |     |       | 914,471 |   |
|             | ** ** | **Ps.**    | **3,122,074** |     | Ps.        | 1,140,140 |   |

 

Cash and cash equivalents consist basically of bankdeposits and highly liquid investments. The Company has restricted cash as ofDecember 31, 2009 and 2008 for Ps. 129,342 and Ps. 128,045, of which Ps.122,809 and Ps. 128,045 are related to restricted amounts (see Note 14),respectively. Ps. 6,533 in 2009 was deposited into an escrow account related toa pending acquisition (see Note 25).

 

**5. Trade accounts receivable**

 
| ** **                                     | ** ** | **2009**       | ** **     | **2008**   | ** ** |
|------------------------------------------------|------------|----------------|----------------|------------|------------|
| As promoter:                                   | ** ** | ** **     |           |       |       |
| Total incurred  construction costs             | ** ** | **Ps.**        | **9,102,230**  |       | Ps.        | 7,487,205 |   |
| Estimated gross profit  on costs incurred      | ** ** | **3,615,262**  |           | 3,082,839  |       |
| Unbilled revenues on  developments in progress | ** ** | **12,717,492** |           | 10,570,044 |       |
| Due from customers  (1)(2)(3)                  | ** ** | **403,925**    |           | 1,343,786  |       |
| Services and other                             | ** ** | **48,919**     |           | 61,382     |       |
|                                           | ** ** | **13,170,336** |           | 11,975,212 |       |
| Allowance for doubtful  accounts               | ** ** | **(57,279**    | **)**          | (48,184    | )          |
|                                           | ** ** | **13,113,057** |           | 11,927,028 |       |
| Trade accounts  receivable, long-term (4)      | ** ** | **(74,846**    | **)**          | (81,498    | )          |
|                                           | ** ** | **Ps.**        | **13,038,211** |       | Ps.        | 11,845,530 |   |

 

Unbilled revenues on developments in progress**represent revenues recognized on costsincurred, in accordance with the percentage-of-completion method, which havenot yet been billed.

 

The Company does not believe that it has a significantconcentration of credit risk. While some of its receivables are fromhomebuyers, the majority are from entities in the home finance business, whosecharacteristics differ from other receivables.

 

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(1)          These amounts include balances due fromINFONAVIT, FOVISSSTE, SOFOLES *(SociedadesFinancieras de Objeto Limitado)*, commercial banks and homebuyers.With the exception of commercial banks and homebuyers, all such categoriesexceed 10% of accounts receivable balances as of December 31, 2009 and2008.

 

(2)          The Company participates in aprogram referred to as “Programa de Entrega Anticipada de Vivienda INFONAVIT”. This program provides for factoring ofINFONAVIT receivables without recourse, thereby providing for more timelycollection.

 

(3)          The Company participates in a factoringprogram with Mexico’s National Development Bank (NAFIN), which providedFOVISSSTE with a funding source to complement its housing programs.  This program provides for factoring ofFOVISSSTE receivables without recourse, thereby providing for more timelycollection.

 

(4)          The long-term trade account receivable isdue to an agreement with the Housing Institute of the Federal District, orInstituto de Vivienda del Distrito Federal (“INVI”), on which it was agreedthat the Company will receive monthly payments, including interest at a rate ofTIIE plus 4%, during a five-year period, beginning June 2009, due to thesale of houses in Mexico City.

 

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**6.Inventories**

 
| ** **                         | ** ** | **2009**        | ** **    | **2008**   | ** ** |
|------------------------------------|------------|-----------------|---------------|------------|------------|
| Land:                              | ** ** | ** **      |          |       |       |
| Titled land                        | ** ** | **Ps.**         | **9,189,849** |       | Ps.        | 6,780,335 |   |
| Contracted land                    | ** ** | **2,673,289**   |          | 4,939,990  |       |
| Advances to land  suppliers        | ** ** | **391,868**     |          | 143,666    |       |
|                               | ** ** | **12,255,006**  |          | 11,863,991 |       |
| Land held for future  developments | ** ** | **(10,912,389** | **)**         | (9,254,469 | )          |
| Land                               | ** ** | **1,342,617**   |          | 2,609,522  |       |
|                               |       |            |          |       |       |
| Other inventories:                 | ** ** | ** **      |          |       |       |
| Construction-in-process            | ** ** | **2,069,229**   |          | 1,542,577  |       |
| Construction materials             | ** ** | **512,355**     |          | 638,488    |       |
| Advances to suppliers              | ** ** | **83,173**      |          | 300,317    |       |
| Total other inventories            | ** ** | **2,664,757**   |          | 2,481,382  |       |
| Total inventories                  | ** ** | **Ps.**         | **4,007,374** |       | Ps.        | 5,090,904 |   |

 

The Company’s policy is to locate and acquire landeach year, classifying land currently being developed and land planned to bedeveloped within the next year as part of current assets, and classifying allremaining land as non-current assets.

 

Due to the application of MFRS D-6 during 2009, 2008and 2007, the net comprehensive financing cost related to qualified assets forthe same periods was Ps. 563,154, Ps. 1,250,080 and Ps. 179,304, respectively.Total CFC related to inventories sold and subsequently applied to cost of saleswas Ps. 670,127 during 2009 (of which Ps. 419,338 is related to the currentyear CFC and Ps. 250,789 is related to prior years), Ps. 976,707 during 2008(of which Ps. 931,682 is related to 2008 CFC and Ps. 45,025 is related toearlier years) and Ps.119,286 during 2007, respectively. The average period forthe amortization of the capitalized comprehensive financing cost is 4 months.The annual capitalization rates are 6.5%, 24.3% and 7.6%, during each of 2009,2008 and 2007, respectively.

 

The Company utilizes certain land trust agreements inorder to obtain its supply of land for construction purposes. As ofDecember 31, 2009 and 2008 the Company has recognized Ps. 241 and Ps.4,438, related to this inventory, which are part of the “contracted” landinventory.

 

During the years ended December 31, 2009, 2008and 2007, the net comprehensive financing cost capitalized in inventories wasas follows:

 
| ** **                                                            | ** ** | **2009**   | ** **   | **2008** | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------|------------|------------|--------------|----------|------------|------------|------------|
| Total accrued net  comprehensive financing cost before capitalization | ** ** | **Ps.**    | **769,720**  |     | Ps.        | 1,808,565  |       | Ps. | 458,208 |   |
| Comprehensive financing  cost capitalized in inventories              | ** ** | ** ** | **(563,154** | **)**    |       | (1,250,080 | )          |   | (179,304 | ) |
| Comprehensive financing  cost after capitalization                    | ** ** | **Ps.**    | **206,566**  |     | Ps.        | 558,485    |       | Ps. | 278,904 |   |

 

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**7.Prepaid expenses and other current assets**

 
| ** **                         | ** ** | **2009**    | ** **  | **2008** | ** ** |
|------------------------------------|------------|-------------|-------------|----------|------------|
| Sales commissions paid  in advance | ** ** | **Ps.**     | **161,833** |     | Ps.        | 103,665 |   |
| Sundry debtors                     | ** ** | **126,927** |        | 101,198  |       |
| Refundable taxes                   | ** ** | **208,908** |        | 215,747  |       |
| Other current assets               | ** ** | **32,049**  |        | 15,928   |       |
| Insurance and bond  contracts      | ** ** | **9,613**   |        | 2,401    |       |
| Prepaid interest                   | ** ** | **5,968**   |        | 4,227    |       |
|                               | ** ** | **Ps.**     | **545,298** |     | Ps.        | 443,166 |   |

 

**8.Property and equipment**

 
| ** **                      | ** ** | **2009**       | ** **    | **2008**  | ** ** |
|---------------------------------|------------|----------------|---------------|-----------|------------|
| Buildings                       | ** ** | **Ps.**        | **253,412**   |      | Ps.        | 253,412 |   |
| Machinery and equipment         | ** ** | **1,458,178**  |          | 1,399,166 |       |
| Transportation equipment        | ** ** | **102,251**    |          | 103,799   |       |
| Air transportation  equipment   | ** ** | **75,203**     |          | 75,203    |       |
| Office furniture and  equipment | ** ** | **101,781**    |          | 106,760   |       |
| Computers                       | ** ** | **99,802**     |          | 128,066   |       |
| Communication equipment         | ** ** | **38,490**     |          | 38,360    |       |
|                            | ** ** | **2,129,117**  |          | 2,104,766 |       |
| Accumulated  depreciation       | ** ** | **(1,050,426** | **)**         | (733,729  | )          |
|                            | ** ** | **1,078,691**  |          | 1,371,037 |       |
| Land                            | ** ** | **31,891**     |          | 31,891    |       |
|                            | ** ** | **Ps.**        | **1,110,582** |      | Ps.        | 1,402,928 |   |

 

The amount of assets acquired via capitalized leasesduring the years ended December 31, 2009, 2008 and 2007, was Ps. 47,035,Ps. 97,131 and Ps. 350,854, respectively.

 

Depreciation expense for the years endedDecember 31, 2009, 2008 and 2007 was Ps.371,402, Ps. 323,727 and Ps.196,307, respectively.

 

**9. Otherassets**

 
| ** **                                         | ** ** | **2009**    | ** **  | **2008** | ** ** |
|----------------------------------------------------|------------|-------------|-------------|----------|------------|
| Net value of the “BETA”  trademark (1)   | ** ** | **Ps.**     | **45,527**  |     | Ps.        | 136,581 |   |
| Trade accounts  receivable, long-term (see Note 5) | ** ** | **74,846**  |        | 81,498   |       |
| Financial instruments  (see Note 11)               | ** ** | **4,375**   |        | 65,975   |       |
| Debt issuance costs,  net                          | ** ** | **158,364** |        | 79,468   |       |
| Investment (2)                                     | ** ** | **—**  |        | 59,226   |       |
| Deferred profit-sharing  (Note 3q)                 | ** ** | **—**  |        | 26,606   |       |
| Guarantee deposits                                 | ** ** | **29,305**  |        | 14,479   |       |
| Other                                              | ** ** | **11,976**  |        | 4,536    |       |
|                                               | ** ** | **Ps.**     | **324,393** |     | Ps.        | 468,369 |   |

 

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Amortization expense for the years ended December 31,2009, 2008 and 2007 was Ps. 112,007, Ps. 101,294 and Ps. 105,410, respectively.The expected amortization of the “BETA” trademark and debt issuance costs forthe years 2010 to 2015 is as follows:

 

| **Year**            | ** ** | **Amortization** | ** **  |
|---------------------|------------|------------------|-------------|
| 2010                | ** ** | **Ps.**          | **68,498**  | ** ** |
| 2011                | ** ** | **22,971**       | ** **  |
| 2012                | ** ** | **22,971**       | ** **  |
| 2013                | ** ** | **21,724**       | ** **  |
| 2014 and thereafter | ** ** | **67,727**       | ** **  |
|                | ** ** | **Ps.**          | **203,891** | ** ** |

 

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(1)  “BETA” Trademark is allocated to theaffordable entry-level segment.

 

(2)  UntilDecember 31, 2009, the Company had an investment in the 15% of theEgyptian company Orascom Housing Communities “S.A.E.”. The Company sold thisinvestment for US$4.3 million on December 31, 2009 with a net gain of Ps.11,676 being recorded in 2009.

 

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**10.Debt**

 

a) As ofDecember 31, 2009 and 2008, the outstanding balances of short-termindebtedness with financial institutions consist of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **2009**   | ** **  | **2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|----------|------------|
| HSBC México, S.A.   A revolving line of credit granted by HSBC Mexico, S.A. on December 26,  2008 and September 14, 2009 for Ps. 50,000. The borrowings matured on  January 23 and December 11, 2009 and bore interest at the Mexican  interbank equilibrium interest rate (TIIE) plus 4.1% and plus 5.5%,  respectively. | ** ** | **Ps.**    | **—**  |     | Ps.        | 50,000 |   |
| Banco Regional de Monterrey, S.A.  A revolving credit line granted by Banco Regional de Monterrey S.A. on  December 11, 2008 for Ps. 90,284 and September 3, 2009 for Ps.  49,284. The borrowings matured on January 8 and October 1, 2009,  and bore interest at TIIE plus 4%.                                                | ** ** | **—** |        | 90,284   |       |
| Grupo Financiero Inbursa, S.A.  A revolving credit line granted by Grupo Financiero Inbursa, S.A. on  December 19, 2008 and September 28, 2009 for Ps. 600,000. The  borrowings matured on January 19 and October 28, 2009, and bore  interest at TIIE plus 4.5%.                                                              | ** ** | **—** |        | 600,000  |       |
| Banco Mercantil del Norte, S.A.  A revolving credit line granted by Banco Mercantil del Norte S.A. on  December 30, 2008 and August 27, 2009 for Ps. 300,000. The borrowings  matured on January 29 and October 28, 2009, and bore interest at  TIIE plus 3.25% and 3.75%, respectively.                                       | ** ** | **—** |        | 300,000  |       |
| Banco Santander México, S.A.  A revolving credit line granted by Banco Santander México, S.A. on  November 12, 2008 for Ps. 100,000. The borrowing matured on May 7,  2009, and bore interest at TIIE plus 1%.                                                                                                                 | ** ** | **—** |        | 100,000  |       |
| Banco Itau BBA, S.A.  Seven credit lines granted by Banco Itau BBA, S.A. (Brazilian financial  institution) on May, September and October 2009 for 9.1 million  Brazilian Reals. The borrowings mature on March, April, May and  July 2010, and bear interest at 6.5%.                                                         | ** ** | **68,535** |        | —   |       |
| Banco Fibra, S.A.   A revolving credit line granted by Banco Fibra, S.A. (Brazilian financial  institution) on July 22, 2009 for 1.3 million Brazilian Reals. The  borrowing matures on July 20, 2010, and bears interest at 9.9%.                                                                                                       | ** ** | **9,569**  |        | —   |       |
| Banco ABC Brasil, S.A.  Three credit lines granted by Banco ABC Brasil, S.A. (Brazilian financial  institution) in August, October and November 2009 for 12 million  Brazilian Reals. The borrowings mature on February, October, and  November 2010, and bear interest at 8.5%.                                                    | ** ** | **90,171** |        | —   |       |
| Banco HSBC, S.A.   A revolving credit line granted by Banco HSBC, S.A. (Brazilian financial  institution) on November 23, 2009 for 1.5 million Brazilian Reals. The  borrowing matures on November 18, 2010, and bear interest at 3.1%.                                                                                                  | ** ** | **11,277** |        | —   |       |
| Interest payable                                                                                                                                                                                                                                                                                                                                   | ** ** | **881**    |        | 3,448    |       |
| Total                                                                                                                                                                                                                                                                                                                                              | ** ** | **Ps.**    | **180,433** |     | Ps.        | 1,143,732 |   |

 

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b) As ofDecember 31, 2009 and 2008, the outstanding balances of long-term debtwith financial institutions consist of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2009**      | ** **    | **2008**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|-----------|------------|
| Bond issuance (“Senior  Guaranteed Notes due 2015”) by Credit Suisse First Boston and Merrill Lynch.  These obligations are guaranteed by PICSA, DECANO and other subsidiary  companies. They are USD denominated in the amount of US $250 million, with a  fixed annual interest rate of 7.5%, payable on September 28, 2015.  Interest is payable semiannually.                                                                                                                              | ** ** | **Ps.**       | **3,260,925** |      | Ps.        | 3,443,450 |   |
| Bond issuance (“Senior  Guaranteed Notes due 2019”) by Credit Suisse Securities LLC and HSBC  Securities Inc. These obligations are guaranteed by PICSA, DECANO and CBC.  They are USD denominated in the amount of US $250 million, with a fixed  annual interest rate of 9.5%, payable on December 11, 2019. Interest is  payable semiannually.                                                                                                                                              | ** ** | **3,232,500** |          | —    |       |
| Banco Nacional de México, S.A.  A line of credit granted by Banco Nacional de México, S.A. on July 16,  2009 for Ps.1,000 million. The borrowing matures on July 16, 2013 and  bears interest at the Mexican interbank equilibrium interest rate (TIIE) plus  4.5%.                                                                                                                                                                                                                       | ** ** | **888,738**   |          | —    |       |
| HSBC México, S.A.   A line of credit granted by HSBC Mexico, S.A. on July 1, 2005 for Ps.  1,081 million, with semiannual payments beginning on March 14, 2008. The  borrowing ultimately matures on September 14, 2010, and bore interest at  TIIE plus 1%. This line of credit was paid out on December 24, 2009.                                                                                                                                                                  | ** ** | **—**    |          | 360,334   |       |
| GE Capital, S.A.   A line or credit granted by GE Capital, S.A. on July 29, 2005 for US$2.3  million. The borrowing ultimately matures on July 29, 2010, and bears  interest at an annual rate of 7.4%.                                                                                                                                                                                                                                                                                             | ** ** | **4,520**     |          | 11,136    |       |
| Grupo Financiero Inbursa, S.A.  A line of credit granted by Grupo Financiero Inbursa, S.A. on June 26,  2008 for Ps. 2,078 million. The borrowing ultimately matures on June 26,  2013 and bears interest at TIIE plus 1.5%.                                                                                                                                                                                                                                                                        | ** ** | **2,078,000** |          | 2,078,000 |       |
| Hipotecaria Nacional, S.A. de C.V.  Three separate lines of credit granted by Hipotecaria Nacional, S.A. de C.V.  for amounts totaling Ps. 299,795. Borrowings were granted on November 6,  2008, November 20, 2008 and December 11, 2008. The borrowings  mature in November and December 2010, and bear interest at TIIE  plus 4%. This line of credit was guaranteed by five of the Company’s land  lots. These three lines of credit were repaid on December 23, 2009. | ** ** | **—**    |          | 299,795   |       |
| Interest payable,  primarily Senior Guaranteed Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **85,642**    |          | 71,076    |       |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **9,550,325** |          | 6,263,791 |       |
| Current portion of  long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **(90,162**   | **)**         | (273,672  | )          |
| Long-term debt balances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Ps.**       | **9,460,163** |      | Ps.        | 5,990,119 |   |

 

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**Covenants**

 

Loan covenants require the Company and its guarantorsubsidiaries to meet certain obligations. These covenants cover changes inownership control, restrictions on incurring additional debt that does not meetcertain requirements established in the loan contracts, restrictions on thesale of assets and the sale of capital stock in subsidiaries, unless they meetcertain requirements, and restricted payments where dividends cannot be paid orcapital reimbursed to stockholders’ equity unless they are made between theguarantor subsidiaries.

 

Most significant financial covenants, contained withinloan agreements, require the Company to maintain:

 

·                          A total of stockholders’ equity of atleast Ps. 11,850,000;

 

·                          A ratio of interest coverage (EBITDA/netfinancing expense) over 3.0 times; and

 

·                          A ratio of leverage (liabilities withcost/EBITDA) of less than 2.50 to 1.0;

 

There are also restrictions applicable to additionaldebt based on EBITDA levels. In the event the Company does not comply with anyof the above provisions, it will be limited in its ability to pay dividends toits stockholders.

 

As of December 31, 2009 and 2008, the Company wasin compliance with the financial covenants contained within its debtagreements.

 

**Debt maturities**

 

As of December 31, 2009, long-term debt maturesas follows:

 

| **Year** | ** ** | **Amount**    | ** **    |
|----------|------------|---------------|---------------|
| 2013     | ** ** | **Ps.**       | **2,966,738** | ** ** |
| 2015     | ** ** | **3,260,925** | ** **    |
| 2019     | ** ** | **3,232,500** | ** **    |
|     | ** ** | **Ps.**       | **9,460,163** | ** ** |

 

The  TIIE rates published in the Federal OfficialGazette as of December 31, 2009 and 2008 were 4.9150% and 8.6886%,respectively. The exchange rate used to convert debt denominated in US Dollarsand Brazilian Reals for the year ended December 31, 2009 were 13.0437Mexican pesos and 7.5183 Mexican pesos, respectively. The exchange rate used toconvert debt denominated in US Dollars for the year ended December 31,2008 was 13.7738 Mexican pesos. The Company did not have debt denominated inBrazilian Reals as of December 31, 2008.

 

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**11.  Financial instruments**

 

Financial Instruments Related to the Senior GuaranteedNotes due 2015

 

As disclosed in Note 10, the Company’s SeniorGuaranteed Notes due 2015 are U.S. dollar denominated. In order to convert theprincipal of the U.S. dollar bonds to Mexican pesos, in September 2005 theCompany entered into a “Principal-Only Swap” with a notional value of US$250million, which entitled the Company to receive this amount in 2015 in returnfor a payment in Mexican pesos at a fixed exchange rate of 10.83 Mexican pesosper U.S. Dollar. As part of this agreement, the Company paid interest of 2.92%a year on the total notional amount in U.S. dollars, in semiannual payments.

 

The Principal-Only Swap transaction did not meet hedgeaccounting requirements, and thus all changes in the fair value of theunderlying derivative were recorded in the Company’s current earnings as acomponent of comprehensive financing cost within the valuation effects onderivative instruments account. As of December 31, 2007, the fair value ofthis derivative was Ps. 79,098 (US$7.2 million) which represented the estimatedpresent value of future cash flows to be paid out by the Company.

 

On July 5, 2008 the Company cancelled itsPrincipal-Only Swap by paying Ps. 54,434 (US$ 5.3 million). No gain or loss wasrecorded upon cancellation of the Principal-Only Swap agreement as it wasalready recorded at fair value.

 

On July 6, 2008 the Company entered into newderivative instruments in order to cover the possible changes in the exchangerate of future interest payments of the Senior Guaranteed Notes due 2015 forUS$250 million (“Interest-Only Swap”). This new transaction also does not meethedge accounting requirements, and thus changes in the fair value of theunderlying derivative have been and will be recorded in the Company’s currentearnings as a component of comprehensive financing cost within the exchange(gain) losses account. As of December 31, 2009 and 2008 the fair value ofthis derivative was a favorable asset position of Ps. 4,375 (US$ 0.3 million)and Ps. 65,975 (US$ 4.8 million), respectively (see Note 9).

 

The net accumulated expense in the statement of incomeof the Interest-Only Swap for the year ended December 31, 2009 was Ps.66,451. The net accumulated income of the Principal-Only Swap and theInterest-Only Swap was Ps. (90,639) for the year ended December 31, 2008.The net accumulated expense of the Principal-Only Swap was Ps. 147,977 for theyear ended December 31, 2007.

 

Financial Instruments Related to the Senior GuaranteedNotes due 2019

 

As disclosed in Note 10, the Company’s SeniorGuaranteed Notes due 2019 are U.S. dollar denominated. In order to decrease therisk of future changes in the exchange rate between U.S. dollar and Mexicanpesos, in December 11, 2009 the Company entered into a “Principal-OnlySwap” with a notional value of US$250 million, which entitled the Company toreceive this amount in 2019 in return for a payment in Mexican pesos at a fixedexchange rate of 12.93 Mexican pesos per U.S. Dollar. As part of thisagreement, the Company will pay interest of 3.87% a year on the total notionalamount of Ps. 3,232.5 million Mexican Pesos, in semiannual payments. Inaddition, on the same date the Company entered into an “Interest-Only Swap” inorder to cover the possible changes in the exchange rate of the first sixinterest payments of the Senior Guaranteed Notes due 2019 for US$250 million(“Interest-Only Swap”).

 

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The Principal-Only Swap and Interest-Only Swaptransactions met hedge accounting requirements. As of December 31, 2009,the fair value of this derivative was Ps. 119,084 (US$ 9.1 million), andrepresented a liability.

 

As of December 31, 2009 and 2008 the Company hadthe following financial instruments:

 
| **As of December 31, 2009** | ** ** |
|----------------------------------|------------|
| **Financial  instruments**       | ** ** | **Type** | ** ** | **Notional  (in US $)** | ** ** | **Fair  value  asset (liability)  (in Ps.)** | ** ** | **Changes  in  comprehensive  income, net of  taxes (in Ps.)** | ** ** | **Changes  in  statement of  income (in Ps.)** | ** ** |
|                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-only swap               |       | No hedge accounting |   | 56.25 million |   | Ps. | 4,375 |   | Ps. | — |   | Ps. | 61,600 |   |
|                             |       |   |   |   |   |   |   |   |   |   |   |
| Principal-only swap              |       | Hedge accounting |   | 250.00 million |   | Ps. | (109,970 | ) | Ps. | (84,592 | ) | Ps. | — |   |
| Interest-only swap               |       | Hedge accounting |   | 71.25 million |   | (9,114 | ) | (3,280 | ) | 4,851 |   |
|                             |       |   |   |   |   | Ps. | (119,084 | ) | Ps. | (87,872 | ) | Ps. | 66,451 |   |

 
| As  of December 31, 2008 | ** ** |
|-------------------------------|------------|
| **Financial  instruments**    | ** ** | **Type** | ** ** | **Notional  (in US $)** | ** ** | **Fair  value  asset (liability)  (in Ps.)** | ** ** | **Changes  in  comprehensive  income, net of  taxes (in Ps.)** | ** ** | **Changes  in  statement of  income (in Ps.)** | ** ** |
|                          |       |   |   |   |   |   |   |   |   |   |   |
| Interest-only swap            |       | No hedge accounting |   | 56.25 million |   | Ps. | 65,975 |   | Ps. | — |   | Ps. | (90,639 | ) |
|                          |       |   |   |   |   |   |   |   |   |   |   |
| Other financial  instruments  |       | No hedge accounting |   | Variable |   | Ps. | — |   | Ps. | — |   | Ps. | 404,601 |   |
|                          |       |   |   |   |   |   |   |   |   |   |   |
|                          |       |   |   |   |   | Ps. | 65,975 |   | Ps. | — |   | Ps. | 313,962 |   |

 

Other Financial Instruments

 

During the normal course of operations the Companymaintains net liability positions in foreign currency (US dollars) which areoriginated by its operations’ short and long-term liabilities. During 2008, theCompany entered into hedging derivative financial instruments that wereexpected to mitigate the risk associated with the exchange loss in theacquisition of foreign currencies. However, due to the recent volatility in theexchange rate between the Mexican Peso and US dollar, the Company decided tocancel and or otherwise restructure all its hedging derivative financialinstruments. At December 31, 2008, the Company only has the Interest-OnlySwap described above. The Company had an impact in its statement of income ofapproximately Ps. 404,601. The Company did not have these financial instrumentsduring 2009; therefore it did not have any impact in its statement of incomefor that year.

 

The net valuation effects of financial instruments forthe years ended December 31, 2009, 2008 and 2007, were Ps. 66,451, Ps.313,962 and Ps. (147,977), respectively.

 

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**12.Leases**

 

**a) Capital leases**

 

As of December 31, 2009 there are contracts ofcapital leases of machinery and equipment for a 5 year period. The capitalleases as of December 31, 2009 and 2008 are shown as follows:

 
| ** **                                                                                                                                                                                                                 | ** ** | **2009**     | ** **  | **2008**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|-------------|------------|------------|
| Financial leases  provided by Bancomer, S.A. in June 2007, with maturity in  January 2013 and an interest rate at TIIE plus 0.8%.                                                                                | ** ** | **Ps.**      | **221,550** |       | Ps.        | 288,857 |   |
| Financial leases  provided by Bancomer, S.A. in September 2008, with maturity in  October 2013 and interest rate at TIIE plus 0.8%.                                                                              | ** ** | **44,524**   |        | 53,725     |       |
| Financial leases  provided by Bancomer, S.A. in December 2008, with maturity in  January 2014 and interest rate at TIIE plus 3.5%.                                                                               | ** ** | **48,565**   |        | 56,525     |       |
| Financial leases  provided by Bancomer, S.A. in March 2009, with maturity in  April 2014 and interest rate at TIIE plus 3.5%.                                                                                    | ** ** | **19,481**   | ** **  | **—** | ** ** |
| Financial leases  provided by Banco Itau, S.A. (Brazilian financial institution) from  May through October 2009, with maturities from May through  October 2012 at an average interest rate of 20.6%.  | ** ** | **8,534**    | ** **  | **—** | ** ** |
| Financial leases  provided by Banco Bradesco, S.A. (Brazilian financial institution) in November and  December 2009 with maturities in November and December 2012 at  an average interest rate of 14%. | ** ** | **18,751**   | ** **  | **—** | ** ** |
| Other                                                                                                                                                                                                                      | ** ** | **—**   |        | 2,315      |       |
| Interest payable                                                                                                                                                                                                           | ** ** | **1,711**    |        | 2,472      |       |
| Total capital leases                                                                                                                                                                                                       | ** ** | **363,116**  |        | 403,894    |       |
| Current portion of  long-term capitalized leases                                                                                                                                                                           | ** ** | **(108,437** | **)**       | (89,255    | )          |
| Total long-term capital  leases                                                                                                                                                                                            | ** ** | **Ps.**      | **254,679** |       | Ps.        | 314,639 |   |

 

Minimum compulsory payments relating to thesecontracts as of December 31, 2009, including interest payable monthly, areas follows:

 
| **Year** | ** ** | **Total**   | ** **        |
|----------|------------|-------------|-------------------|
| 2010     | ** ** | **Ps.**     | ** 108,437** | ** ** |
| 2011     | ** ** | **115,904** | ** **        |
| 2012     | ** ** | **104,813** | ** **        |
| 2013     | ** ** | **30,851**  | ** **        |
| 2014     | ** ** | **3,111**   | ** **        |
| Total    | ** ** | **Ps.**     | ** 363,116** | ** ** |

 

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**Covenants**

 

The most significant financial covenants of the leasesrequire the Company and its subsidiaries to maintain:

 

·                  A liquidity ratio of current assets to short-termliabilities no less than 1.50 to 1.0;

 

·                  A financing ratio of total liabilities tostockholders’ equity no greater than 1.70 to 1.0;

 

·                  A relation of operational income to net comprehensivefinancing cost at a minimum level of 2.0;

 

As of December 31, 2009 and 2008, the Company wasin compliance with these financial covenants.

 

**b) Operating leases**

 

As of December 31, 2009 the Company had enteredinto agreements for the operating lease of machinery and equipment for a periodof 5 to 6 years. The minimum compulsory payments relating to these agreementsare as follows:

 

| **Year** | ** ** | **2009**   | ** **  |
|----------|------------|------------|-------------|
| 2010     | ** ** | **Ps.**    | **49,232**  | ** ** |
| 2011     | ** ** | **46,065** | ** **  |
| 2012     | ** ** | **32,695** | ** **  |
| 2013     | ** ** | **20,494** | ** **  |
| 2014     | ** ** | **283**    | ** **  |
| Total    | ** ** | **Ps.**    | **148,769** | ** ** |

 

Operating leases expensed for the years endedDecember 31, 2009, 2008 and 2007 amounted to Ps. 50,426, Ps. 52,833 andPs. 33,694, respectively.

 

**13.Employee benefits obligations**

 

The Company has a plan for covering seniority premiumswhich consists of a lump sum payment of 12 days’ wages for each year worked,calculated using the most recent salary, not to exceed twice the legal minimumwage established by law. Since 2005, the Company has recognized a liability forpersonal severance pay. The related liability and annual cost of such benefitsare calculated by an independent actuary on the basis of formulas defined inthe plans using the projected unit credit method.

 

As mentioned in Note 3, during 2008 the Companyapplied the provisions of new MFRS D-3, *EmployeeBenefits* which replaces the previous MFRS accounting Bulletin D-3, *Labor Obligations*. The most significanteffects of its application were as follows:

 

i)                 Additional labor cost of Ps. 5,559 beingrecognized in its 2008 statement of income as compared to prior period.

 

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ii)              Elimination of the recognition of anadditional liability and resulting recognition of an intangible asset andcomprehensive income item. Upon the adoption of MFRS D-3 the Company reversedits intangible asset of Ps. 30,092 and additional liability of Ps. 34,189resulting in a credit to shareholders equity of Ps. 4,097 in 2008.

 

As of December 31, 2009 and 2008 and for theyears ended 2009, 2008 and 2007, the present values of these obligations andthe rates used for the calculations are as follows:

 
| ** **                                              | ** ** | **For the  year ended December 31, 2009** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                              | ** ** | **Severance  pay**                             | ** ** | **Seniority  premium** | ** ** | **Total** | ** ** |
| Integration of Net  Period Cost:                        | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Labor cost                                              | ** ** | **Ps.**                                        | **23,428** | ** ** | **Ps.** | **1,932** | ** ** | **Ps.** | **25,360** | ** ** |
| Financial cost                                          | ** ** | **10,605**                                     | ** ** | **478** | ** ** | **11,083** | ** ** |
| Transition liability                                    | ** ** | **3,643**                                      | ** ** | **140** | ** ** | **3,783** | ** ** |
| Amortization of prior  services and changes to the plan | ** ** | **6,341**                                      | ** ** | **156** | ** ** | **6,497** | ** ** |
| Actuarial gains                                         | ** ** | **(3,437**                                     | **)**      | **(825** | **)** | **(4,262** | **)** |
| Net period cost                                         | ** ** | **Ps.**                                        | **40,580** | ** ** | **Ps.** | **1,881** | ** ** | **Ps.** | **42,461** | ** ** |
|                                                    | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **For the  year ended December 31, 2008** | ** ** |
| ** **                                              | ** ** | **Severance  pay**                             | ** ** | **Seniority  premium** | ** ** | **Total** | ** ** |
| Integration of Net Period  Cost:                        |       |                                           |       |   |   |   |   |
| Labor cost                                              |       | Ps.                                            | 14,002     |   | Ps. | 1,748 |   | Ps. | 15,750 |   |
| Financial cost                                          |       | 9,084                                          |       | 309 |   | 9,393 |   |
| Transition liability                                    |       | 3,643                                          |       | 139 |   | 3,782 |   |
| Amortization of prior  services and changes to the plan |       | 9,144                                          |       | 306 |   | 9,450 |   |
| Actuarial losses  (gains)                               |       | 78,392                                         |       | (367 | ) | 78,025 |   |
| Net period cost                                         |       | Ps.                                            | 114,265    |   | Ps. | 2,135 |   | Ps. | 116,400 |   |
|                                                    | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **For the  year ended December 31, 2007** | ** ** |
| ** **                                              | ** ** | **Severance  pay**                             | ** ** | **Seniority  premium** | ** ** | **Total** | ** ** |
| Integration of Net  Period Cost:                        |       |                                           |       |   |   |   |   |
| Labor cost                                              |       | Ps.                                            | 8,062      |   | Ps. | 1,182 |   | Ps. | 9,244 |   |
| Financial cost                                          |       | 3,020                                          |       | 118 |   | 3,138 |   |
| Transition liability                                    |       | 3,416                                          |       | 38 |   | 3,454 |   |
| Actuarial losses                                        |       | 1,346                                          |       | 6 |   | 1,352 |   |
| Inflation adjustment                                    |       | 1,135                                          |       | 93 |   | 1,228 |   |
| Net period cost                                         |       | Ps.                                            | 16,979     |   | Ps. | 1,437 |   | Ps. | 18,416 |   |
|                                                         |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                              | ** ** | **Balances  as of December 31, 2009** | ** **  |
|-----------------------------------------|------------|--------------------------------------------|-------------|
| ** **                              | ** ** | **Severance  pay**                         | ** **  | **Seniority  premium** | ** ** | **Total** | ** ** |
| Vested benefit  obligations             | ** ** | **Ps.**                                    | **116,356** | ** ** | **Ps.** | **5,273** | ** ** | **Ps.** | **121,629** | ** ** |
| Transition liability                    | ** ** | **(10,930**                                | **)**       | **(418** | **)** | **(11,348** | **)** |
| Prior services and  changes to the plan | ** ** | **(17,900**                                | **)**       | **(594** | **)** | **(18,494** | **)** |
| Non-recognized  actuarial gain          | ** ** | **6,286**                                  | ** **  | **114** | ** ** | **6,400** | ** ** |
| Net projected liability                 | ** ** | **Ps.**                                    | **93,812**  | ** ** | **Ps.** | **4,375** | ** ** | **Ps.** | **98,187** | ** ** |

 
| ** **                              | ** ** | **Balances  as of December 31, 2008** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **Severance  pay**                         | ** ** | **Seniority  premium** | ** ** | **Total** | ** ** |
| Vested benefit  obligations             |       | Ps.                                        | 112,617    |   | Ps. | 4,122 |   | Ps. | 116,739 |   |
| Transition liability                    |       | (14,573                                    | )          | (558 | ) | (15,131 | ) |
| Prior services and  changes to the plan |       | (24,241                                    | )          | (750 | ) | (24,991 | ) |
| Non-recognized  actuarial gain          |       | 8,381                                      |       | 152 |   | 8,533 |   |
| Net projected liability                 |       | Ps.                                        | 82,184     |   | Ps. | 2,966 |   | Ps. | 85,150 |   |

 

The changes in thebalance of labor obligations for the years ended December 31, 2009, 2008and 2007 are as follows:

 
| ** **                                              | ** ** | **For the  year ended December 31, 2009** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                              | ** ** | **Severance  pay**                             | ** ** | **Seniority  premium** | ** ** | **Total** | ** ** |
| Initial balance                                         | ** ** | **Ps.**                                        | **82,184** | ** ** | **Ps.** | **2,966** | ** ** | **Ps.** | **85,150** | ** ** |
| Labor cost                                              | ** ** | **23,428**                                     | ** ** | **1,932** | ** ** | **25,360** | ** ** |
| Financial cost                                          | ** ** | **10,605**                                     | ** ** | **478** | ** ** | **11,083** | ** ** |
| Transition liability                                    | ** ** | **3,643**                                      | ** ** | **140** | ** ** | **3,783** | ** ** |
| Amortization of prior  services and changes to the plan | ** ** | **6,341**                                      | ** ** | **156** | ** ** | **6,497** | ** ** |
| Actuarial gains                                         | ** ** | **(3,437**                                     | **)**      | **(825** | **)** | **(4,262** | **)** |
| Benefits paid                                           | ** ** | **(28,952**                                    | **)**      | **(472** | **)** | **(29,424** | **)** |
| Ending balance                                          | ** ** | **Ps.**                                        | **93,812** | ** ** | **Ps.** | **4,375** | ** ** | **Ps.** | **98,187** | ** ** |

 
| ** **                                              | ** ** | **For the  year ended December 31, 2008** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                              | ** ** | **Severance  pay**                             | ** ** | **Seniority  premium** | ** ** | **Total** | ** ** |
| Initial balance                                         |       | Ps.                                            | 42,291     |   | Ps. | 2,617 |   | Ps. | 44,908 |   |
| Labor cost                                              |       | 14,002                                         |       | 1,748 |   | 15,750 |   |
| Financial cost                                          |       | 9,084                                          |       | 309 |   | 9,393 |   |
| Transition liability                                    |       | 3,643                                          |       | 139 |   | 3,782 |   |
| Amortization of prior  services and changes to the plan |       | 9,144                                          |       | 306 |   | 9,450 |   |
| Actuarial losses                                        |       | 78,392                                         |       | (367 | ) | 78,025 |   |
| Benefits paid                                           |       | (74,372                                        | )          | (1,786 | ) | (76,158 | ) |
| Ending balance                                          |       | Ps.                                            | 82,184     |   | Ps. | 2,966 |   | Ps. | 85,150 |   |

 

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| ** **           | ** ** | **For the  year ended December 31, 2007** | ** **   |
|----------------------|------------|------------------------------------------------|--------------|
| ** **           | ** ** | **Severance  pay**                             | ** **   | **Seniority  premium** | ** ** | **Total** | ** ** |
| Initial balance      |       | Ps.                                            |  49,590 |   | Ps. |  2,685 |   | Ps. |  52,275 |   |
| Labor cost           |       | 8,062                                          |         | 1,182 |   | 9,244 |   |
| Financial cost       |       | 3,020                                          |         | 118 |   | 3,138 |   |
| Transition liability |       | 3,416                                          |         | 38 |   | 3,454 |   |
| Actuarial losses     |       | 1,346                                          |         | 6 |   | 1,352 |   |
| Inflation adjustment |       | 1,135                                          |         | 93 |   | 1,228 |   |
| Benefits paid        |       | (24,278                                        | )            | (1,505 | ) | (25,783 | ) |
| Ending balance       |       | Ps.                                            |  42,291 |   | Ps. |  2,617 |   | Ps. |  44,908 |   |

 

The following is an analysis at December 31 ofthe Company’s liabilities that make up its labor obligations related toseniority premiums and employee termination payments for reasons other thancorporate restructuring:

 
| ** ** | ** ** | **Seniority  premium** | ** ** | **Severance  pay** | ** ** |
|------------|------------|------------------------|------------|--------------------|------------|
| ** ** | ** ** | **Defined**            | ** ** | **Plan**           | ** ** | **Pending** | ** ** | **Defined** | ** ** | **Plan** | ** ** | **Pending** | ** ** |
| ** ** | ** ** | **benefit**            | ** ** | **situation**      | ** ** | **amortized** | ** ** | **benefit** | ** ** | **situation** | ** ** | **amortized** | ** ** |
| **Year**   | ** ** | **obligations**        | ** ** | **deficit**        | ** ** | **Items** | ** ** | **obligations** | ** ** | **deficit** | ** ** | **Items** | ** ** |
| **2009**   | ** ** | **Ps.**                | **5,273**  | ** **         | **Ps.**    | **5,273** | ** ** | **Ps.** | **1,176** | ** ** | **Ps.** | **116,356** | ** ** | **Ps.** | **116,356** | ** ** | **Ps.** | **35,367** | ** ** |
| 2008       |       | 4,122                  |       | 4,122              |       | 1,156 |   | 112,617 |   | 112,617 |   | 30,443 |   |
| 2007       |       | 5,125                  |       | 5,125              |       | 1,452 |   | 111,052 |   | 111,052 |   | 35,376 |   |
| 2006       |       | 2,685                  |       | 2,685              |       | 1,305 |   | 55,469 |   | 55,469 |   | 39,967 |   |
| 2005       |       | 1,870                  |       | 1,870              |       | 1,253 |   | 46,639 |   | 46,639 |   | 38,689 |   |
|            |            |                        |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Beginning in 2008, the transition liability is beingamortized over a five-year period.

 

The rates used in the actuarial analysis are asfollow:

** **
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discounts of labor  obligations | ** ** | **8.50** | **%**      | 8.50     | %          | 5.25     | %          |
| Salary increases                | ** ** | **4.50** | **%**      | 4.50     | %          | 1.25     | %          |
| Inflation rates                 | ** ** | **3.50** | **%**      | 3.50     | %          | 4.00     | %          |

 

**14.Trade accounts payable**

** **
| ** **                | ** ** | **2009**    | ** **          | **2008** | ** ** |
|---------------------------|------------|-------------|---------------------|----------|------------|
| Suppliers                 | ** ** | **Ps.**     | ** 1,618,256** |     | Ps.        |  2,680,141 |   |
| Revolving credit lines  * | ** ** | **220,853** |                | 996,534  |       |
| Other creditors           | ** ** | **394,372** |                | 329,178  |       |
| Total accounts payable    | ** ** | **Ps.**     | ** 2,233,481** |     | Ps.        |  4,005,853 |   |

 

----

* The Company established a trust that allows itssuppliers and land suppliers to obtain financing from various financialinstitutions, in part through a factoring program sponsored by NacionalFinanciera S.N.C. (“Nafinsa”). In relation to this program, the Companyestablished a trust fund called Fideicomiso AAA-Homex with Nacional Financiera,S,N.C. (“Nafinsa”), which granted a line of credit for Ps.1,000,000 with aguarantee fund of Ps. 122,809 and Ps. 128,045, respectively (investmentaccount), as of December 31, 2009 and 2008. Under this program, theAAA-Homex trust can make use of the Nafinsa line of credit to finance a portionof the accounts

 

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receivable of the Company’s suppliers. As mentioned inNote 2, the AAA Homex trust is a consolidated subsidiary of the Company. As ofDecember 31, 2009 and 2008, this factoring program encompassedapproximately 4,270 and 3,895 suppliers and land suppliers, respectively, wherethe financing resources are covered by the suppliers themselves.

 

**15. Landsuppliers**

** **
| ** **                          | ** ** | **2009**    | ** **          | **2008** | ** ** |
|-------------------------------------|------------|-------------|---------------------|----------|------------|
| Short-term                          | ** ** | **Ps.**     | ** 548,586**   |     | Ps.        |  2,326,036 |   |
| Short-term revolving  credit line * | ** ** | **789,640** |                | —   |       |
| Total short-term                    | ** ** | **Ps.**     | ** 1,338,226** |     | Ps.        |  2,326,036 |   |
|                                |       |        |                |     |       |
| Long-term                           | ** ** | **Ps.**     | ** 74,659**    |     | Ps.        |  405,426 |   |

 

----

* See Note 14 above.

 

Land suppliers representthe outstanding balance payable to the Company’s suppliers of land currently inuse or estimated to be developed. Long-term land suppliers represent payableswith maturities of over twelve months.

 

**16.Stockholders’ equity**

 

a) Common stock issued at par value (historical Pesos)as of December 31, 2009 and 2008 is as follows:

 
| ** **     | ** ** | **Number of Shares** | ** ** | **Amount**  | ** ** |
|----------------|------------|--------------------------------|------------|-------------|------------|
| ** **     | ** ** | **2009**                       | ** ** | **2008**    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Fixed capital: |       |                           |       |        |       |   |   |   |   |
| Sole series    | ** ** | **335,869,550**                |       | 335,869,550 | ** ** | **Ps.** | ** 425,443** |   | Ps. |  425,443 |   |
|                |            |                                |            |             |            |  |  |  |  |  |  |

 

b) Retained earnings include the statutory legalreserve. The General Corporate Law requires that at least 5% of net income ofthe year be transferred to the legal reserve until the reserve equals 20% ofcapital stock at par value. The legal reserve may be capitalized but may not bedistributed unless the entity is dissolved. The legal reserve must bereplenished if it is reduced for any reason. The legal reserve as ofDecember 31, 2009 and 2008 amounted Ps. 105,602 and is included as part ofthe retained earnings.

 

c) The balances of the stockholders’ equity taxaccount as of December 31, 2009 and 2008 are:

 
| ** **                   | ** ** | **2009** | ** **          | **2008** | ** ** |
|------------------------------|------------|----------|---------------------|----------|------------|
| Contributed capital  account | ** ** | **Ps.**  | ** 4,107,124** |     | Ps.        |  3,965,554 |   |
|                              |            |          |                     |          |            |  |  |

 

Earnings distributed in excess of the balances of theNet Tax Profit Account (CUFIN) will be subject to income tax payable by thecompanies at the rate in force. At December 31, 2009 the Company’s CUFINbalance is Ps. 727,418.

 

d) On February 27, 2007, the Board of Directorsauthorized a stock option plan, as an incentive to key executives of theCompany (see paragraph e) below).

 

e) As of December 31, 2009 and 2008, the Companyhas a stock option plan that consists of 1,072,432 and 999,200 approved stockoptions of the Company, respectively. 

 

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A total of 978,298 stock options were initiallygranted to the key executives. During 2007 these grants were made at anexercise price of 98.08 Mexican pesos, which was in excess of the shares’underlying fair value at the grant date. During 2008, a total of 29,929 optionswere exercised, and 335,853 options were cancelled upon separation of therelated employees. In addition, during 2009 the Company increased the number ofshares available in the stock option plan by 73,232 and granted 321,549 optionsat an exercise price of 43.54 Mexican pesos.

 

The executives have the right to exercise one-third oftheir total options granted per year. The right to exercise the option expiredafter one year from the grant date or, in some cases, after 180 days from thedeparture of the executive from the Company. Given the condition of the equitymarkets in 2008 and 2009, the Company’s Compensation Committee authorized themodification of the terms of the awards. Specifically, the duration of the program for options granted up toDecember 31, 2008, was extended whereby the exercise of awards if not madein the previously specified period, could be exercised one year following butnot later than December 31, 2010.

 

During 2009, the Company also made changes to theunderlying option grants made in 2007 and 2009 so as for them to now beultimately settled with issuance of Company shares rather than with the paymentof Company cash.  Both of these eventswere considered substantive changes to the underlying terms of the previousstock option grants, and compensation expense related to these changes has beenre-measured accordingly.

 

The following information is an analysis of stockoption activity during the years:

 
| ** **                                   | ** ** | **Options  available  for grant** | ** ** | **Stock  options  outstanding** | ** ** | **Average  exercise price** | ** **      |
|----------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------------------------|-----------------|
| Balance at  January 1, 2007             |       | —                            |       | —                          |       | —                      |            |
| Stocks repurchased for  future grant         |       | 999,200                           |       | —                          |       | Ps.                         |  99.42     |   |
| Stock options granted                        |       | (978,298                          | )          | 978,298                         |       | 98.08                       |            |
| Balance at  December 31, 2007           |       | 20,902                            |       | 978,298                         |       | 98.08                       |            |
| Stock options forfeited                      |       | 335,853                           |       | (335,853                        | )          | 98.08                       |            |
| Stock options exercised                      |       | 29,929                            |       | (29,929                         | )          | 98.08                       |            |
| Balance at  December 31, 2008           |       | 386,684                           |       | 612,516                         |       | 98.08                       |            |
| Shares repurchased for  future option grants |       | 73,232                            |       | —                          |       | 46.69                       |            |
| Stock options granted                        |       | (321,549                          | )          | 321,549                         |       | 43.54                       |            |
| Balance at  December 31, 2009           | ** ** | **138,367**                       | ** ** | **934,065**                     | ** ** | **Ps.**                     | ** 79.30** | ** ** |

 

The weighted average exercise price of stock optionsoutstanding as of December 31, 2009 is as follows:

 
| ** **      | ** ** | **Number  of options** | ** ** | **Exercise  price** | ** ** |
|-----------------|------------|------------------------|------------|---------------------|------------|
| Granted in 2007 |       | 612,516                |       | Ps.                 | 98.08      |   |
| Granted in 2008 |       | —                 |       | —              |       |
| Granted in 2009 |       | 321,549                |       | 43.54               |       |
|            |       | 934,065                |       | Ps.                 | 79.30      |   |

 

The average fair value of all the stock optionsgranted was 15.63, 6.02 and 18.42 Mexican pesos per stock option, during theyears ended December 31, 2009, 2008 and 2007, respectively.

 

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Key assumptions used to calculate the fair value forthe years ended December 31, 2009, 2008 and 2007 are as follows:

 
| ** **                         | ** ** | **2009**                  | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|------------------------------------|------------|---------------------------|------------|----------------------|------------|----------------------|------------|
| Expected dividend yield            | ** ** | **0**                     | **%**      | 0                    | %          | 0                    | %          |
| Expected stock price  volatility   | ** ** | **59.56**                 | **%**      | 72.21                | %          | 21.50                | %          |
| Risk-free interest rate            | ** ** | **5.54**                  | **%**      | 7.72                 | %          | 8.10                 | %          |
| Expected life of  options in years | ** ** | **3  years**              |       | 2.5 years            |       | 2.1 years            |       |
| Model used                         | ** ** | **Black  Scholes Merton** |       | Black Scholes Merton |       | Black Scholes Merton |       |

 

Compensation cost related to vested stock optionawards totaled Ps. 10,638 at December 31, 2009. Total compensation costrelated to vested stock option awards not recognized was Ps. 3,687 and Ps.18,019 at December 31, 2008 and 2007, respectively.

 

f) On September 26, 2007, Promotora ResidencialHuehuetoca, S.A. de C.V. (Huehuetoca) declared dividends to its stockholderswhich included the Company and minority shareholders. Dividends paid tominority shareholders were Ps. 9,133 and have been reflected as a reduction ofnon-controlling interest in the accompanying consolidated financial statements.

 

g) On March 10, 2008, the Board of Directorsauthorized the Company to repurchase up to $250 million in treasury stockthrough market transaction. During the year ended December 31, 2009, theCompany repurchased 49,500 treasury shares for Ps. 1,398. There was norepurchase of treasury stock during 2008.

 

h) As of December 31, 2009, 187,867 shares remainin treasury. As of December 31, 2008 and 2007 999,200 shares legallyremain in treasury, respectively.

 

**17.Foreign currency balances and transactions**

 

a) As of December 31, 2009 and 2008, the foreigncurrency monetary position is as follows:

 
| ** **                        | ** ** | **2009**                                  | ** **     | **2008**                                     | ** ** |
|-----------------------------------|------------|-------------------------------------------|----------------|----------------------------------------------|------------|
| ** **                        | ** ** | **Thousands of U.S.  dollars:** | ** **     | **Thousands of Brazilian  reals:** | ** ** | **Thousands of U.S.  dollars:** | ** ** | **Thousands of Brazilian  reals:** | ** ** |
| Monetary assets                   | ** ** | **US$**                                   | **6,046**      | ** **                                   | **BR$**    | **10,444** |   | US$ | 6,014 |   | BR$ | 23 |   |
| Monetary liabilities              | ** ** | **(563,074**                              | **)**          | **(69,880**                                  | **)**      | (298,270 | ) | (5,140 | ) |
| Monetary liability  position, net | ** ** | **US$**                                   | **(557,028**   | **)**                                        | **BR$**    | **(59,436** | **)** | US$ | (292,256 | ) | BR$ | (5,117 | ) |
| Equivalent in Mexican  pesos      | ** ** | **Ps.**                                   | **(7,265,706** | **)**                                        | **Ps.**    | **(446,858** | **)** | Ps. | (4,025,476 | ) | Ps. | (30,113 | ) |

 

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b) The exchange rates in effect at the dates of theconsolidated balance sheets and issuance of the consolidated financialstatements were as follows:

 
| ** **     | ** ** | **(In  Mexican pesos)**     | ** ** |
|----------------|------------|-----------------------------|------------|
| ** **     | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** | **June 29,  2010** | ** ** |
| U.S. dollar    | ** ** | **13.0437**                 |       | 13.7738 |   | 12.8525 |   |
| Egyptian pound | ** ** | **2.3921**                  |       | 2.5242 |   | 2.23611 |   |
| Brazilian real | ** ** | **7.5183**                  |       | 5.8849 |   | 7.13686 |   |
| Indian rupee   | ** ** | **0.2788**                  |       | 0.2800 |   | 0.27596 |   |

 

**18. Transactions and balances withrelated parties**

 

a)****Thefollowing agreements have been entered into with related parties:

 

The Company was a party to an administrative serviceagreement with two entities whose principal owners are officers of the Company(Serviasesorías and Administradores de la Empresa en Equipo), for which PICSApaid a 5% based on total expenses. The amounts paid under this agreementtotaled Ps. 55,389 in 2007. No amounts were paid in 2009 and 2008. As ofApril 1, 2007, these companies entered in a liquidation process and theemployees were transferred to subsidiaries of the Company.

 

b) For the years ended December 31, 2009 and2008, there are no balances from/to related parties.

 

c) Compensation paid to the Company’s key managerialpersonnel or relevant directors is as follows:

 
| ** **                                  | ** ** | **2009**   | ** **        | **2008**   | ** ** | **2007**      | ** ** |
|---------------------------------------------|------------|------------|-------------------|------------|------------|---------------|------------|
| ** **                                  | ** ** | ** ** | ** **        | ** ** | ** ** | ** **    | ** ** |
| Short and long-term  direct benefits        | ** ** | **Ps.**    | ** 201,058** |       | Ps.        |  191,148 |       | Ps. |  140,326 |   |
| Termination benefits                        | ** ** | **6,508**  |              | 35,276     |       | 40,781        |       |
| Stock option  compensation expense recorded | ** ** | **10,638** |              | 616        |       | —        |       |
|                                        | ** ** | **Ps.**    | ** 218,204** |       | Ps.        |  227,040 |       | Ps. |  181,107 |   |

 

During 2007, certain stock option benefits weregranted to key employees as disclosed in Note 16e.

 

There were no post retirement benefits payments duringthe years presented herein.

 

**19.Segment reporting**

 

The Company generates separate reports by affordableentry-level and middle-income operations. The following segment reportinginformation is presented according to the information used by management fordecision-making purposes. The Company segregates the financial information bysegments, (affordable entry-level and middle-income) considering theoperational and organizational structure of the business (which was establishedby house models as explained in the next paragraph), according to theprovisions of Bulletin B-5 *Segment reporting*.

 

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**General description of the productsor services**

 

Mexico’s developer-built housing industry is dividedinto three segments according to cost:  affordable entry-level,middle-income, and residential. The prices of affordable entry-level segmentrange between Ps. 195 and Ps. 540; those of the middle-income segment arebetween Ps. 541 and Ps. 1,885 and those of the residential segment are abovePs. 1,885. The Company’s focus is to provide affordable entry-level andmiddle-income housing for its customers. Therefore, the operating segments thatare presented in detail are the affordable entry-level and the middle-incomesegments, in conformity with guidelines of Bulletin B-5.

 

Affordable entry-level developments range in size from500 to 20,000 homes and are developed in stages typically comprising 300 homeseach. During 2009, 2008 and 2007, affordable entry-level homes had an averageprice of approximately Ps. 284, Ps. 276 and Ps. 260, respectively. A typicalaffordable entry-level home consists of a kitchen, living-dining area, one tothree bedrooms, and one bathroom.

 

Middle-income developments range in size from 400 to2,000 homes and are developed in stages typically comprising 200 homes each.During 2009, 2008 and 2007, middle-income homes had an average price ofapproximately Ps. 823, Ps. 817 and Ps. 781, respectively. A typicalmiddle-income home consists of a kitchen, dining room, living room, two orthree bedrooms, and two bathrooms.

 

The following table shows the operating results byeach segment identified as of December 31, 2009, 2008 and 2007:

 
| **Year ending December 31, 2009** | ** ** | **Entry-level** | ** **           | **Middle-income** | ** ** | **Consolidated**    | ** ** |
|----------------------------------------|------------|-----------------|----------------------|-------------------|------------|---------------------|------------|
| Revenues                               | ** ** | **Ps.**         | ** 15,193,178** | ** **        | **Ps.**    | ** 4,232,004** | ** ** | **Ps.** | ** 19,425,182** | ** ** |
| Income from operations                 | ** ** | **2,479,386**   | ** **           | **690,624**       | ** ** | **3,170,010**       | ** ** |
| Depreciation and  amortization         | ** ** | **378,093**     | ** **           | **105,316**       | ** ** | **483,409**         | ** ** |
|                                        |            |                 |                      |                   |            |                     |            |  |  |  |

 
| **Year ending December 31, 2008** | ** ** | **Entry-level** | ** **       | **Middle-income** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|-----------------|------------------|-------------------|------------|------------------|------------|
| Revenues                                              |       | Ps.             |  14,511,293 |              | Ps.        |  4,339,203  |       | Ps. |  18,850,496 |   |
| Income from operations                                |       | 2,309,116       |             | 690,477           |       | 2,999,593        |       |
| Depreciation and  amortization                        |       | 327,185         |             | 97,836            |       | 425,021          |       |
|                                                       |            |                 |                  |                   |            |                  |            |  |  |  |

 
| **Year ending December 31, 2007** | ** ** | **Entry-level** | ** **       | **Middle-income** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|-----------------|------------------|-------------------|------------|------------------|------------|
| Revenues                                              |       | Ps.             |  12,545,899 |              | Ps.        |  3,676,625  |       | Ps. |  16,222,524 |   |
| Income from operations                                |       | 2,616,011       |             | 766,628           |       | 3,382,639        |       |
| Depreciation and  amortization                        |       | 233,337         |             | 68,380            |       | 301,717          |       |
|                                                       |            |                 |                  |                   |            |                  |            |  |  |  |

 

The income from operations caption in the tables abovewere calculated as the total revenue from each segment, less allocated totalconsolidated operating cost and expenses. The allocation of total consolidatedoperating costs and expenses into the segments was based on the percentage thatthe sales in each segment represent of the total consolidated sales.Depreciation and amortization expense is allocated to each segment using thesame basis as operating costs and expenses.

 

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The Company does not segregate its total assets byoperating segment.

 

**20.Operating expenses**

** **
| ** **                              | ** ** | **2009**      | ** **          | **2008**  | ** ** | **2007**        | ** ** |
|-----------------------------------------|------------|---------------|---------------------|-----------|------------|-----------------|------------|
| Administrative                          | ** ** | **Ps.**       | ** 1,332,178** |      | Ps.        |  1,259,870 |       | Ps. |  855,687 |   |
| Selling                                 | ** ** | **1,083,524** |                | 1,026,722 |       | 849,784         |       |
| Amortization expense of  BETA trademark | ** ** | **91,054**    |                | 91,054    |       | 92,958          |       |
|                                    | ** ** | **Ps.**       | ** 2,506,756** |      | Ps.        |  2,377,646 |       | Ps. |  1,798,429 |   |

 

The table belowshows the most significant operating expenses:

 
| ** **                   | ** ** | **2009**   | ** **        | **2008** | ** ** | **2007**      | ** ** |
|------------------------------|------------|------------|-------------------|----------|------------|---------------|------------|
| Salaries and other  benefits | ** ** | **Ps.**    | ** 711,366** |     | Ps.        |  614,560 |       | Ps. |  439,113 |   |
| Office expenses              | ** ** | **88,271** |              | 99,411   |       | 70,761        |       |
| Advertising                  | ** ** | **72,044** |              | 203,211  |       | 31,997        |       |
|                              |            |            |                   |          |            |               |            |  |  |  |

 

**21.Other income (expenses)**

** **
| ** **                        | ** ** | **2009**   | ** **       | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|------------|------------------|----------|------------|----------|------------|
| Brazilian settlement  (1)         | ** ** | **Ps.**    | **—**       |     | Ps.        | (48,536  | )          | Ps. |  — |   |
| Recovery of taxes (2)             | ** ** | **—** |             | —   |       | 394,510  |       |
| Current profit-sharing            | ** ** | **—** |             | (67,707  | )          | (30,684  | )          |
| Deferred profit-sharing           | ** ** | **—** |             | (3,061   | )          | —   |       |
| Other income  (expenses), net (3) | ** ** | **49,475** |             | 9,378    |       | (154,603 | )          |
|                              | ** ** | **Ps.**    | ** 49,475** |     | Ps.        | (109,926 | )          | Ps. | 209,223 |   |

 

----

(1) See Note25.

 

(2) During2007, the Company recovered from tax authorities value-added tax related to theyears 2006, 2005 and 2004.

 

(3) Includesa Ps. 65,917 expense recorded in 2007 related to the final outcome oflitigation between the Company and BETA’s founders.

 

**22.Interest expense**

** **
| ** **                                               | ** ** | **2009**    | ** **        | **2008** | ** ** | **2007**      | ** ** |
|----------------------------------------------------------|------------|-------------|-------------------|----------|------------|---------------|------------|
| Interest expense  related to senior guaranteed notes (1) | ** ** | **Ps.**     | ** —**  |     | Ps.        |  —  |       | Ps. |  141,532 |   |
| Other interest expense                                   | ** ** | **162,069** |              | 127,526  |       | 86,850        |       |
| Commissions and  financing costs (2) (3)            | ** ** | **221,696** |              | 109,507  |       | 116,546       |       |
|                                                     | ** ** | **Ps.**     | ** 383,765** |     | Ps.        |  237,033 |       | Ps. |  344,928 |   |

 

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(1) As of December 31, 2009 and 2008 theinterest expense related to senior guaranteed notes was Ps. 288,156 and Ps.269,052, respectively; however due to the MFRS D-6 application, these amountswere fully capitalized in both years (see Note 6). As of December 31, 2007the interest expense related to senior guaranteed notes was Ps. 290,509, ofwhich Ps. 149,157 was capitalized, while Ps. 141,352 remained in the comprehensivefinancing cost. During 2007, the Company adopted the provisions of MFRS D-6,resulting in the capitalization of a portion of its net financing cost.

 

(2) Includes the commissions paid by the Companyto INFONAVIT and Registro Único de Vivienda (RUV), when obtaining approval ofindividual financing for its customers. The commissions facilitate the homesales and cash inflows recovery, so the Company considers these commissions aspart of the financing costs. The amounts expensed in 2009, 2008 and 2007 werePs. 87,881, Ps. 75,818 and Ps. 65,585, respectively.

 

(3) Due to anticipated payments made by theCompany of short-term lines of credit during December 2009 (see Note 10),the Company amortized Ps. 45,873 related to commissions previously capitalizedin other assets.

 

**23. Incometax, asset tax and**Flat RateBusiness Tax (IETU)**

 

In accordance with Mexicantax law, the Company is subject to income tax (ISR), since 2008 Flat RateBusiness Tax (“IETU”) and until 2007 asset tax (IMPAC) and files its taxreturns on an individual entity basis and the related tax results are combinedin the accompanying consolidated financial statements. The ISR is computedtaking into consideration the taxable and deductible effects of inflation, suchas depreciation calculated on restated asset values. Taxable income isincreased or reduced by the effects of inflation on certain monetary assets andliabilities through the inflationary component, which is similar to the gain orloss from monetary position.

 

The Company files ISR andIMPAC tax returns on an individual entity basis and the related tax results arecombined in the accompanying consolidated financial statements.

 

On December 7, 2009 atax reform bill was approved and published for 2010 fiscal year, which reforms,amends and annul certain tax dispositions and is applicable effective January 1,2010.

 

This tax reform bill enactsan ISR rate increase that will be effective as follows:

a) for years 2010 to 2012,30%;

b) for year 2013, 29%; and

c) for year 2014 and futureyears, 28%

 

In addition, certain changesto the consolidation regime will be effective; however, the Company is notsubject to such regime.

 

IMPAC was calculated byapplying 1.25% on the net average of the majority of restated assets lesscertain liabilities. The IMPAC was payable only to the extent that it exceededISR payable for the same period. Any required payment of IMPAC was creditableagainst the excess of ISR over IMPAC of the following ten years.

 

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On October 1, 2007, thetax law IETU was approved. This tax is mandatory from January 1, 2008 andreplaced the IMPAC tax laws.

 

The IETU of the period iscalculated applying the rate of 17.5% (16.5% for 2008 and 17% for 2009) basedon income determined by cash flows less authorized credits.

 

The credits for the IETU aremainly composed of unamortized negative IETU base, salaries and social securitycontributions, and deductions from assets such as inventories and fixed assets,during the initial transition period.

 

The payment of IETU isrequired only to the extent that it exceeds the ISR for the same period.  The ISR paid during the period will reducethe total IETU payable for the same period.

 

When the deductions exceedthe accumulated income (negative IETU), no IETU is levied. The amount of thenegative IETU multiplied by the applicable rate, results in an IETU credit,which can be offset against the ISR generated in the same period or against theIETU payable, if any, within the next ten years.

 

Based on projected taxcalculations in the future it is estimated that the Company will be subject tothe payment of the ISR only.

 

a) As of December 31,2009, 2008 and 2007 the ISR consist of the following:

 
| ** ** | ** ** | **2009**    | ** **          | **2008** | ** ** | **2007**      | ** ** |
|------------|------------|-------------|---------------------|----------|------------|---------------|------------|
| ISR:       |       |        |                |     |       |          |       |
| Current    | ** ** | **Ps.**     | ** 279,974**   |     | Ps.        |  141,569 |       | Ps. |  132,873 |   |
| Deferred   | ** ** | **903,018** |                | 570,606  |       | 818,407       |       |
|       | ** ** | **Ps.**     | ** 1,182,992** |     | Ps.        |  712,175 |       | Ps. |  951,280 |   |

 

To determine deferred ISR asof December 31, 2009 and 2008, the Company applied the different tax ratesthat will be in effect beginning in 2010, to temporary differences according totheir estimated dates of reversal.

 

b) The reconciliation of thestatutory and effective ISR rates expressed as a percentage of income beforethe ISR is:

 
| ** **                                            | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **%**      | ** ** | **%**    | ** ** | **%**    | ** ** |
| Statutory  rate                                       | ** ** | **28**     |       | 28       |       | 28       |       |
| Add  (deduct) effect of permanent differences mainly: |       |       |       |     |       |     |       |
| Nondeductible  expenses                               | ** ** | **3**      |       | 1        |       | 1        |       |
| Difference  between book and tax inflation effects    | ** ** | **5**      |       | 2        |       | 2        |       |
| Recovered  added-value tax                            | ** ** | **—** |       | —   |       | (2       | )          |
| Effect  of change in statutory rate on deferred ISR   | ** ** | **3**      |       | —   |       | —   |       |
| Effective  tax rate                                   | ** ** | **39**     |       | 31       |       | 29       |       |

 

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The effect of change in thestatutory rate on deferred ISR represented an additional charge in theconsolidated statement of income for 2009 of Ps. 78,624.

 

c) At December 31, 2009and 2008 the main items comprising the asset (liability) balance of deferredISR are:

 
| ** **                                                      | ** ** | **2009**       | ** **           | **2008**   | ** ** |
|-----------------------------------------------------------------|------------|----------------|----------------------|------------|------------|
| Deferred  ISR:                                                  |       |           |                 |       |       |
| Effect  of tax loss carryforwards                               | ** ** | **Ps.**        | ** 617,150**    |       | Ps.        |  994,555 |   |
| Other  creditors                                                | ** ** | **423,148**    |                 | 473,756    |       |
| Allowance  for doubtful accounts                                | ** ** | **31,485**     |                 | 13,491     |       |
| Labor  obligations                                              | ** ** | **23,565**     |                 | 23,842     |       |
| Asset  tax recoverable                                          | ** ** | **10,873**     |                 | 10,802     |       |
| PTU  liability incurred                                         | ** ** | **5,087**      |                 | 19,141     |       |
| Unbilled  revenues on developments in progress                  | ** ** | **(3,654,944** | **)**                | (2,959,612 | )          |
| Construction-in-process,  inventories and taxable inventory (1) | ** ** | **(1,204,074** | **)**                | (1,713,702 | )          |
| Property  and equipment                                         | ** ** | **(68,429**    | **)**                | (166,542   | )          |
| Other  assets                                                   | ** ** | **(66,668**    | **)**                | (86,696    | )          |
| Prepaid  expenses                                               | ** ** | **(2,808**     | **)**                | (3,063     | )          |
| Derivative  financial instruments                               | ** ** | **(1,312**     | **)**                | (18,473    | )          |
| Deferred  ISR liability                                         | ** ** | **(3,886,927** | **)**                | (3,412,501 | )          |
| Valuation  allowance (see paragraph f below)                    | ** ** | **(421,843**   | **)**                | —     |       |
| Total  deferred liability, net                                  | ** ** | **Ps.**        | ** (4,308,770** | **)**      | Ps.        |  (3,412,501 | ) |
|                                                            |       |           |                 |       |       |
| Asset                                                           | ** ** | **Ps.**        | ** 643,640**    |       | Ps.        |  328,598 |   |
| Liability                                                       | ** ** | **(4,952,410** | **)**                | (3,741,099 | )          |
| ** **                                                      |       | **Ps.**        | ** (4,308,770** | **)**      | Ps.        |  (3,412,501 | ) |

 

----

(1)           In conformity with the Mexican Income Tax Law (MITLA) inforce through December 31, 2004, the cost of sales was considered as anon-deductible expense and inventory purchases and production costs wereconsidered as deductible items. This tax treatment in the MITLA gave rise to atemporary difference because of the difference in the book value of inventoriesand its corresponding tax value. Effective January 1, 2005, the MITLAconsiders cost of sales as a deductible item instead of inventory purchases andproduction costs. The MITLA established transition rules to be followed toinclude the December 31, 2004 inventory balance into taxable revenue.However, as result of the interpretation of the transition rules establishedby the MITLA, the Company did not include its inventory balance at December 31,2004. Consequently, the Company recorded a taxable inventory as a deferred taxliability of Ps. 156,555 and Ps. 125,245 as of December 31, 2009 and 2008,respectively. This taxable inventory relates to the inventory item and tax lawchange described above as it is the source of income on which the Company didnot pay taxes.

 

d) As of December 31,2009 the tax loss carryforward expiring in the following ten years amounted toPs. 2,071,753.

 

i.                              The asset tax,which is a minimum income tax, was payable based on 1.25% of the average valueof most assets net of certain liabilities. The balances as of December 31,2009 and 2008 of the asset tax were Ps. 10,873 and Ps. 10,802, respectively.

 

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ii.                           The losscarryforwards and recoverable IMPAC for which the deferred ISR asset andprepaid ISR, respectively, have been recognized can be recovered subject tocertain conditions.  Tax losscarryforwards and recoverable IMPAC for which the deferred ISR asset andprepaid ISR, respectively, have been recognized can be recovered, subject tocertain conditions. The amounts as of December 31, 2009 andexpiration dates are:

 
| ** **              | ** ** | **Tax Loss**       | ** **      | **Recoverable** | ** ** |
|-------------------------|------------|--------------------|-----------------|-----------------|------------|
| **Year of  Expiration** | ** ** | **Carry-forwards** | ** **      | **IMPAC**       | ** ** |
| 2012                    |       | Ps.                |  —    |            | Ps.        |  364 |   |
| 2013                    |       | —             |            | 1,175           |       |
| 2014                    |       | —             |            | 2,186           |       |
| 2015                    |       | —             |            | 1,555           |       |
| 2016                    |       | 78,857             |            | 1,468           |       |
| 2017                    |       | 55,419             |            | 4,125           |       |
| 2018                    |       | 909,997            |            | —          |       |
| 2019                    |       | 1,027,480          |            | —          |       |
|                    |       | Ps.                |  2,071,753 |            | Ps.        |  10,873 |   |

 

e) The Federal tax authorityhas the right to perform reviews of the taxes paid by Mexican companies for aperiod of five years; therefore tax years beginning with 2004 are subject topossible review.

 

f) The Company has takencertain positions in its annual tax returns which are classified as uncertaintax positions for financial reporting purposes. Specifically, uncertain tax positions currently outstanding relate tothe Company’s interpretation of the MITLA related to the inclusion of certaindebts in the calculation of the inflation adjustment, and the deduction of landby real estate developers.  As of December 31,2008, amounts related to uncertain tax positions totaled Ps. 102,969. As of December 31,2009, uncertain tax positions result in Ps. 421,843 in deferred tax assetswhich have been provided for through a full valuation allowance, and anadditional current liability in the amount of Ps. 248,781.

 

**24. Subsequent events**

 

a) On March 22,2010, the Company, through its subsidiary Homex India Private Limited****executed a Memorandum of Understandingwith Puravankara Projects Limited, an Indian private limited company, in whichthey have established the rules in principle for the formation of anon — exclusive Joint Venture company to undertake projects in the affordableentry-level housing segment in India. The first project of the Company consistsof 1,323 units and is expected to be in the metro area of Chennai, in SouthIndia.

 

b) On January 15, 2010,the Company deposited the remaining US$4.5 million into an escrow account inrelation to a contemplated acquisition (see Note 25).

 

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**25. Contingencies and commitments**

 

*Constructionguarantees*

 

The Company provides atwo-year warranty against construction defects to all of its customers whichcould be due to the Company’s own activities, to defects in the constructionmaterials provided by third parties (electrical installations, plumbing, gas,waterproofing, etc.) or to other circumstances not within the control ofthe Company.

 

The Company is insuredagainst any defect, hidden or visible, that could occur during theconstruction, and after the construction for a certain period of time. Inaddition, the contractors provide a surety against any hidden or visibledefects which is refunded on the approval of customers. The contractors alsoprovide a security fund to cover any probable claims from customers during the warrantyperiod, which is returned to them once such period ends.

 

Insurance coverage expensedfor the years ended December 31, 2009, 2008 and 2007 amounted to Ps.3,226, Ps. 2,904 and 4,371, respectively.

 

*Settlementof Contingency*

 

In July 2007, theCompany entered into a Quota holders’ Agreement with EmpreendimentosImobiliarios Limitada (“E.O.M”), pursuant to which the Company agreed tocontribute 67% and E.O.M. agreed to contribute 33% of the projected 4.0 millionBrazilian Reals capital stock of Homex Brasil Incorporacoes and ConstrucoesImobiliarios Limitada. Following disagreements with E.O.M., the Companyexercised its right to withdraw from the Quota holders’ Agreement.

 

In November 2008, theCompany reached an agreement (“Brazilian settlement”) to end the Quota holders’Agreement entered into with E.O.M in July 2007, and terminate alllitigation that had been taking place in the previous months. The settlement ofthe dispute included the purchase of the 33 % interest of members of the Khafiffamily in Homex Brasil, through E.O.M., for 8,352,941 Brazilian Reals,equivalent to approximate Ps. 48,536, of which 5.2 million (Ps. 25,030) hasbeen paid as of December 31, 2009 (Ps. 11,730 was paid as of December 31,2008). The remaining balance will be paid in two equal payments in the monthsof April and October of 2010. The Company has treated the 2008 stepacquisition of this non-controlling interest as a transaction between entitiesunder common control, as is appropriate under MFRS. Because E.O.M. had negligibleidentifiable tangible or intangible assets as of the date of the transaction,the Company has recognized the entire amount of this transaction as asettlement expense (other expense) in the statement of income for 2008 (SeeNote 21).

 

The Company now operates inBrazil through its 100% subsidiary.

 

*Commitment*

 

On December 22, 2009the Company entered into an Equity Interest Purchase Agreement of threecompanies (all together Loreto Companies). Depending on certain conditionsdescribed in the paragraph below, the Company will acquire through the LoretoCompanies different assets (hotel, golf course and land) that combinedrepresent approximately 950,000 square meters in the touristic project known asLoreto Bay in Loreto, Baja California Sur. The developable portion of suchassets is in the range of 325,000 square meters.

 

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The purchase price agreedfor the above mentioned transaction is US$ 22.5 million to be paid to theSellers upon the Company’s satisfaction of diverse legal requirements, of whichthe most relevant is to evidence that the title of the assets transferred tothe entities that will own them, is free and clear from any encumbrance.

 

In accordance to the termsof the agreement, the Company was to deposit US$ 5 million into an escrowaccount. At the date of the financial statements, the Company has deposited US$500,000; the rest was deposited on January 15, 2010 as explained in Note24 above.

 

Through its tourism divisionthe Company intends to develop (in the above mentioned developable area) 1,100units.

 

*OtherContingencies*

 

The Company is party tovarious legal disputes as a result of the normal course of constructionbusiness.   The Company is of the opinionthat the ultimate outcome of such matters will not have a material adverseimpact on the Company’s consolidated financial statements.

 

**26. Newaccounting principles**

 

In December 2008 and 2009,the following new accounting standards were issued under MFRS. Two of thesestandards were adopted by the Company on January 1, 2010 and the rest willbe adopted on January 1, 2011. At the date of the financial statements,the Company is evaluating the effect of the observance that these newaccounting standards will have on the Company’s consolidated results ofoperations and financial position; as well as disclosures to the consolidatedfinancial statements.

 

**Effectivein 2010:**

 

**IMFRS 14,Construction, Sales and Services Agreements related to Real Estate**

 

In December 2008 IMFRS14 was issued by the CINIF to complement Bulletin’s D-7 regulation, *Construction Agreements and Manufacturing of CertainCapital Assets*. This Interpretation is applicable to the recognitionof revenues, costs and expenses for all entities that undertake theconstruction of capital assets directly or through sub contractors.

 

Due to the application ofthis Interpretation, effective January 1, 2010, the Company will stoprecognizing its revenues, costs and expenses based on thepercentage-of-completion method. At that date, the Company will begin torecognize them based on methods mentioned in this Interpretation. Revenue andcost recognition will then more closely approximate what is often referred toas a “completed contract method” in which revenues, costs and expenses shouldbe recognized, when all of the following conditions are fulfilled:

 

a)the entity has transferred the control to the homebuyer, in other words, thesignificant risks and benefits due to the property or the assets ownership;

b)the entity does not keep for itself any continue participation on the actualmanagement of the sold assets, in the usual grade associated with the property,nor does retain the effective control of the sold assets;

c) the revenues amount canbe estimated reliably;

d) it is probable that theentity receives the economic benefits associated with the transaction; and

e) the costs and expensesincurred or to be incurred related to the transaction can be estimatedreliably.

 

This Interpretation will beadopted as of January 1, 2010, with retrospective application to prioraccounting periods presented with its 2010 consolidated financial statements.The Company has estimated that the application of

 

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IMFRS 14 to the consolidatedfinancial statements would have had the following effects with respect to theyear ended December 31, 2009:

 

·                  sales wouldhave decreased 11.1% from Ps. 19,425.2 million to Ps. 17,277.7 million;

 

·                  operatingincome would have decreased 17.4% from Ps. 3,170.0 million to Ps. 2,618.3million;

 

·                  net incomewould have decreased 20.9% from Ps. 1,829.9 million to Ps. 1,446.9 million; and

 

·                  totalstockholders’ equity as of December 31, 2009 would have decreased 15.8%from Ps. 12,988.0 million to Ps. 10,935.7 million.

 

In addition, the applicationof IMFRS 14 to the consolidated financial statements would have had the followingeffects as of December 31, 2009: (i) a decrease in accountsreceivable for the developments in progress, (ii) an increase ininventories consisting of housing under construction, (iii) a decrease indeferred income taxes for net income attributable to housing not yet titled, (iv) anincrease in prepaid expenses and other current assets for the sales commissionspaid in advance and (v) a decrease in stockholders’ equity as indicatedabove.

 

**MFRS C-1,Cash and cash equivalents**

 

This MFRS replaces MFRS C-1,*Cash*and describes general rules forthe valuation, presentation and disclosure of cash and cash equivalents itemsthat are included in a Company’s balance sheet.

 

The main changes of thisMFRS are as follows: (a) set a new name for this MFRS, from Cash to Cashand Cash Equivalents; (b) addresses the restricted cash presentation inthe financial statements; and, (c) set and defines new terms like:temporary investments, acquisition costs, cash equivalents, restricted cash,net realizable value, nominal value, and fair value.

 

**Effectivein 2011 and 2012:**

 

**MFRS B-5,Reporting Financial Information by Segment**

 

This MFRS replaces MFRS B-5,*Reporting Financial Information by Segment*andestablishes the criteria to identify the entity’s segments to disclose as wellas the disclosures about those segments. In addition, establishes disclosurerequirements of certain of the Entity’s information.

 

The main changes of thisMFRS are as follows: (a) MFRS B-5 includes a managerial approach, whileprevious MFRS B-5, although it referred to managerial approach, required thatthe information to disclose were referred to identified segments based on theproducts or services, geographical areas and customers homogenous groups, alsorequiring that that information would be segregated in primary and secondaryinformation; (b) new MFRS does not require that business areas are subjectto different risks amongst them, in order to qualify as operative segments,while previous MFRS B-5 did; (c) in accordance to new MFRS B-5, businessareas in development stage could be catalogued as operative segment, whileprevious MFRS B-5 required operative segments to generate revenues; (d) MFRSB-5 requires to disclose by segments income interest and interest expense, aswell as other comprehensive financial cost items, while previous MFRS B-5 didnot require this information; and (e) MFRS B-5 requires to disclose theamounts of liabilities that are included in the usual information of anoperative segment that the Company normally uses to make decisions, whileprevious MFRS B-5 did not require this and let management the option to do soor not.

 

**InternationalFinancial Reporting Standards (IFRS)**

 

On January 27, 2009 theMexican Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV)established through the Federation Official Gazette the requirements for listedcompanies to prepare and present their financial information under IFRSbeginning in 2012. Likewise it was specified that early adoption for the years

 

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2008, 2009, 2010 and 2011 isallowed. The Company has yet to determine the exact date on which it will adoptIFRS, although it will naturally occur on or prior to the date required.

 

**27.    Summaryof differences between Mexican Financial Reporting Standards (MFRS) and US GAAP**

 

The consolidated financialstatements of the Company are prepared in accordance with MFRS, which vary in certainsignificant respects from US GAAP. A reconciliation of the reported netincome, equity and comprehensive income to US GAAP is presented in Note 28a andb.

 

Effective January 1,2008, and as a result of adopting Standard B-10, *Effects of inflation*, the Company ceased recognizing theeffects of inflation in its financial statements and considered the restatedamounts of all non-monetary items as their carrying basis as of January 1,2008. The Company has not reconciled inflation adjustments recorded prior to2008, nor has it reconciled inflation adjustments still included in itsnon-monetary items, including depreciation.

 

The United States FinancialAccounting Standards Board (“FASB”) released the *FASB Accounting Standards Codification*, or “ASC” for short,on January 15, 2008 and it became effective in the summer of 2009. At thattime all previous US GAAP reference sources became obsolete. The ASC organizesthousands of U.S. GAAP pronouncements under approximately 90 accounting topicareas.  The objective of this project wasto arrive at a single source of authoritative U.S. accounting and reportingstandards, other than guidance issued by the SEC. Below are references tovarious ASC’s, and their former US GAAP references.

 

The differences between MFRSand US GAAP included in the reconciliation that affect the accompanyingconsolidated financial statements of the Company are as follows:

 

**a)             Revenueand cost recognition**

 

The substantial majority ofthe Company’s revenues are derived from the construction of homes on Companyowned land, and the related sale of such homes. Under US GAAP, the Companyrecognizes these revenues pursuant to ASC 360.20 (formerly FAS 66 *Accounting for Sales of Real Estate Sales)*.Such revenues are recognized when all of the following events occur:

 

·  a sale isconsummated;

 

·  a significant initialconsideration is received (when applicable);

 

·  the earnings processis complete and the collection of any remaining receivables is reasonablyassured.

 

All such conditionstypically occur at the time the title passes to the homebuyer, and he has thelegal right to take possession of this property.

 

In situations where theCompany sells customers a house with incremental improvements beyond the “basic”house, the Company recognizes amounts from the customer on a cash-basis whenreceived, which is essentially cost recovery accounting.

 

Under MFRS, the Company usesthe percentage-of-completion method of accounting to account for housingproject revenues and costs related to housing construction; progress towardscompletion is measured in terms of comparing the actual costs incurred to theestimated total cost of a project.

 

Approximately Ps. 198,755 ofthe Company’s revenues during the year ended December 31, 2009 werederived from construction services performed pursuant to a formal contract withthe Mexican Government, on Mexican Government owned land.  Such revenues have been accounted for US GAAPpurposes under a percentage-of-completion method of accounting pursuant to ASC605.35 (formerly SOP 81-1 — “Accounting for Performance of Construction-Typeand Certain Production-Type Contracts”), consistent with MFRS.

 

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A reconciling item for theincremental revenues and costs associated with the above differences isincluded in the US GAAP reconciliation of net income and equity for all periodspresented.

 

**b)         Deferredincome taxes**

 

The Company followsASC740.10 (formerly SFAS No. 109, “Accounting for Income Taxes”) for USGAAP purposes, which differs from the MFRS. Under MFRS, the effects ofinflation on the deferred tax balance generated by monetary items arerecognized in the result on monetary position. Under US GAAP, the deferred taxbalance is classified as a non-monetary item. As a result, the consolidatedstatement of operations differs with respect to the presentation of the gain(loss) on monetary position and deferred income tax provision.

 

As a result of the differencesrelated to the recognition of revenue, costs and interest capitalization asdescribed below, the related deferred income tax presented under MFRS isdifferent from the effect calculated in accordance with US GAAP.

 

Below is a reconciliation ofdeferred tax balances between MFRS and USGAAP:

 
| ** **                                               | ** ** | **2009**       | ** **          | **2008**   | ** ** |
|----------------------------------------------------------|------------|----------------|---------------------|------------|------------|
| Deferred  income tax liability according to MFRS, net    | ** ** | **Ps.**        |  **4,308,770** |       | Ps.        |  3,412,501 |   |
| Effect  of US GAAP adjustments:                          |       |           |                |       |       |
| Accounts receivable                                      | ** ** | **(3,766,913** | **)**               | (2,989,550 | )          |
| Inventories                                              | ** ** | **2,852,227**  |                | 2,225,359  |       |
| Other, net                                               | ** ** | **(6,798**     | **)**               | (8,845     | )          |
| Deferred  income tax liability according to US GAAP, net | ** ** | **Ps.**        |  **3,387,286** |       | Ps.        |  2,639,465 |   |

 

Deferred income tax balancesheet classification:

 
| ** **                          | ** ** | **2009**       | ** **            | **2008**        | ** ** |
|-------------------------------------|------------|----------------|-----------------------|-----------------|------------|
| ** **                          | ** ** | **Current**    | ** **            | **Non-current** | ** ** | **Current** | ** ** | **Non-current** | ** ** |
|                                |       |           |                  |            |       |   |   |   |   |
| Deferred tax assets                 | ** ** | **Ps.**        |  **630,592**     | ** **      | **Ps.**    |  **225,670** |   | Ps. |  2,006,768 |   | Ps. |  1,027,242 |   |
| Deferred tax liability              | ** ** | **(4,242,236** | **)**                 | **(1,312**      | **)**      | (5,512,244 | ) | (161,231 | ) |
| Net  deferred tax (liability) asset | ** ** | **Ps.**        |  **(3,611,644)** | ** **      | **Ps.**    |  **224,358** |   | Ps. |  (3,505,476) |   | Ps. |  866,011 |   |
|                                     |            |                |                       |                 |            |  |  |  |  |  |  |  |  |  |

 

At December 31, 2009and 2008, the Company had Ps.224,358 and Ps. 866,011, respectively, of netlong-term deferred tax assets. These amounts include net operating losscarryforwards as disclosed in Note 23. The Company believes that it is morelikely than not those amounts will ultimately be recovered, primarily throughthe reversal of deferred tax liabilities. Accordingly, no valuationallowance has been provided under US GAAP for these amounts.

 

**c)             Statementof cash flows**

 

Until the year endedDecember 31, 2007 under MFRS, the Company presented a consolidatedstatement of changes in financial position in accordance with Bulletin B-12, “Statementof Changes in Financial Position” (B-12), which identified the generation andapplication of resources by the differences between beginning and endingfinancial statement balances in constant Mexican pesos. B-12 also required thatmonetary and foreign exchange gains and losses be treated as cash items for thedetermination of resources generated by operations. Effective January 1,2008, MFRS B-2, “Statement of Cash Flows” was issued to replace Bulletin B-2.This standard establishes that the statement of changes in financial positionis substituted by a statement of cash flows as part of the basic financialstatements. The transitory rules of MFRS B-2 establish that theapplication of this standard is prospective. Therefore, the financialstatements for years ended December 31, 2007 include a statement ofchanges in financial position, as previously established by Mexican accountingBulletin B-12.

 

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In accordance with US GAAP the Company follows therequirements of ASC230.10 (formerly SFAS No. 95, “Statement of Cash Flows”),excluding the effects of inflation. Refer to the Company’s condensed USGAAPstatement of cash flow below.

 

**d)         Classification differences**

 

Under MFRS, advances for the purchase of land andconstruction materials are recorded as part of the cost of real estateinventories. Under US GAAP, such advances are classified as prepaid expenses.

 

Under MFRS, deferred taxes are classified asnon-current. US GAAP requires a current or non-current classification based onthe classification of the related asset or liability.

 

Under MFRS, the commissions paid by the Company toINFONAVIT and Registro Unico de Vivienda (RUV), when obtaining approval ofindividual financing for its clients, which facilitate home sales and cashinflows recovery are consider part of the financing costs; US GAAP requiresthat such amounts be recorded as operating costs.

 

Under MFRS, amounts due under the Company’s factoringagreements are included in trade accounts payable; US GAAP requires that suchamounts be recorded as a borrowing from the financial intermediary.

 

Under MFRS, interest expense from the factoringprogram sponsored by Nafinsa is included in the net comprehensive financingcost; US GAAP requires that such amounts be recorded as part of the operatingexpenses.

 

Under MFRS, profit- sharing costs are considered as an“other expense” For USGAAP purposes, employee statutory profit-sharing isclassified as an operating expense.

 

Under MFRS, Ps. 48,536 and Ps. 99,808 of otherexpenses were reclassified to operating expenses for US GAAP purposes in 2008and 2007, respectively.

 

**e)          Backlog**

 

The amount of backlog recorded in the Company’s 2006purchase accounting under US GAAP differed from the amount reported underMFRS. This backlog has been fully amortized as of December 31, 2009, andthus the difference in equity presented below essentially relates todifferences in the carrying value of goodwill between MFRS and US GAAP.

 

**f)             Inventory**

 

Inventories under US GAAP are stated at cost, based onthe average cost method. Inventories as of December 31, 2009 and 2008 areas follows:

 
| ** **                         | ** ** | **2009**        | ** **     | **2008**   | ** ** |
|------------------------------------|------------|-----------------|----------------|------------|------------|
| Land:                              | ** ** |            | ** **     |       | ** ** |
| Titled land                        | ** ** | **Ps.**         | **9,937,437**  |       | Ps.        | 7,742,436 |   |
| Contracted land                    | ** ** | **2,673,289**   |           | 4,939,990  |       |
|                               | ** ** | **12,610,726**  |           | 12,682,426 |       |
| Land held for future  developments | ** ** | **(10,912,389** | **)**          | (9,254,469 | )          |
| Land                               | ** ** | **1,698,337**   |           | 3,427,957  |       |
|                               |       |            |           |       |       |
| Other inventories:                 |       |            |           |       |       |
| Construction-in-process            | ** ** | **10,727,532**  |           | 8,612,476  |       |
| Construction materials             | ** ** | **512,355**     |           | 638,488    |       |
| Total other inventories            | ** ** | **11,239,887**  |           | 9,250,964  |       |
| Total inventories                  | ** ** | **Ps.**         | **12,938,224** |       | Ps.        | 12,678,921 |   |

 

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**g)          Goodwill**

 

The amount of goodwill under US GAAP related to a 2006acquisition is greater than that reported under MFRS, due to the difference inthe revenue recognition methods between MFRS and US GAAP.

Goodwill is not amortized.  However, it is subject to annual impairmenttests as required by ASC 350.10 (formerly SFAS 142), and is adjusted for anyimpairment losses. Goodwill is allocated to the affordable entry-level segment.

 

**h)          Laborobligations**

 

The Company has recorded liabilities for the senioritypremium and termination indemnity (severance) liabilities for its Mexicansubsidiaries with employees (Administradora Picsa, Desarrolladora de Casas delNoroeste and Altos Mandos de Negocios). For its MFRS consolidated financialstatements, the Company applies MFRS D-3. Significant assumptions(weighted-average rates) used in determining net periodic pension cost and theCompany’s related plan obligations for 2008 and 2007 are described in Note 13.

 

Severance indemnities: Under MFRS, effective 2005revised Bulletin D-3 requires the recognition of a severance indemnityliability calculated based on actuarial valuations. Recognition criteria underUS GAAP are established in ASC712.10 (formerly SFAS No. 112, “Employers’Accounting for Post-employment Benefits”), which requires that a liability forcertain termination benefits provided under an ongoing benefit arrangement suchas these statutorily mandated severance indemnities be recognized when thelikelihood of future settlement is probable and the liability can be reasonablyestimated. MFRS allows for the Company to amortize the transition obligationrelated to the adoption of revised Bulletin D-3 over the expected service lifeof the employees, but beginning January 1, 2008 the transition obligationmust be amortized at most in five years. However, US GAAP required the Companyto recognize such effect upon initial adoption under ASC715.10, which resultsin an immaterial difference in the amount recorded under the two accountingprinciples.

 

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Prior to the adoption of ASC715 (formerly SFASNo. 158), there was no difference in the liabilities recorded for pensionplans and seniority premiums between MFRS and US GAAP.

 
|   | ** **            | ** ** | **2009**    | ** ** | **2008** | ** ** |
|--------|-----------------------|------------|-------------|------------|----------|------------|
|   | Unrecognized items:   |       |        |       |     |       |
|   | Transition obligation | ** ** | **Ps.**     | **9,613**  |     | Ps.        | 11,251 |   |
|   | Prior service cost    | ** ** | **9,522**   |       | 10,691   |       |
|   | Net actuarial loss    | ** ** | **(17,634** | **)**      | (5,603   | )          |
|   | Unrecognized items    | ** ** | **Ps.**     | **1,501**  |     | Ps.        | 16,339 |   |

 

For purposes of determining the cost of our pensionplans, seniority premiums and severance indemnities under US GAAP, the Companyuses a December 31 measurement date for its seniority premiums andseverance indemnities.

 
| ** **                               | ** ** | **2009**    | ** **  | **2008** | ** ** |
|------------------------------------------|------------|-------------|-------------|----------|------------|
| **Change in benefit obligations:**       |       |        |        |     |       |
| Benefit obligation at  beginning of year | ** ** | **Ps.**     | **116,749** |     | Ps.        | 116,177 |   |
| Net periodic cost                        | ** ** | **49,152**  |        | 105,300  |       |
| Benefits paid                            | ** ** | **(29,424** | **)**       | (76,158  | )          |
| Other comprehensive income               | ** ** | **(14,838** | **)**       | (28,570  | )          |
| **Unfunded status**                      | ** ** | **Ps.**     | **121,639** |     | Ps.        | 116,749 |   |

 

Net periodic costs for 2009, 2008 and 2007 aresummarized below:

 
| ** **                                  | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Integration of Net  Periodic Costs:         |       |       |       |     |       |     |       |
| Labor cost                                  | ** ** | **Ps.**    | **25,360** |     | Ps.        | 15,750   |       | Ps. | 10,033 |   |
| Financial cost                              | ** ** | **11,083** |       | 9,393    |       | 5,378    |       |
| Amortization of transition liability        | ** ** | **1,639**  |       | 1,639    |       | 13,473   |       |
| Actuarial losses                            | ** ** | **9,902**  |       | 78,518   |       | 6,243    |       |
| Amortization of prior  services adjustments | ** ** | **1,168**  |       | —   |       | —   |       |
| Net periodic costs                          | ** ** | **Ps.**    | **49,152** |     | Ps.        | 105,300  |       | Ps. | 35,127 |   |

 

**i)           Disclosure about fair value offinancial instruments**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Statement No. 157, “Fair ValueMeasurements” (“FAS 157”). FAS 157 was later codified into ASC 820.10. ASC820.10 establishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value.  The hierarchy givesthe highest priority to unadjusted quoted prices in active markets for identicalassets or liabilities (Level 1 measurements) and the lowest priority tounobservable inputs (Level 3 measurements).  The three levels of thefair value hierarchy are described below:

 

Level 1 - Unadjusted quoted prices in active marketsthat are accessible at the measurement date for identical, unrestricted assetsor liabilities;

 

Level 2 - Quoted prices in markets that are notactive, or inputs that are observable, either directly or indirectly, forsubstantially the full term of the asset or liability;

 

Level 3 - Prices or valuation techniques that requireinputs that are both significant to the fair value measurement and unobservable(supported by little or no market activity).

 

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When possible the Company uses quoted prices todetermine fair value. Where quoted prices are not available, the fair value isinternally derived based upon appropriate valuation methodologies with respectto the amount and timing of future cash flows and estimated discount rates.However, considerable judgment is required in interpreting market data todevelop estimates of fair value, so the estimates are not necessarilyindicative of the amounts that could be realized or would be paid in a currentmarket exchange. The effect of using different market assumptions or estimationmethodologies could be material to the estimated fair values. Fair valuepresented herein is based on information available at December 31, 2009and 2008. Although management is not aware of any factors that would besignificantly affect the fair value amounts, such amounts have not been updatedsince those dates. Therefore the current estimates of fair value at dates afterDecember 31, 2009 and 2008 could differ significantly from these amounts.

 

The fair value of total debt, excluding capital leasesand interest payables, is estimated for variable rate debt whereby changes ininterest rates generally do not impact the fair value of the debt instrument,and quoted market prices are used for senior guaranteed notes atDecember 31, 2009 and 2008. As of December 31, 2009 and 2008, thecarrying value of total debt is Ps.10,005,640 and Ps. 7,332,999, respectively.The fair value is Ps.9,484,226 at December 31, 2009 and Ps. 5,625,724 atDecember 31, 2008.

 

The Company’s estimate of the derivative’s fair valuewas made using Level 2 evidence as per the ASC820.10 hierarchy discussed above.

 

ASC820.10 requires the fair value of an asset or liability to be determined basedon the assumptions that market participants would use in pricing the asset orliability. Therefore, if market participants would consider counterparty creditrisk in pricing the derivative contract, then an entity’s valuation methodologyunder US GAAP should incorporate the effect of this risk on fair value.   MFRS does not specifically require theinclusion of the counterparty’s credit risk in the computation of fair value.   The Company has incorporated the counterpartycredit risk into the valuation of their derivative positions under US GAAP, butnot under MFRS.

 

TheCompany determined the US GAAP fair value of its principal-only andinterest-only swaps as of December 31, 2009 to be Ps. 191,369, resultingin a difference of Ps. 72,285 from the carrying value of Ps.119,084  shown in the December 31, 2009 MFRS balancesheet.   Differences attributable tocounterparty credit risk were immaterial during periods prior to 2009, and thushave not been reflected as reconciling items in those years.

 

**j)           Prepaid sales commissions**

 

The amortization of the prepaid sales commissionexpense asset is based on an amortization methodology tied to MFRS revenuerecognition (percentage-of-completion). For US GAAP purposes this prepaidexpense is amortized linked to the revenue recognition method applied under ASCNo. 360.20.

 

**k)         Capitalization of net comprehensivefinancing cost**

 

Under MFRS, the capitalization of net comprehensivefinancing cost (interest, foreign exchange gains and losses and monetaryposition gains and losses) incurred to finance investment projects iscapitalized starting in 2007.

 

Under US GAAP, if interest is incurred during theconstruction of qualifying assets, capitalization is required as part of thecost of such assets. The Company applies the weighted-average interest rate onall outstanding debt to the balance of construction-in-progress additionsduring the period. Accordingly, a reconciling item for the capitalization ofinterest is included in the US GAAP reconciliation of net income and equity,and the effect of interest capitalized to the cost of inventories is includedwithin operating income for US GAAP purposes.

 

**l)             Commitmentsand contingencies**

 

The Company holds insurance that covers defects, hiddenor visible, during construction and which also covers the warranty periodprovided by the Company to home buyers. As mentioned in Note 25 to thefinancial statements, the Company provides a two year warranty to all of ourcustomers. This warranty could apply to damages derived either fromCompany operations or from defects in materials supplied by third parties (suchas electrical installations, plumbing, gas, waterproofing, etc.) orother circumstances outside the Company’s control.

 

For manufacturing defects, the Company does notrecognize a warranty accrual in the accompanying consolidated financialstatements since it obtains a security bond from our contractors to cover theclaims related to their work. The Company withholds a guarantee depositfrom them, which is reimbursed to the contractors once the warranty formanufacturing defects period expires. The Company believes that atDecember 31, 2009 and 2008, there were no unrecorded losses with respectto these warranties.

 

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**28.      Reconciliation of MFRS net income and equity to US GAAP net income and equityand the presentation of condensed financial statements in accordance with USGAAP.**

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 160, “Non-controlling Interest in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160was codified as a component of ASC 810.10. ASC 810.10 requires non-controllinginterests held by parties other than the parent in subsidiaries to be clearlyidentified, labeled, and presented in the consolidated statements of financialposition within equity, but separate from the parent’s equity. Additionally,consolidated net income shall be adjusted to include the net income attributedto the non-controlling interest. The consolidated cumulative othercomprehensive income shall be adjusted to include the net income attributed tothe non-controlling interest.

 

Accordingly, in 2009 nofurther classification difference exists related to non-controlling interests.Previous year’s reconciliations of net income and equity presented below havebeen retrospectively adjusted (reclassified) for all periods to reflect theadoption of ASC 810.10. The adoption of this new guidance resulted in aretrospective adjustment of equity and income statement, for presentation anddisclosures purposes as follows:

 
| ** **                | ** ** | **As originally issued********2008** | ** ** | **Reclassification** | ** ** | **As   reclassified  2008** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|
| Non-controlling  interest |       | Ps.                                            | 246,343    |                 | Ps.        | (246,343                    | )          | Ps. | — |   |
| Equity                    |       | 9,247,218                                      |       | 246,343              |       | 9,493,561                   |       |
| Net  income               |       | 567,782                                        |       | 38,131               |       | 605,913                     |       |
|                           |            |                                                |            |                      |            |                             |            |  |  |  |

 
| ** **                | ** ** | **As originally issued********2007** | ** ** | **Reclassification** | ** ** | **As   reclassified  2007** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|
| Non-controlling  interest |       | Ps.                                            | 208,212    |                 | Ps.        | (208,212                    | )          | Ps. | — |   |
| Equity                    |       | 8,627,504                                      |       | 208,212              |       | 8  835,716                  |       |
| Net  income               |       | 1,667,234                                      |       | 128,612              |       | 1,795,846                   |       |
|                           |            |                                                |            |                      |            |                             |            |  |  |  |

 

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**a.****         ****Reconciliation of Consolidated Net Income for the Year**

 
| ** **                                                                                     | ** ** | **2009**       | ** **    | **2008********(reclassified)** | ** ** | **2****007********(reclassified)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------|---------------|--------------------------------|------------|------------------------------------|------------|
| Consolidated net income  according to MFRS                                                     | ** ** | **Ps.**        | **1,829,927** |                           | Ps.        | 1,619,007                          |       | Ps. | 2,361,678 |   |
|                                                                                           |       |           |          |                           |       |                               |       |
| US GAAP adjustments:                                                                           |       |           |          |                           |       |                               |       |
| Reversal of revenue  recognized under percentage-of-completion method of accounting (Note 27a) | ** ** | **(1,767,542** | **)**         | (3,957,078                     | )          | (2,366,873                         | )          |
| Reversal of cost  recognized under percentage-of-completion method of accounting (Note 27a)    | ** ** | **1,214,675**  |          | 2,617,373                      |       | 1,608,498                          |       |
| Amortization of backlog  (Notes 27e)                                                           |       | —         |          | —                         |       | (16,747                            | )          |
| Labor obligations (Note 27h)                                                                   | ** ** | **(6,692**     | )             | 11,109                         |       | (17,416                            | )          |
| Capitalization of interest  (Note 27k)                                                         | ** ** | **159,215**    |          | (203,914                       | )          | (261,734                           | )          |
| Deferral of unsecured  homebuyers’ receivables                                            | ** ** | **(37,712**    | **)**         | (8,705                         | )          | 3,451                              |       |
| Deferral of future involvement                                                                 | ** ** | **(365**       | **)**         | 3,529                          |       | 2,119                              |       |
| Prepaid sales commissions  (Note 27j)                                                          | ** ** | **32,337**     |          | 71,449                         |       | 36,825                             |       |
| Fair value adjustment to  financial instruments (Note 27i)                                     |       | **(72,285**    | **)**         | —                         |       | —                             |       |
| Other items                                                                                    |       | —         |          | 29,667                         |       | —                             |       |
| Effects of inflation on US  GAAP adjustments                                                   |       | —         |          | —                         |       | 203,634                            |       |
| Total US GAAP adjustments  before tax effects                                                  | ** ** | **(478,369**   | **)**         | (1,436,570                     | )          | (808,243                           | )          |
| Tax effects on US GAAP  adjustments                                                            | ** ** | **148,448**    |          | 423,476                        |       | 242,411                            |       |
| Total US GAAP adjustments                                                                      | ** ** | **(329,921**   | **)**         | (1,013,094                     | )          | (565,832                           | )          |
|                                                                                           |       |           |          |                           |       |                               |       |
| Net income according to US  GAAP                                                               | ** ** | **Ps.**        | **1,500,006** |                           | Ps.        | 605,913                            |       | Ps. | 1,795,846 |   |

 

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**b.****            ****Reconciliation of Consolidated Equity**

 
| ** **                                                                                     | ** ** | **2009**        | ** **     | **2008********(reclassified)** | ** ** | **2007********(reclassified)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|----------------|--------------------------------|------------|--------------------------------|------------|
| Consolidated equity  according to MFRS                                                         | ** ** | **Ps.**         | **13,222,963** |                           | Ps.        | 11,517,257                     |       | Ps. | 9,841,130 |   |
| US GAAP adjustments:                                                                           |       |            |           |                           |       |                           |       |
| Reversal of revenue recognized  under percentage-of-completion method of accounting (Note 27a) | ** ** | **(12,604,856** | **)**          | (10,837,314                    | )          | (6,880,237                     | )          |
| Reversal of cost  recognized under percentage-of-completion method of accounting (Note 27a)    | ** ** | **9,152,646**   |           | 7,937,971                      |       | 5,320,597                      |       |
| Backlog (Note 27e)                                                                             | ** ** | **(237,001**    | **)**          | (237,001                       | )          | (237,001                       | )          |
| Labor obligations (Note 27h)                                                                   | ** ** | **(23,442**     | **)**          | (31,589                        | )          | (67,175                        | )          |
| Prepaid sales commissions  (Note 27j)                                                          | ** ** | **227,566**     |           | 195,229                        |       | 123,782                        |       |
| Deferral of unsecured  homebuyers’ receivables of the year                                | ** ** | **(109,328**    | **)**          | (71,616                        | )          | (62,911                        | )          |
| Deferral of future involvement                                                                 | ** ** | **(2,291**      | **)**          | (1,926                         | )          | (5,455                         | )          |
| Acquisition  of non controlling interest                                                       | ** ** | **79,437**      |           | 79,437                         |       | 79,437                         |       |
| Fair value adjustment to  financial instruments (Note 27i)                                     | ** ** | **(72,285**     | )              | —                         |       | —                         |       |
| Capitalization of interest  (Note 27k)                                                         | ** ** | **173,808**     |           | 14,593                         |       | 218,506                        |       |
| Goodwill, net (Note 27g)                                                                       | ** ** | **86,754**      |           | 86,754                         |       | 86,754                         |       |
| Total US GAAP adjustments  before tax effects                                                  | ** ** | **(3,328,992**  | **)**          | (2,865,462                     | )          | (1,423,703                     | )          |
| Tax effects on US GAAP  adjustments                                                            | ** ** | **990,214**     |           | 841,766                        |       | 418,289                        |       |
| Total US GAAP adjustments                                                                      | ** ** | **(2,338,778**  | **)**          | (2,023,696                     | )          | (1,005,414                     | )          |
|                                                                                           |       |            |           |                           |       |                           |       |
| Equity according to US  GAAP                                                                   | ** ** | **Ps.**         | **10,884,185** |                           | Ps.        | 9,493,561                      |       | Ps. | 8,835,716 |   |

 

**c.****         ****Reconciliation of Consolidated Comprehensive Income**

 
| ** **                                 | ** ** | **2009**     | ** **    | **2008************(reclassified)** | ** ** | **2007************(reclassified)** | ** ** |
|--------------------------------------------|------------|--------------|---------------|------------------------------------|------------|------------------------------------|------------|
| Consolidated net income  according to MFRS | ** ** | **Ps.**      | **1,829,927** |                               | Ps.        | 1,619,007                          |       | Ps. | 2,361,678 |   |
|                                       |       |         |          |                               |       |                               |       |
| Comprehensive income adjustments           | ** ** | **(42,400**  | **)**         | 23,362                             |       | (481                               | )          |
|                                       |       |         |          |                               |       |                               |       |
| Labor obligations                          | ** ** | **14,838**   |          | 28,570                             |       | (22,896                            | )          |
|                                       |       |         |          |                               |       |                               |       |
| Financial instruments                      | ** ** | **(87,872**  | **)**         | —                             |       | —                             |       |
|                                       |       |         |          |                               |       |                               |       |
| Net US GAAP adjustments:                   |       |         |          |                               |       |                               |       |
| Net income                                 | ** ** | **(329,921** | **)**         | (1,013,094                         | )          | (565,832                           | )          |
|                                       |       |         |          |                               |       |                               |       |
| Comprehensive income  according to US GAAP | ** ** | **Ps.**      | **1,384,572** |                               | Ps.        | 657,845                            |       | Ps. | 1,772,469 |   |

 

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**d.****                           ****Condensed Consolidated BalanceSheets according to US GAAP**

 
| ** **                    | ** ** | **2009**       | ** **     | **2008********(reclassified)** | ** ** |
|-------------------------------|------------|----------------|----------------|--------------------------------|------------|
| **Assets**                    |       |           |           |                           |       |
| Current assets                | ** ** | **Ps.**        | **18,389,873** |                           | Ps.        | 18,052,424 |   |
| Land for development          | ** ** | **10,912,389** |           | 9,254,469                      |       |
| Property and equipment        | ** ** | **1,110,582**  |           | 1,402,928                      |       |
| Goodwill                      | ** ** | **650,344**    |           | 650,344                        |       |
| Other assets                  | ** ** | **550,064**    |           | 1,414,114                      |       |
|                          |       |           |           |                           |       |
| Total assets                  | ** ** | **Ps.**        | **31,613,252** |                           | Ps.        | 30,774,279 |   |
|                          |       |           |           |                           |       |
| **Liabilities and equity**    |       |           |           |                           |       |
| Current liabilities           | ** ** | **Ps.**        | **10,625,255** |                           | Ps.        | 14,274,161 |   |
| Long-term liabilities         | ** ** | **10,103,812** |           | 7,006,557                      |       |
| Equity                        | ** ** | **10,884,185** |           | 9,493,561                      |       |
|                          |       |           |           |                           |       |
| Total liabilities and  equity | ** ** | **Ps.**        | **31,613,252** |                           | Ps.        | 30,774,279 |   |

 

**e.                            Condensed Consolidated Statements of Operations according to US GAAP**

 
| ** **                                                                           | ** ** | **2009**       | ** **     | **2008  (reclassified)** | ** ** | **2007  (reclassified)** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------|----------------|--------------------------|------------|--------------------------|------------|
| Revenues                                                                             | ** ** | **Ps.**        | **17,615,888** |                     | Ps.        | 14,884,701               |       | Ps. | 13,849,728 |   |
| Costs                                                                                | ** ** | **12,658,080** |           | 10,398,464               |       | 9,814,725                |       |
| Gross profit                                                                         | ** ** | **4,957,808**  |           | 4,486,237                |       | 4,035,003                |       |
| Operating income                                                                     | ** ** | **2,527,445**  |           | 2,108,793                |       | 2,116,650                |       |
| Income before income taxes                                                           | ** ** | **2,534,550**  |           | 894,612                  |       | 2,504,715                |       |
| Income taxes                                                                         | ** ** | **1,034,544**  |           | 288,699                  |       | 708,869                  |       |
| Consolidated net income  according to US GAAP                                        | ** ** | **Ps.**        | **1,500,006**  |                     | Ps.        | 605,913                  |       | Ps. | 1,795,846 |   |
| Less: income attributable  to the non-controlling interests                          | ** ** | **(11,351**    | **)**          | 38,131                   |       | 128,612                  |       |
| Net income attributable to  the controlling interests                                |       | **Ps.**        | **1,511,357**  |                     | Ps.        | 567,782                  |       | Ps. | 1,667,234 |   |
| Consolidated net income  according to US GAAP                                        | ** ** | **Ps.**        | **1,500,006**  |                     | Ps.        | 605,913                  |       | Ps. | 1,795,846 |   |
| Other comprehensive income                                                           | ** ** | **(115,435**   | **)**          | 51,932                   |       | (23,377                  | )          |
| Consolidated  comprehensive income                                                   | ** ** | **1,384,571**  | ** **     | 657,845                  |       | 1,772,469                |       |
| Less: comprehensive income  attributable to the non-controlling interest             | ** ** | **(11,351**    | **)**          | 38,131                   |       | 128,612                  |       |
| Comprehensive income  attributable to the controlling interest                       | ** ** | **Ps.**        | **1,395,922**  |                     | Ps.        | 619,714                  |       | Ps. | 1,643,857 |   |
| Weighted average shares  outstanding (in thousands)                                  | ** ** | **334,830**    |           | 334,870                  |       | 335,688                  |       |
| Earnings per share of  controlling interest according to US GAAP (basic and diluted) | ** ** | **Ps.**        | **4.51**       |                     | Ps.        | 1.70                     |       | Ps. | 4.96 |   |

 

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**f.                           Condensed statements of cash flows according to US GAAP**

 

Under MFRS, statements of changes in financialposition identify the sources and uses of resources based on the differencesbetween beginning and ending consolidated financial statement balances inconstant pesos. Monetary position results and unrealized foreign exchangeresults are treated as cash items in the determination of resources provided byoperations. Under US GAAP (ASC230), statements of cash flows present only cashitems and exclude non-cash items. ASC 230 does not provide guidance withrespect to inflation-adjusted financial statements. The differences betweenMFRS and US GAAP in the amounts reported are mainly due to: (i) thetreatment of restrictive cash balances, (ii) elimination of inflationaryeffects of monetary assets and liabilities from financing and investingactivities against the corresponding monetary position result in operatingactivities, and (iii) the recognition in operating, financing andinvesting activities of the US GAAP adjustments, and the presentation of short-termdebt activity with financing activities.

 

The following cash flow statements were prepared inaccordance with ASC230 provided by operating, financing and investingactivities, giving effect to the US GAAP adjustments, excluding the effect ofinflation required by Bulletin B-10. The following information is presented inthousands of historical pesos and is not presented in pesos of constantpurchasing power:

 

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| ** **                                                 | ** ** | **2009**       | ** **    | **2008********(reclassified)** | ** ** | **2007********(reclassified)** | ** ** |
|------------------------------------------------------------|------------|----------------|---------------|--------------------------------|------------|--------------------------------|------------|
| Operating activities:                                      |       |           |          |                           |       |                           |       |
| Adjusted consolidated net income                           | ** ** | **Ps.**        | **1,500,006** |                           | Ps.        | 605,913                        |       | Ps. | 1,795,846 |   |
| Non-cash items:                                            |       |           |          |                           |       |                           |       |
| Depreciation                                               | ** ** | **371,402**    |          | 323,727                        |       | 175,717                        |       |
| Deferred income tax and  statutory profit-sharing          | ** ** | **781,178**    |          | 150,191                        |       | 575,996                        |       |
| Share-based payment transactions                           | ** ** | **10,638**     |          | —                         |       | —                         |       |
| Amortization                                               | ** ** | **91,054**     |          | 91,054                         |       | 106,566                        |       |
| Exchange (gain) loss                                       | ** ** | **(184,346**   | **)**         | 715,500                        |       | 20,000                         |       |
| Change in valuation  effects of derivative instruments     | ** ** | **66,451**     |          | 313,962                        |       | (139,749                       | )          |
| Changes in operating  assets and liabilities               | ** ** | **(2,964,381** | **)**         | (6,003,726                     | )          | (1,952,405                     | )          |
| Net cash flows (used in)  provided by operating activities | ** ** | **(327,998**   | **)**         | (3,803,379                     | )          | 581,971                        |       |
|                                                       |       |           |          |                           |       |                           |       |
| Investing activities:                                      | ** ** |           |          |                           |       |                           |       |
| Investments in:                                            | ** ** |           |          |                           |       |                           |       |
| Property and equipment                                     | ** ** | **(95,465**    | **)**         | (575,379                       | )          | (680,748                       | )          |
| Restricted cash                                            | ** ** | **(1,297**     | **)**         | 28,045                         |       | (119,855                       | )          |
| Net cash flows used in  investing activities               | ** ** | **(96,762**    | **)**         | (547,334                       | )          | (800,603                       | )          |
|                                                       |       |           |          |                           |       |                           |       |
| Financing activities:                                      |       |           |          |                           |       |                           |       |
| Short-term (payments)  borrowings, net                     | ** ** | **(1,672,256** | **)**         | 1,143,732                      |       | —                         |       |
| Proceeds from long-term  borrowings                        | ** ** | **4,168,004**  |          | 2,377,795                      |       | 2,647,276                      |       |
| Repayments of long-term  borrowings                        | ** ** | **(84,468**    | **)**         | (237,508                       | )          | (2,408,739                     | )          |
| Shares repurchased for  employee stock option plan         | ** ** | **(4,586**     | **)**         | —                         |       | (99,342                        | )          |
| Dividends paid by subsidiary                               | ** ** | **—**     |          | —                         |       | (9,133                         | )          |
| Net cash flows provided by  financing activities           | ** ** | **2,406,694**  |          | 3,284,019                      |       | 130,062                        |       |
|                                                       |       |           |          |                           |       |                           |       |
| Net increase (decrease) in  cash and cash equivalents      | ** ** | **1,981,934**  |          | (1,066,694                     | )          | (88,570                        | )          |
| Cash and cash equivalents  at the beginning of the year    | ** ** | **1,140,140**  |          | 2,206,834                      |       | 2,295,404                      |       |
| Cash and cash equivalents  at the end of the year          | ** ** | **Ps.**        | **3,122,074** |                           | Ps.        | 1,140,140                      |       | Ps. | 2,206,834 |   |
|                                                       |       |           |          |                           |       |                           |       |
| Supplemental cash flow information:                        |       |           |          |                           |       |                           |       |
| Interest paid                                              | ** ** | **Ps.**        | **874,911**   |                           | Ps.        | 665,807                        |       | Ps. | 399,943 |   |
| Income tax paid                                            | ** ** | **Ps.**        | **16,403**    |                           | Ps.        | 123,351                        |       | Ps. | 132,873 |   |
| Income tax recovered                                       | ** ** | **Ps.**        | **59,675**    |                           | Ps.        | —                         |       | Ps. | — |   |
| Non-cash financing activities:                             |       |           |          |                           |       |                           |       |
| Capital lease obligation incurred                          | ** ** | **Ps.**        | **47,035**    |                           | Ps.        | 97,131                         |       | Ps. | 350,331 |   |

 

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**g.          Consolidated Statements of Changes in Equity according to US GAAP**

** **
| ** **                                        | ** ** | **Common  Stock** | ** **  | **Additional  paid-in capital** | ** ** | **Treasury  stock (Note  16)** | ** ** | **Retained  earnings** | ** **   | **Other  comprehensive  income** | ** ** | **Equity of  non-  controlling  interest** | ** ** | **Equity** | ** **   | **Comprehensive  income of the  year** | ** ** |
|---------------------------------------------------|------------|-------------------|-------------|---------------------------------|------------|--------------------------------|------------|------------------------|--------------|----------------------------------|------------|--------------------------------------------|------------|------------|--------------|----------------------------------------|------------|
| Balances as of January 1, 2007               |       | Ps.               | 528,011     |                            | Ps.        | 3,280,222                      |       | Ps.                    | —       |                             | Ps.        | 3,296,218                                  |       | Ps.        | (21,462      | )                                      | Ps.        | 79,600 |   | Ps. | 7,162,589 |   | Ps. |   |   |
| Shares repurchased for employee stock option plan |       |              |        |                            |       | (99,342                        | )          |                   |         |                             |       |                                       |       | (99,342    | )            |                                   |       |
| Comprehensive income adjustment                   |       |              |        |                            |       |                           |       |                   |         | (481                             | )          |                                       |       | (481       | )            | (481                                   | )          |
| Labor obligations                                 |       |              |        |                            |       |                           |       |                   |         | (22,896                          | )          |                                       |       | (22,896    | )            | (22,896                                | )          |
| Net income                                        |       |              |        |                            |       |                           |       | 1,667,234              |         |                             |       | 128,612                                    |       | 1,795,846  |         | 1,795,846                              |       |
| Balances as of December 31, 2007             |       | 528,011           |        | 3,280,222                       |       | (99,342                        | )          | 4,963,452              |         | (44,,839                         | )          | 208,212                                    |       | 8,835,716  |         | 1,772,469                              |       |
| Comprehensive income adjustment                   |       |              |        |                            |       |                           |       |                   |         | 23,362                           |       |                                       |       | 23,362     |         | 23,362                                 |       |
| Labor obligations                                 |       |              |        |                            |       |                           |       |                   |         | 28,570                           |       |                                       |       | 28,570     |         | 28,570                                 |       |
| Net income                                        |       |              |        |                            |       |                           |       | 567,782                |         |                             |       | 38,131                                     |       | 605,913    |         | 605,913                                |       |
| Balances as of December 31, 2008             |       | 528,011           |        | 3,280,222                       |       | (99,342                        | )          | 5,531,234              |         | 7,093                            |       | 246,343                                    |       | 9,493,561  |         | 657,845                                |       |
| Shares repurchased for stock option plan          |       |              |        |                            |       | (4,586                         | )          |                   |         |                             |       |                                       |       | (4,586     | )            |                                   |       |
| Share-based compensation transactions             |       |              |        | 10,638                          |       |                           |       |                   |         |                             |       |                                       |       | 10,638     |         |                                   |       |
| Changes in fair value of derivative instruments   |       |              |        |                            |       |                           |       |                   |         | (87,872                          | )          |                                       |       | (87,872    | )            | (87,872                                | )          |
| Labor obligations                                 |       |              |        |                            |       |                           |       |                   |         | 14,838                           |       |                                       |       | 14,838     |         | 14,838                                 |       |
| Net income                                        |       |              |        |                            |       |                           |       | 1,511,357              |         | (42,400                          | )          | (11,351                                    | )          | 1,457,606  |         | 1,457,606                              |       |
| **Balances  as of December 31, 2009**        | ** ** | **Ps.**           | **528,011** | ** **                      | **Ps.**    | **3,290,860**                  | ** ** | **Ps.**                | **(103,928** | **)**                            | **Ps.**    | **7,042,591**                              | ** ** | **Ps.**    | **(108,341** | **)**                                  | **Ps.**    | **234,992** | ** ** | **Ps.** | **10,884,185** | ** ** | **Ps.** | **1,384,572** | ** ** |

 

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**29.                              Additional US GAAP disclosure information**

 

**a) Accounting for uncertainty inincome taxes**

 

The Company adopted the provisions of ASC740 (formerlyFASB Interpretation No. 48,”Accounting for Uncertainty in Income Taxes”(FIN48) as of January 1, 2007). The adoption of ASC740 did not have animpact on the Company’s financial statements and did not result in a cumulativeadjustment to retained earnings at adoption,

 

The Company establishes reserves to remove some or allof the tax benefit of any of tax positions at the time it determines that itbecomes uncertain based upon one of the following conditions: (1) the tax positionis not “more likely than not” to be sustained, (2) the tax position is “morelikely than not” to be sustained, but for a lesser amount, or (3) the taxposition is “more likely than not” to be sustained, but not in the financialperiod in which the tax position was originally taken.

 

For purposes of evaluating whether or not a taxposition is uncertain, (1) the Company presumes the tax position will beexamined by the relevant taxing authority that has full knowledge of allrelevant information, (2) the technical merits of a tax position arederived from authorities such as legislation and statutes, legislative intent,regulations, rulings and case law and their applicability to the facts andcircumstances of the tax position, and (3) each tax position is evaluatedwithout consideration of the possibility of offset or aggregation with othertax positions taken.

 

A number of years may elapse before a particularuncertain tax position is audited and finally resolved or when a tax assessmentis raised. The number of years subject to tax assessments varies depending onthe tax jurisdiction and is generally five years for the countries in which theCompany principally operates. The tax benefit that has been previously reservedbecause of a failure to meet the “more likely than not” recognition thresholdwould be recognized in our income tax expense in the first period when theuncertainty disappears under any one of the following conditions: (1) thetax position is “more likely than not” to be sustained, (2) the taxposition, amount, and/or timing is ultimately settled through negotiation orlitigation, or (3) the statute of limitations for the relevant taxingauthority to examine and challenge the tax position has expired.

 

**b) Recent accounting pronouncements**

 

***U.S. GAAP***

 

The most relevant US GAAP standards that came intoforce in each of the three years ended December 31, 2009 are describedbelow:

 

**In2009:**

 

***ASC 810.10 (formerly FAS 160)***

 

In December 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160,“Non-controlling Interest in Consolidated Financial Statements — an amendmentof ARB No. 51” (“FAS 160”). FAS 160 was codified as a component of ASC810.10. ASC 810.10 requires non-controlling interests held by parties otherthan the parent in subsidiaries to be clearly identified, labeled, andpresented in the consolidated statements of financial position within equity,but separate from the parent’s equity.

 

This new guidance is effective for fiscal yearsbeginning after December 15, 2008. The Company’s US GAAP financialinformation included in Note 28 has been retrospectively adjusted for allperiods to reflect the adoption of ASC 810.10.

 

***ASC 805.10 (formerly FAS 141 (R))***

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 141 (revised 2007), “BusinessCombinations” (“FAS 141 (R)”). FAS 141 (R) was a revision of FAS 141 andwas codified as a component of ASC 805.10. This new guidance requires thatcosts incurred to effect the acquisition (i.e., acquisition-related cost) berecognized separately from the acquisition. In addition, restructuring coststhat the acquirer expected but was not obligated to incur, which includedchanges to benefit plans, were recognized as if they were a liability assumedat the acquisition date. This new guidance requires the acquirer to recognizethose costs separately from the business combination. This new guidance iseffective for the Company in 2009, and did not have any impact on the Company’sconsolidated financial statements, primarily as no acquisitions occurred duringthe year.

 

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***ASC 815.10 (formerly FAS 161)***

 

In March 2008, the FASB issued Statement ofFinancial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of FASB Statement No. 133”(“FAS 161”). FAS 161 was codified as a component of ASC 815.10. This newguidance requires enhanced disclosures about an entity’s derivatives andhedging activities to improve the transparency of financial reporting. It iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008. This new guidance increases year enddisclosures but did not have an impact on the Company’s consolidated financialposition and results of operations.

 

***ASC 350.10 (formerly FSP FAS 142-3)***

 

In April 2008, the FASB issued FASB StaffPosition FAS 142-3, “Determination of the Useful Life of Intangible Assets”(“FSP FAS 142-3”). FSP FAS 142-3 was codified as a component of ASC 350. Thisnew guidance amends the factors that should be considered in developing renewalor extension assumptions used to determine the useful life of a recognizedintangible asset. The new guidance is effective for financial statements issuedfor fiscal years beginning after December 15, 2008. This pronouncement didnot have any impact on the Company’s financial position and results ofoperation.

 

***ASC 323.10 (formerly EITF 08-6)***

 

In November 2008, the Emerging Issues Task Force(EITF) reached a consensus on EITF 08-6, “Equity Method Investment AccountingConsiderations”. EITF 08-6 was codified as a component of ASC 323.10. This newguidance provides guidance on the application of the equity method. It statesequity-method investments should be recognized using a cost accumulation model.Also, it requires that equity method investments as a whole be assessed forother-than-temporary impairments. This new guidance is effective on aprospective basis for transactions in an investee’s shares occurring orimpairments recognized in fiscal years beginning on or after December 15,2008.   During the years ended December 31,2009, the Company’s equity method investments did not represent a significantcomponent of its operations. Accordingly, the adoption of this EITF did nothave a significant impact on its consolidated financial statements.

 

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***ASC 350.30 (formerly EITF 08-7)***

 

In November 2008, the EITF reached a consensus onEITF 08-7 “Accounting for Defensive Intangible Assets”. EITF 08-7 was codifiedas a component of ASC 350.30. This new guidance provides that intangible assetsthat an acquirer intends to use as defensive assets, intangible assets acquiredin a business combination or an asset acquisition that an entity does notintend to actively use but does intend to prevent others from using, are aseparate unit of account from the existing intangible assets of the acquirer.It also states that a defensive intangible asset should be amortized over theperiod that fair value of the defensive intangible asset diminishes. This newguidance is effective on a prospective basis for transactions occurring infiscal years beginning on or after December 15, 2008. This new guidancedid not have any  impact on the Company’sconsolidated financial position and results of operations.

 

***ASC 855 (formerly FAS 165)***

 

In May 2009, the FASB issued ASC 855, “SubsequentEvents”. ASC 855 establishes general standards of accounting for and disclosureof events that occur after the balance sheet date but before financialstatements are issued or are available to be issued. In particular, ASC 855sets forth (1) the period after the balance sheet date during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements,(2) the circumstances under which an entity should recognize events ortransactions occurring after the balance sheet date in its financial statementsand (3) the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date. In accordance with ASC855, an entity should apply the requirements to annual financial periods endingafter June 15, 2009. Subsequent events have been considered through thefinancial statement approval date specified in Note 1 above.

 

**In2008:**

 

***ASC 820.10 (formerly FAS 157)***

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 was codified as a component of ASC 820.10. This guidance defines fair value, establishes a frameworkfor the measurement of fair value, and enhances disclosures about fair valuemeasurements. The statement does not require any new fair value measures.

 

The statement is effectivefor fair value measures already required or permitted by other standards forfiscal years beginning after November 15, 2007 and it is required to beapplied prospectively, except for certain financial instruments. Any transitionadjustment will be recognized as an adjustment to opening retained earnings inthe year of adoption. When adopted in 2008, this guidance did not have an impact on the Company’s consolidated financial position andresults of operations at adoption.

 

***ASC 820.10 (formerly FSP 157-3)***

 

In October 2008, theFASB issued FASB Staff Position 157-3, “Determining the Fair Value of aFinancial Assets When the Market of that Asset is not Active” (FSP 157-3). FSP157-3 was codified as a component of ASC 820.10. This new guidance provides anexample that clarifies and reiterates certain provisions of the existing fairvalue standard, including basing fair value on orderly transactions and usageof management and broker inputs. This new guidance was effective immediatelyand did not have a material impact on financial position or results ofoperations of the Company.

 

***ASC 825.10 (formerly FAS 159)***

 

In February 2007, theFASB issued FASB Statement No. 159, The Fair Value Option for FinancialAssets and Financial Liabilities (the “Statement” or “Statement 159”). FAS 159was codified as a component of ASC 825.10. This guidance allows entities tovoluntarily choose, at specified election dates, to measure many financialassets and financial liabilities (as well as certain nonfinancial instrumentsthat are similar to financial instruments) at fair value (the “fair valueoption”, or “FVO”). The election is made on an instrument-by-instrument basisand is irrevocable. If the fair value option is elected for an instrument, theStatement specifies that all subsequent changes in fair value for thatinstrument shall be reported in earnings (or another performance indicator forentities such as not-for-profit organizations that do not report earnings).

 

The fair value option willmitigate some of the volatility in reported earnings that results from the useof different measurement attributes to account for financial assets andfinancial liabilities. By electing the fair value option, an entity can achieveconsistent accounting for related assets and liabilities without having toapply complex hedge accounting provisions.

 

Statement 159 requiresextensive disclosures whose primary objective is to facilitate comparison amongentities that choose different measurement attributes for similar assets andliabilities, as well as, comparison of similar assets and liabilities for whichan individual entity selects different measurement attributes.

 

The Statement is effectiveas of the beginning of an entity’s first fiscal year that begins after November 15,2007 (January 1, 2008 for the Company). The Company did not elect the Fair ValueOption for any of its financial assets

 

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or liabilities, andtherefore, the adoption of ASC 825.10 in 2008 had no impact on the Company’sfinancial position, results of operations or cash flows at adoption.

 

**In 2007:**

 

***ASC 740.10 Income taxes (formerly FIN 48)***

 

The Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48) as of January 1, 2007.  FIN 48 was codified as a component of ASC740.10. FIN48 clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with ASC 740.20 Income taxes,(formerly FAS 109). The adoption of FIN 48 in 2007 did not have an impact onthe Company’s financial statements and did not result in a cumulativeadjustment to retained earnings at adoption.

 

The most relevant US GAAP standards that have yetto come into force are described below.  The Company is currently in the process of evaluating the impact thatthese new pronouncements will have on its consolidated financial statements.

 

***ASC 715.20 (formerly FSP FAS 132(R)-1)***

*** ***

In December 2008, the FASB issued FASB StaffPosition FAS 132(R)-1, “Employers ́ Disclosures about Postretirement BenefitPlan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 was codified as a componentof ASC 715. This new guidance amends previous US GAAP in that this guidancereplaces the requirement to disclose the percentage of fair value of total planassets with a requirement to disclose the fair value of each major assetcategory. It also clarifies that defined benefits pension or otherpostretirement plan assets not subject to certain disclosure requirements. Thisnew guidance is effective for fiscal years ending after December 2009.

 

***ASC 860.10 (formerly FAS 166)***

 

FASB Statement No. 166 “Accounting for Transfersof Financial Assets - an amendment of FASB Statement No. 140” (“FAS 166”)was codified as a component of ASC 860. ASC 860 provides for removal of the concept of a qualifyingspecial-purpose entity and removes the exception from applying variableinterest entity accounting, to qualifying special-purpose entities. It alsoclarifies that one objective of US GAAP is to determine whether a transferorand all of the entities included in the transferor’s financial statements beingpresented have surrendered control over transferred financial assets. ASC 860modifies the financial-components approach used in US GAAP and limits thecircumstances in which a financial asset, or portion of a financial asset,should be derecognized when the transferor has not transferred the entireoriginal financial asset to an entity that is not consolidated with thetransferor in the financial statements being presented and/or when thetransferor has continuing involvement with the transferred financial asset. ASC860 also defines the term participating interest to establish specific conditionsfor reporting a transfer of a portion of a financial asset as a sale.

 

ASC 860 requires that a transferor recognize andinitially measure at fair value all assets obtained (including a transferor’sbeneficial interest) and liabilities incurred as a result of a transfer offinancial assets accounted for as a sale. Enhanced disclosures are alsorequired by ASC 860. This new guidance must be applied as of the beginning ofeach reporting entity’s first annual reporting period that begins after November 15,2009. This guidance must be applied to transfers occurring on or after theeffective date.

 

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***ASC 810.10 (formerly FAS 167 )***

 

FAS 167 was codified as a component of ASC 810. TheFASB’s objective in issuing this new guidance was to improve financialreporting by enterprises involved with variable interest entities. The Boardundertook this project to address (1) the effects on certain provisions ofASC 810 (formerly FIN 46R “Consolidation of Variable Interest Entities”(“FIN46R”)), as a result of the elimination of the qualifying special-purpose entityconcept in FAS 166, and (2) constituent concerns about the application ofcertain key provisions, including those in which the accounting anddisclosures  under previous guidance donot always provide timely and useful information about an enterprise’sinvolvement in a variable interest. The new guidance shall be effective as ofthe beginning of each reporting entity’s first annual reporting period thatbegins after November 15, 2009. Earlier application is prohibited.

 

***ASC 505 — ASU 2010-01***

 

InJanuary 2010, the FASB issued ASU 2010-01, “Accounting for Distributionsto Shareholders with  Components of Stockand Cash.” The ASU clarifies when the stock portion of a distribution allowsshareholders to elect to receive cash or stock, with a potential limitation onthe total amount of cash which all shareholders could elect to receive in theaggregate, the distribution would be considered a share issuance as opposed toa stock dividend and the share issuance would be reflected in earnings pershare prospectively.

 

**30.         Valuation and qualifying accounts for the years ended December 31, 2009,2008 and 2007**

 
| **Description**                                                                | ** ** | **Beginning  balance  accrual** | ** ** | **Additions  charged to  income** | ** ** | **Writte-off** | ** ** | **Ending  balance  accrual** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|----------------|------------|------------------------------|------------|
|                                                                           |       |                            |       |                                   |       |           |       |                         |       |
| Allowance for doubtful accounts                                                |       |                            |       |                                   |       |           |       |                         |       |
| 2009                                                                           |       | Ps.                             | 48,184     |                                   | Ps.        | 26,968         |       | Ps.                          | (17,873    | ) | Ps. | 57,279 |   |
| 2008                                                                           |       | 89,318                          |       | 29,173                                 |       | (70,307        | )          | 48,184                       |       |
| 2007                                                                           |       | 73,554                          |       | 115,572                                |       | (99,808        | )          | 89,318                       |       |
|                                                                           |       |                            |       |                                   |       |           |       |                         |       |
| Allowance for doubtful  accounts sundry debtors included within current assets |       |                            |       |                                   |       |           |       |                         |       |
| 2009                                                                           |       | Ps.                             | 5,643      |                                   | Ps.        | 25,445         |       | Ps.                          | 1,891      |   | Ps. | 29,197 |   |
| 2008                                                                           |       | —                          |       | 29,098                                 |       | 23,455         |       | .                            | 5,643      |   |

 

**31.         Supplemental guarantor information**

 

**Supplemental guarantor information**

 

The Senior Guaranteed Notes due 2015 and 2019are fully and unconditionally guaranteed, on an unsecured senior, joint andseveral basis, by each of the Company’s significant subsidiaries. Each of theguarantor subsidiaries (for Senior Guaranteed Notes due 2015: ProyectosInmobiliarios de Culiacán, S. A. de C. V. (PICSA), Desarrollodora de Casas delNoroeste, S. A. de C. V. (DECANO), Casas Beta del Centro, S. de R.L. de C.V.(CBC), Casas Beta del Norte, S. de R.L. de C.V.,  Casas Beta del Noroeste, S. de R.L. de C.V.,Edificaciones Beta, S. de R.L. de C.V., 

 

 

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Edificaciones Beta del Norte, S. de R. L. deC.V. and Edificaciones Beta del Noroeste, S. de R.L. de C.V. and for SeniorGuaranteed Notes due 2019: PICSA, DECANO and CBC) is a wholly-owned subsidiary.The following condensed combining financial information includes the guarantorsubsidiaries, non-guarantor-subsidiaries and the parent company for both SeniorGuaranteed Notes 2005 and 2009. The wholly-owned guarantor subsidiaries columnincludes both the guarantors of our Senior Guaranteed Notes 2005 and theguarantors of our Senior Guaranteed Notes 2009.

 

Investments in subsidiaries are accounted for by theparent company under the equity method for purpose of the supplementalcombining presentation. Earnings of subsidiaries are therefore reflected in theparent company’s investment account and earnings. The principal eliminationentries eliminate the parent company’s investment in subsidiaries andintercompany balances and transactions.

 

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**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Balance Sheet as ofDecember 31, 2009**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                  | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **  | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                                      |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Currents assets:                                            |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Cash and cash equivalents                                   |       | Ps.                 | 1,568      |                                        | Ps.        | 2,986,406        |       | Ps.                                                                   | —      |                              | Ps.        | 2,987,974        |       | Ps.              | 134,100    |   | Ps. |   |   | Ps. | 3,122,074 |   |
| Restricted cash                                             |       | 6,533               |       |                                        |       |             |       | 6,533                                                                 |        | 122,809                           |       |             |       | 129,342          |       |
| Trade accounts  receivable, net                             |       |                |       | 11,906,929                                  |       |             |       | 11,906,929                                                            |        | 1,131,282                         |       |             |       | 13,038,211       |       |
| Accounts receivable from  affiliates                        |       | 7,716,083           |       | 15,831,862                                  |       | (23,062,610      | )          | 485,335                                                               |        | 4,130,235                         |       | (4,615,570       | )          |             |       |
| Inventories                                                 |       | 12,025              |       | 3,769,269                                   |       |             |       | 3,781,294                                                             |        | 226,080                           |       |             |       | 4,007,374        |       |
| Prepaid expenses and other current assets, net              |       | 10,927              |       | 281,640                                     |       | (64,555          | )          | 228,012                                                               |        | 332,322                           |       | (15,036          | )          | 545,298          |       |
| Total current assets                                        |       | 7,747,136           |       | 34,776,106                                  |       | (23,127,165      | )          | 19,396,077                                                            |        | 6,076,828                         |       | (4,630,606       | )          | 20,842,299       |       |
| Land held for future development                            |       |                |       | 10,741,650                                  |       |             |       | 10,741,650                                                            |        | 170,739                           |       |             |       | 10,912,389       |       |
| Property and equipment,  net                                |       |                |       | 716,059                                     |       |             |       | 716,059                                                               |        | 394,523                           |       |             |       | 1,110,582        |       |
| Investment in shares                                        |       | 14,277,083          |       | 216,755                                     |       | (13,937,163      | )          | 556,675                                                               |        | 190,802                           |       | (747,477         | )          |             |       |
| Other assets, net                                           |       | 195,714             |       | 23,287                                      |       |             |       | 219,001                                                               |        | 110,718                           |       | (5,326           | )          | 324,393          |       |
| Goodwill                                                    |       | 731,861             |       |                                        |       |             |       | 731,861                                                               |        |                              |       |             |       | 731,861          |       |
| Deferred income taxes                                       |       |                |       |                                        |       |             |       |                                                                  |        |                              |       | 643,640          |       | 643,640          |       |
| **Total**                                                   | ** ** | **Ps.**             | 22,951,794 | ** **                                  | **Ps.**    | 46,473,857       | ** ** | **Ps.**                                                               | (37,064,328 | )                                 | **Ps.**    | 32,361,323       | ** ** | **Ps.**          | 6,943,610  | ** ** | **Ps.** | (4,739,769 | ) | **Ps.** | 34,565,164 | ** ** |
|                                                        |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Liabilities and  stockholders’ equity                  |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Current liabilities:                                        |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Current debt and current portion of long-term debt          |       | Ps.                 | 85,588     |                                        | Ps.        | —           |       | Ps.                                                                   | —      |                              | Ps.        | 85,588           |       | Ps.              | 185,007    |   | Ps. | — |   | Ps. | 270,595 |   |
| Current portion of leases                                   |       |                |       | 99,858                                      |       |             |       | 99,858                                                                |        | 8,579                             |       |             |       | 108,437          |       |
| Trade accounts payable                                      |       | 14,385              |       | 1,937,583                                   |       |             |       | 1,951,968                                                             |        | 287,770                           |       | (6,257           | )          | 2,233,481        |       |
| Land suppliers                                              |       |                |       | 1,333,526                                   |       |             |       | 1,333,526                                                             |        | 4,700                             |       |             |       | 1,338,226        |       |
| Advances from customers                                     |       |                |       | 972,481                                     |       |             |       | 972,481                                                               |        | 305,329                           |       |             |       | 1,277,810        |       |
| Taxes other than income taxes                               |       | 153,242             |       | 286,858                                     |       | (5,726           | )          | 434,374                                                               |        | 328,433                           |       | (18,027          | )          | 744,780          |       |
| Due to related parties                                      |       | 1,188,949           |       | 21,873,661                                  |       | (23,062,610      | )          |                                                                  |        | 4,615,570                         |       | (4,615,570       | )          |             |       |
| Income taxes                                                |       | 7,589               |       | 172,620                                     |       | (58,829          | )          | 121,380                                                               |        | 20,298                            |       | 2,242            |       | 143,920          |       |
| Employee statutory  profit-sharing                          |       |                |       | 16,799                                      |       |             |       | 16,799                                                                |        | 190                               |       |             |       | 16,989           |       |
| Provision for uncertain tax positions                       |       |                |       | 240,460                                     |       |             |       | 240,460                                                               |        | 8,321                             |       |             |       | 248,781          |       |
| Total current liabilities                                   |       | 1,449,753           |       | 26,933,846                                  |       | (23,127,165      | )          | 5,256,434                                                             |        | 5,764,197                         |       | (4,637,612       | )          | 6,383,019        |       |
| Long-term debt                                              |       | 8,571,425           |       | 888,738                                     |       |             |       | 9,460,163                                                             |        |                              |       |             |       | 9,460,163        |       |
| Long-term leases                                            |       |                |       | 235,786                                     |       |             |       | 235,786                                                               |        | 18,893                            |       |             |       | 254,679          |       |
| Financial instruments                                       |       | 119,084             |       |                                        |       |             |       | 119,084                                                               |        |                              |       |             |       | 119,084          |       |
| Long-term land suppliers                                    |       |                |       | 14,368                                      |       |             |       | 14,368                                                                |        | 60,291                            |       |             |       | 74,659           |       |
| Employee benefit  obligations                               |       |                |       | 41,636                                      |       |             |       | 41,636                                                                |        | 44,450                            |       | 13,101           |       | 98,187           |       |
| Deferred income taxes                                       |       | 12,065              |       | 4,279,748                                   |       |             |       | 4,291,813                                                             |        | 78,411                            |       | 582,186          |       | 4,952,410        |       |
| Total liabilities                                           |       | 10,152,327          |       | 32,394,122                                  |       | (23,127,165      | )          | 19,419,284                                                            |        | 5,965,242                         |       | (4,042,325       | )          | 21,342,201       |       |
| Stockholders’ equity:                                  |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Common stock                                                |       | 528,011             |       | 4,288,789                                   |       | (4,288,789       | )          | 528,011                                                               |        | 995,558                           |       | (995,558         | )          | 528,011          |       |
| Additional paid-in  capital                                 |       | 3,288,761           |       |                                        |       |             |       | 3,288,761                                                             |        | (16,145                           | )          | 18,245           |       | 3,290,861        |       |
| Shares repurchased for employee stock option plan,  at cost |       | (103,928            | )          |                                        |       |             |       | (103,928                                                              | )           |                              |       |             |       | (103,928         | )          |
| Retained earnings                                           |       | 9,219,092           |       | 9,752,706                                   |       | (9,648,374       | )          | 9,323,424                                                             |        | 8,100                             |       | 18,469           |       | 9,349,993        |       |
| Derivative instruments                                      |       | (132,469            | )          |                                        |       |             |       | (132,469                                                              | )           |                              |       | 44,597           |       | (87,872          | )          |
| Other stockholders’  equity accounts                   |       |                |       | 38,240                                      |       |             |       | 38,240                                                                |        | (9,145                            | )          | (18,189          | )          | 10,906           |       |
| Stockholders’ equity of controlling interest           |       | 12,799,467          |       | 14,079,735                                  |       | (13,937,163      | )          | 12,942,039                                                            |        | 978,368                           |       | (932,436         | )          | 12,987,971       |       |
| Non-controlling interest in consolidated  subsidiaries      |       |                |       |                                        |       |             |       |                                                                  |        |                              |       | 234,992          |       | 234,992          |       |
| Total stockholders’  equity                            |       | 12,799,467          |       | 14,079,735                                  |       | (13,937,163      | )          | 12,942,039                                                            |        | 978,368                           |       | (697,444         | )          | 13,222,963       |       |
| Total liabilities and stockholders’ equity             | ** ** | **Ps.**             | 22,951,794 | ** **                                  | **Ps.**    | 46,473,857       | ** ** | **Ps.**                                                               | (37,064,328 | )                                 | **Ps.**    | 32,361,323       | ** ** | **Ps.**          | 6,943,610  | ** ** | **Ps.** | (4,739,769 | ) | **Ps.** | 34,565,164 | ** ** |

 

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**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Balance Sheet as ofDecember 31, 2008**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                         | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **      | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-----------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                             |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |       |
| Currents assets:                                   |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |       |
| Cash and cash equivalents                          |       | Ps.                 | 435        |                                        | Ps.        | 1,009,895        |       | Ps.                                                                   | —          |                              | Ps.        | 1,010,330        |       | Ps.              | 129,810    |   | Ps. |   |   | Ps. | 1,140,140 |   |
| Restricted cash                                    |       |                |       |                                        |       |             |       |                                                                  |            | 128,045                           |       |             |       | 128,045          |       |
| Trade accounts  receivable, net                    |       |                |       | 10,295,586                                  |       |             |       | 10,295,586                                                            |            | 1,549,944                         |       |             |       | 11,845,530       |       |
| Accounts receivable from  affiliates               |       | 4,809,186           |       | 10,427,108                                  |       | (14,631,078      | )          | 605,216                                                               |            | 2,313,820                         |       | (2,919,036       | )          |             |       |
| Inventories                                        |       | 6,374               |       | 4,984,524                                   |       |             |       | 4,990,898                                                             |            | 100,006                           |       |             |       | 5,090,904        |       |
| Other current assets, net                          |       | (91,819             | )          | 340,129                                     |       | (1,200           | )          | 247,110                                                               |            | 193,012                           |       | 3,044            |       | 443,166          |       |
| Total current assets                               |       | 4,724,176           |       | 27,057,242                                  |       | (14,632,278      | )          | 17,149,140                                                            |            | 4,414,637                         |       | (2,915,992       | )          | 18,647,785       |       |
| Land held for future development                   |       |                |       | 9,254,469                                   |       |             |       | 9,254,469                                                             |            |                              |       |             |       | 9,254,469        |       |
| Property and equipment,  net                       |       |                |       | 967,175                                     |       |             |       | 967,175                                                               |            | 435,753                           |       |             |       | 1,402,928        |       |
| Investment in shares                               |       | 11,655,349          |       | 356,495                                     |       | (11,105,966      | )          | 905,878                                                               |            | 42,380                            |       | (948,258         | )          |             |       |
| Other assets, net                                  |       | 275,949             |       | 48,748                                      |       |             |       | 324,697                                                               |            | 146,716                           |       | (3,044           | )          | 468,369          |       |
| Goodwill                                           |       | 731,861             |       |                                        |       |             |       | 731,861                                                               |            |                              |       |             |       | 731,861          |       |
| Deferred income taxes                              |       | 49,431              |       | 231,759                                     |       |             |       | 281,190                                                               |            | 47,408                            |       |             |       | 328,598          |       |
| **Total**                                          | ** ** | **Ps.**             | 17,436,766 | ** **                                  | **Ps.**    | 37,915,888       | ** ** | **Ps.**                                                               | (25,738,244     | )                                 | **Ps.**    | 29,614,410       | ** ** | **Ps.**          | 5,086,894  | ** ** | **Ps.** | (3,867,294 | ) | **Ps.** | 30,834,010 | ** ** |
|                                               |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |       |
| Liabilities and  stockholders’ equity         |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |       |
| Current liabilities:                               |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |       |
| Current debt and current portion of long-term debt |       | Ps.                 | 670,858    |                                        | Ps.        | 735,275          |       | Ps.                                                                   |            |                              | Ps.        | 1,406,133        |       | Ps.              | 11,271     |   | Ps. |   |   | Ps. | 1,417,404 |   |
| Current portion of leases                          |       |                |       | 89,255                                      |       |             |       | 89,255                                                                |            |                              |       |             |       | 89,255           |       |
| Trade accounts payable                             |       | 140,999             |       | 3,596,771                                   |       |             |       | 3,737,770                                                             |            | 268,083                           |       |             |       | 4,005,853        |       |
| Land suppliers                                     |       |                |       | 2,259,827                                   |       |             |       | 2,259,827                                                             |            | 66,209                            |       |             |       | 2,326,036        |       |
| Advances from customers                            |       |                |       | 139,440                                     |       |             |       | 139,440                                                               |            | 226,522                           |       |             |       | 365,962          |       |
| Taxes other than income taxes                      |       | 19,591              |       | 211,517                                     |       |             |       | 231,108                                                               |            | 126,713                           |       |             |       | 357,821          |       |
| Due to related parties                             |       | 120,575             |       | 14,510,545                                  |       | (14,631,120      | )          |                                                                  |            | 2,919,036                         |       | (2,919,036       | )          |             |       |
| Income taxes                                       |       | 7,588               |       | 2,023                                       |       | (1,160           | )          | 8,451                                                                 |            | 17,721                            |       |             |       | 26,172           |       |
| Provision for uncertain  tax positions             |       | —              |       | 102,969                                     |       | —           |       | 102,969                                                               |            | —                            |       | —           |       | 102,969          |       |
| Employee profit-sharing                            |       |                |       | 69,432                                      |       |             |       | 69,432                                                                |            | 1,013                             |       |             |       | 70,445           |       |
| Total current liabilities                          |       | 959,611             |       | 21,717,054                                  |       | (14,632,280      | )          | 8,044,385                                                             |            | 3,636,568                         |       | (2,919,036       | )          | 8,761,917        |       |
| Long-term debt                                     |       | 5,521,449           |       | 468,670                                     |       |             |       | 5,990,119                                                             |            |                              |       |             |       | 5,990,119        |       |
| Long-term leases                                   |       |                |       | 314,639                                     |       |             |       | 314,639                                                               |            |                              |       |             |       | 314,639          |       |
| Financial instruments                              |       |                |       |                                        |       |             |       |                                                                  |            | 18,403                            |       |             |       | 18,403           |       |
| Long-term land suppliers                           |       |                |       | 405,426                                     |       |             |       | 405,426                                                               |            |                              |       |             |       | 405,426          |       |
| Employee benefit  obligations                      |       |                |       | 44,187                                      |       |             |       | 44,187                                                                |            | 40,963                            |       |             |       | 85,150           |       |
| Deferred income taxes                              |       |                |       | 3,607,041                                   |       |             |       | 3,607,041                                                             |            | 134,058                           |       |             |       | 3,741,099        |       |
| Total liabilities                                  |       | 6,481,060           |       | 26,557,017                                  |       | (14,632,280      | )          | 18,405,797                                                            |            | 3,829,992                         |       | (2,919,036       | )          | 19,316,753       |       |
| Stockholders’ equity:                         |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |       |
| Common stock                                       |       | 528,011             |       | 2,683,789                                   |       | (2,683,789       | )          | 528,011                                                               |            | 704,018                           |       | (704,018         | )          | 528,011          |       |
| Additional paid-in  capital                        |       | 3,280,223           |       |                                        |       |             |       | 3,280,223                                                             |            |                              |       |             |       | 3,280,223        |       |
| Shares repurchased for employee stock option plan  |       | (99,342             | )          |                                        |       |             |       | (99,342                                                               | )               |                              |       |             |       | (99,342          | )          |
| Retained earnings                                  |       | 7,246,814           |       | 8,636,842                                   |       | (8,422,175       | )          | 7,461,481                                                             |            | 537,817                           |       | (490,583         | )          | 7,508,715        |       |
| Other stockholders’  equity accounts          |       |                |       | 38,240                                      |       |             |       | 38,240                                                                |            | 15,067                            |       |             |       | 53,307           |       |
| Majority stockholders’  equity                |       | 10,955,706          |       | 11,358,871                                  |       | (11,105,964      | )          | 11,208,613                                                            |            | 1,256,902                         |       | (1,194,601       | )          | 11,270,914       |       |
| Minority interest in consolidated subsidiaries     |       |                |       |                                        |       |             |       |                                                                  |            |                              |       | 246,343          |       | 246,343          |       |
| Total stockholders’  equity                   |       | 10,955,706          |       | 11,358,871                                  |       | (11,105,964      | )          | 11,208,613                                                            |            | 1,256,902                         |       | (948,258         | )          | 11,517,257       |       |
| Total liabilities and stockholders’ equity    | ** ** | **Ps.**             | 17,436,766 | ** **                                  | **Ps.**    | 37,915,888       | ** ** | **Ps.**                                                               | **(25,738,244** | **)**                             | **Ps.**    | 29,614,410       | ** ** | **Ps.**          | 5,086,894  | ** ** | **Ps.** | **(3,867,294** | **)** | **Ps.** | 30,834,010 | ** ** |

 

F-68

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Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Statement of Income for theYear Ended December 31, 2009**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                    | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **  | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                      |       | Ps.                 | 185,533    |                                        | Ps.        | 29,550,672       |       | Ps.                                                                   | (10,534,341 | )                                 | Ps.        | 19,201,864       |       | Ps.              | 2,046,398  |   | Ps. | (1,823,080 | ) | Ps. | 19,425,182 |   |
| Cost of sales                                 |       |                |       | 23,110,319                                  |       | (9,601,808       | )          | 13,508,511                                                            |        | 240,025                           |       | (120             | )          | 13,748,416       |       |
| Gross profit                                  |       | 185,533             |       | 6,440,353                                   |       | (932,533         | )          | 5,693,353                                                             |        | 1,806,373                         |       | (1,822,960       | )          | 5,676,766        |       |
| Operating expenses                            |       | 162,876             |       | 2,322,479                                   |       | (182,555         | )          | 2,302,800                                                             |        | 2,026,906                         |       | (1,822,950       | )          | 2,506,756        |       |
| Income from operations                        |       | 22,657              |       | 4,117,874                                   |       | (749,978         | )          | 3,390,553                                                             |        | (220,533                          | )          | (10              | )          | 3,170,010        |       |
| Other (expense) income,  net                  |       | 18,271              |       | 44,824                                      |       | (98              | )          | 62,997                                                                |        | (13,522                           | )          |             |       | 49,475           |       |
| Net comprehensive  financing cost:            |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Interest expense                              |       | 772,586             |       | 1,398,698                                   |       | (2,109,646       | )          | 61,638                                                                |        | 322,127                           |       |             |       | 383,765          |       |
| Interest income                               |       | (570,557            | )          | (660,381                                    | )          | 1,367,762        |       | 136,824                                                               |        | (320,964                          | )          |             |       | (184,140         | )          |
| Exchange (gain) loss                          |       | (429,273            | )          | 131,120                                     |       | 181,745          |       | (116,408                                                              | )           | 56,898                            |       |             |       | (59,510          | )          |
| Valuation effects of derivative instruments   |       | 66,451              |       |                                        |       |             |       | 66,451                                                                |        |                              |       |             |       | 66,451           |       |
|                                          |       | (160,793            | )          | 869,437                                     |       | (560,139         | )          | 148,505                                                               |        | 58,061                            |       |             |       | 206,566          |       |
| Income before income taxes                    |       | 201,721             |       | 3,293,261                                   |       | (189,937         | )          | 3,305,045                                                             |        | (292,116                          | )          | (10              | )          | 3,012,919        |       |
| Income tax (benefit)  expense                 |       | 61,497              |       | 1,164,909                                   |       |             |       | 1,226,406                                                             |        | (15,532                           | )          | (27,882          | )          | 1,182,992        |       |
|                                          |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Equity in income of associated companies      |       | 1,689,703           |       | (46,507                                     | )          | (1,643,196       | )          |                                                                  |        |                              |       |             |       |             |       |
| Consolidated net income                       |       | Ps.                 | 1,829,927  |                                        | Ps.        | 2,081,845        |       | Ps.                                                                   | (1,833,133  | )                                 | Ps.        | 2,078,639        |       | Ps.              | (276,584   | ) | Ps. | 27,872 |   | Ps. | 1,829,927 |   |
| Net income of controlling interest            |       | 1,841,278           |       | 2,081,845                                   |       | (1,833,133       | )          | 2,089,990                                                             |        | (276,584                          | )          | 27,872           |       | 1,841,278        |       |
| Net (loss) income of non-controlling interest |       | (11,351             | )          |                                        |       |             |       | (11,351                                                               | )           |                              |       |             |       | (11,351          | )          |
| Consolidated net income                       | ** ** | **Ps.**             | 1,829,927  | ** **                                  | **Ps.**    | 2,081,845        | ** ** | **Ps.**                                                               | (1,833,133  | )                                 | **Ps.**    | 2,078,639        | ** ** | **Ps.**          | (276,584   | ) | **Ps.** | 27,872 | ** ** | **Ps.** | 1,829,927 | ** ** |

 

F-69

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Table of Contents

 

 **Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Statement of Income for theYear Ended December 31, 2008**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                    | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **  | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                      |       | Ps.                 | 664,806    |                                        | Ps.        | 27,816,590       |       | Ps.                                                                   | (10,582,176 | )                                 | Ps.        | 17,899,220       |       | Ps.              | 2,817,243  |   | Ps. | (1,865,967 | ) | Ps. | 18,850,496 |   |
| Cost of sales                                 |       |                |       | 21,708,407                                  |       | (8,911,344       | )          | 12,797,063                                                            |        | 686,879                           |       | (10,685          | )          | 13,473,257       |       |
| Gross profit                                  |       | 664,806             |       | 6,108,183                                   |       | (1,670,832       | )          | 5,102,157                                                             |        | 2,130,364                         |       | (1,855,282       | )          | 5,377,239        |       |
| Selling, general and administrative expenses  |       | 164,305             |       | 2,760,111                                   |       | (644,298         | )          | 2,280,118                                                             |        | 1,954,744                         |       | (1,857,216       | )          | 2,377,646        |       |
| Income (loss) from  operations                |       | 500,501             |       | 3,348,072                                   |       | (1,026,534       | )          | 2,822,039                                                             |        | 175,620                           |       | 1,934            |       | 2,999,593        |       |
| Other (expense) income,  net                  |       | 3,181               |       | (47,855                                     | )          | (215             | )          | (44,889                                                               | )           | (65,037                           | )          |             |       | (109,926         | )          |
| Net comprehensive  financing cost:            |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Interest expense                              |       | 412,426             |       | 1,071,488                                   |       | (1,393,358       | )          | 90,556                                                                |        | 146,477                           |       |             |       | 237,033          |       |
| Interest income                               |       | (173,079            | )          | (615,387                                    | )          | 857,103          |       | 68,637                                                                |        | (225,988                          | )          |             |       | (157,351         | )          |
| Exchange (gain) loss                          |       | (88,086             | )          | 796,934                                     |       | (713,825         | )          | (4,977                                                                | )           | 169,818                           |       |             |       | 164,841          |       |
| Valuation effects of derivative instruments   |       | 313,962             |       |                                        |       |             |       | 313,962                                                               |        |                              |       |             |       | 313,962          |       |
|                                          |       | 465,223             |       | 1,253,035                                   |       | (1,250,080       | )          | 468,178                                                               |        | 90,307                            |       |             |       | 558,485          |       |
| Income before income tax                      |       | 38,459              |       | 2,047,182                                   |       | 223,331          |       | 2,308,972                                                             |        | 20,276                            |       | 1,934            |       | 2,331,182        |       |
| Income tax (benefit)  expense                 |       | 89,542              |       | 647,374                                     |       |             |       | 736,916                                                               |        | (24,741                           | )          |             |       | 712,175          |       |
|                                          |       |                |       |                                        |       |             |       |                                                                  |        |                              |       |             |       |             |       |
| Equity in income of associated companies      |       | 1,670,090           |       | 36,934                                      |       | (1,707,024       | )          |                                                                  |        |                              |       |             |       |             |       |
| Consolidated net income                       |       | Ps.                 | 1,619,007  |                                        | Ps.        | 1,436,742        |       | Ps.                                                                   | (1,483,693  | )                                 | Ps.        | 1,572,056        |       | Ps.              | 45,017     |   | Ps. | 1,934 |   | Ps. | 1,619,007 |   |
| Net income of controlling interest            |       | 1,580,876           |       | 1,436,742                                   |       | (1,483,693       | )          | 1,533,925                                                             |        | 45,017                            |       | 1,934            |       | 1,580,876        |       |
| Net (loss) income of non-controlling interest |       | 38,131              |       |                                        |       |             |       | 38,131                                                                |        |                              |       |             |       | 38,131           |       |
| Consolidated net income                       | ** ** | **Ps.**             | 1,619,007  | ** **                                  | **Ps.**    | 1,436,742        | ** ** | **Ps.**                                                               | (1,483,693  | )                                 | **Ps.**    | 1,572,056        | ** ** | **Ps.**          | 45,017     | ** ** | **Ps.** | 1,934 | ** ** | **Ps.** | 1,619,007 | ** ** |

 

F-70

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Table ofContents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Statement of Income for theYear Ended December 31, 2007**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                   | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                     |       | Ps.                 | 160,475    |                                        | Ps.        | 22,878,186       |       | Ps.                                                                   | (8,444,373 | )                                 | Ps.        | 14,594,288       |       | Ps.              | 2,995,300  |   | Ps. | (1,367,064 | ) | Ps. | 16,222,524 |   |
| Costs                                        |       | —              |       | 18,108,058                                  |       | (8,134,779       | )          | 9,973,279                                                             |       | 1,068,177                         |       | —           |       | 11,041,456       |       |
| Gross profit                                 |       | 160,475             |       | 4,770,128                                   |       | (309,594         | )          | 4,621,009                                                             |       | 1,927,123                         |       | (1,367,064       | )          | 5,181,068        |       |
| Selling, general and administrative expenses |       | 135,086             |       | 1,687,420                                   |       | —           |       | 1,822,506                                                             |       | 1,511,825                         |       | (1,535,902       | )          | 1,798,429        |       |
| Income (loss) from  operations               |       | 25,389              |       | 3,082,708                                   |       | (309,594         | )          | 2,798,503                                                             |       | 415,298                           |       | 168,838          |       | 3,382,639        |       |
| Other income, net                            |       | 1,744               |       | 210,137                                     |       | —           |       | 211,881                                                               |       | (2,658                            | )          | —           |       | 209,223          |       |
| Net comprehensive  financing cost:           |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Interest expense                             |       | 321,151             |       | 968,190                                     |       | (1,021,046       | )          | 268,295                                                               |       | 76,633                            |       | —           |       | 344,928          |       |
| Interest income                              |       | (107,484            | )          | (708,277                                    | )          | 770,447          |       | (45,314                                                               | )          | (94,888                           | )          | —           |       | (140,202         | )          |
| Exchange (gain) loss                         |       | (117,084            | )          | 7,919                                       |       | (12,594          | )          | (121,759                                                              | )          | 564                               |       | —           |       | (121,195         | )          |
| Monetary position loss  (gain)               |       | (92,346             | )          | 189,907                                     |       | 83,889           |       | 181,450                                                               |       | 13,923                            |       | —           |       | 195,373          |       |
|                                         |       | 4,237               |       | 457,739                                     |       | (179,304         | )          | 282,672                                                               |       | (3,768                            | )          | —           |       | 278,904          |       |
| Income (loss) before income tax              |       | 22,896              |       | 2,835,106                                   |       | (130,290         | )          | 2,727,712                                                             |       | 416,408                           |       | 168,838          |       | 3,312,958        |       |
| Income tax (benefit)  expense                |       | 59,828              |       | 783,058                                     |       | —           |       | 842,886                                                               |       | 108,394                           |       | —           |       | 951,280          |       |
|                                         |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Equity in income of associated companies     |       | 2,398,610           |       | (621                                        | )          | (2,397,989       | )          | —                                                                |       | —                            |       | —           |       | —           |       |
| Consolidated net income                      |       | Ps.                 | 2,361,678  |                                        | Ps.        | 2,051,427        |       | Ps.                                                                   | (2,528,279 | )                                 | Ps.        | 1,884,826        |       | Ps.              | 308,014    |   | Ps. | 168,838 |   | Ps. | 2,361,678 |   |
| Net income of controlling interest           |       | 2,233,066           |       | 2,051,427                                   |       | (2,528,279       | )          | 1,756,214                                                             |       | 308,014                           |       | 168,838          |       | 2,233,066        |       |
| Net income of non-controlling interest       |       | 128,612             |       | —                                      |       | —           |       | 128,612                                                               |       | —                            |       | —           |       | 128,612          |       |
| Consolidated net income                      | ** ** | **Ps.**             | 2,361,678  | ** **                                  | **Ps.**    | 2,051,427        | ** ** | **Ps.**                                                               | (2,528,279 | )                                 | **Ps.**    | 1,884,826        | ** ** | **Ps.**          | 308,014    | ** ** | **Ps.** | 168,838 | ** ** | **Ps.** | 2,361,678 | ** ** |
|                                              |            |                     |            |                                             |            |                  |            |                                                                       |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-71

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedStatement of Cash Flows**

**Statement of Cash Flows forthe Year Ended December 31, 2009**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                               | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Cash flows generated by (used in) operating  activities                  |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Income before income tax                                                 |       | Ps.                 | 201,721    |                                        | Ps.        | 3,293,261        |       | Ps.                                                                 | (189,937   | )                                 | Ps.        | 3,305,045        |       | Ps.              | (292,116   | ) | Ps. | (10 | ) | Ps. | 3,012,919 |   |
| Items related to investing activities:                                   |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Depreciation and amortization                                            |       | 112,007             |       | 300,472                                     |       |             |       | 412,479                                                             |       | 70,930                            |       |             |       | 483,409          |       |
| Loss (gain) on sale of property and equipment                            |       |                |       | 3,179                                       |       |             |       | 3,179                                                               |       | 23,527                            |       |             |       | 26,706           |       |
| Interest income                                                          |       | (570,557            | )          | (660,381                                    | )          | 1,187,472        |       | (43,466                                                             | )          | (320,964                          | )          | 180,290          |       | (184,140         | )          |
| Gain on sale of other investment                                         |       |                |       |                                        |       |             |       |                                                                |       | (11,676                           | )          |             |       | (11,676          | )          |
| Items related to financing activities:                                   |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Interest expense                                                         |       | 752,458             |       | 1,205,893                                   |       | (1,187,472       | )          | 770,879                                                             |       | 302,244                           |       | (186,974         | )          | 886,149          |       |
| Share-based payment  transactions                                        |       | 10,638              |       |                                        |       |             |       | 10,638                                                              |       |                              |       |             |       | 10,638           |       |
| Valuation effects of derivative instruments                              |       | 66,451              |       |                                        |       |             |       | 66,451                                                              |       |                              |       |             |       | 66,451           |       |
| Deferred profit-sharing                                                  |       |                |       | 24,646                                      |       |             |       | 24,646,                                                             |       | 1,960                             |       |             |       | 26,606           |       |
| Exchange (gain) loss                                                     |       | (182,525            | )          |                                        |       |             |       | (182,525                                                            | )          | (1,821                            | )          |             |       | (184,346         | )          |
|                                                                     |       | 390,193             |       | 4,167,070                                   |       | (189,937         | )          | 4,367,326                                                           |       | (227,916                          | )          | (6,694           | )          | 4,132,716        |       |
| Increase in trade accounts receivable                                    |       |                |       | (1,611,343                                  | )          |             |       | (1,611,343                                                          | )          | 418,662                           |       |             |       | (1,192,681       | )          |
| Increase in trade accounts receivable from  affiliates                   |       | (2,906,897          | )          | (5,404,754                                  | )          | 8,431,532        |       | 119,881                                                             |       | (1,816,415                        | )          | 1,696,534        |       |             |       |
| Increase in inventories and land held for future  developments           |       | (5,651              | )          | (271,927                                    | )          |             |       | (277,578                                                            | )          | (296,812                          | )          |             |       | (574,390         | )          |
| (Increase) Decrease in prepaid expenses and other  assets                |       | (175,621            | )          | (813,971                                    | )          | 588,071          |       | (401,521                                                            | )          | 189,078                           |       | (8,374           | )          | (220,817         | )          |
| Interest income collected                                                |       | 570,557             |       | 660,381                                     |       | (1,187,472       | )          | 43,466                                                              |       | 320,964                           |       | (180,290         | )          | 184,140          |       |
| (Decrease) Increase in trade accounts payable                            |       | (6,093              | )          | (1,659,188                                  | )          |             |       | (1,665,281                                                          | )          | 19,687                            |       | (6,257           | )          | (1,651,851       | )          |
| Decrease in accounts payable to affiliates                               |       | 1,068,374           |       | 7,363,117                                   |       | (8,431,491       | )          |                                                                |       | 1,696,534                         |       | (1,696,534       | )          |             |       |
| Decrease in accounts payable to land suppliers                           |       |                |       | (1,317,359                                  | )          |             |       | (1,317,359                                                          | )          | (1,218                            | )          |             |       | (1,318,577       | )          |
| Increase in other  liabilities                                           |       | 138,548             |       | 839,775                                     |       | (5,726           | )          | 972,597                                                             |       | 274,975                           |       | (1,023           | )          | 1,246,549        |       |
| Increase in employee benefits obligations                                |       |                |       | (2,551                                      | )          |             |       | (2,551                                                              | )          | 2,487                             |       | 13,101           |       | 13,037           |       |
| Payments of derivative  instruments                                      |       | (123,271            | )          |                                        |       |             |       | (123,271                                                            | )          |                              |       |             |       | (123,271         | )          |
| Income tax recovered  (paid)                                             |       |                |       | 59,675                                      |       |             |       | 59,675                                                              |       | (16,403                           | )          |             |       | 43,272           |       |
| Net cash flows from operating activities                                 |       | (1,049,861          | )          | 2,008,925                                   |       | (795,023         | )          | 164,041                                                             |       | 563,623                           |       | (189,537         | )          | 538,127          |       |
|                                                                     |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Cash flows generated by (used in) investing  activities                  |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Acquisition of property and equipment                                    |       |                |       | (62,924                                     | )          |             |       | (62,924                                                             | )          | (26,428                           | )          |             |       | (89,352          | )          |
| Proceeds from sale of property and equipment                             |       |                |       | 28,396                                      |       |             |       | 28,396                                                              |       | 2,229                             |       |             |       | 30,625           |       |
| Net cash flows from investing activities                                 |       |                |       | (34,528                                     | )          |             |       | (34,528                                                             | )          | (24,199                           | )          |             |       | (58,727          | )          |
|                                                                     |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Cash flows generated by (used in) financing activities                   |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Proceeds and payments from affiliates                                    |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Proceeds from new  borrowings                                            |       | 9,869,733           |       | 5,677,352                                   |       |             |       | 15,547,085                                                          |       | 202,066                           |       |             |       | 15,749,151       |       |
| Payments of notes payable                                                |       | (7,237,583          | )          | (6,054,368                                  | )          |             |       | (13,291,951                                                         | )          | (45,920                           | )          |             |       | (13,337,871      | )          |
| Net proceeds from  affiliates                                            |       | (1,398,915          | )          | 968,636                                     |       | 795,023          |       | 364,744                                                             |       | (547,597                          | )          | 182,853          |       |             |       |
| Interest paid                                                            |       | (171,122            | )          | (589,506                                    | )          |             |       | (760,628                                                            | )          | (120,967                          | )          | 6,684            |       | (874,911         | )          |
| Shares repurchased                                                       |       | (4,586              | )          |                                        |       |             |       | (4,586                                                              | )          |                              |       |             |       | (4,586           | )          |
| Net cash flows from financing activities                                 |       | 1,057,527           |       | 2,114                                       |       | 795,023          |       | 1,854,664                                                           |       | (512,418                          | )          | 189,537          |       | 1,531,783        |       |
| Net increase (decrease) of cash and cash equivalents                     |       | 7,666               |       | 1,976,511                                   |       |             |       | 1,984,177                                                           |       | 27,006                            |       |             |       | 2,011,183        |       |
| Translation adjustment                                                   |       |                |       |                                        |       |             |       |                                                                |       | (27,952                           | )          |             |       | (27,952          | )          |
| Cash, cash equivalents and restricted cash at the  beginning of the year |       | 435                 |       | 1,009,895                                   |       |             |       | 1,010,330                                                           |       | 257,855                           |       |             |       | 1,268,185        |       |
| Cash, cash equivalents and restricted cash at the  end of the year       | ** ** | **Ps.**             | 8,101      | ** **                                  | **Ps.**    | 2,986,406        | ** ** | **Ps.**                                                             | ** ** | **Ps.**                           | 2,994,507  | ** **       | **Ps.**    | 256,909          |       |   | ** ** | **Ps.** | 3,251,416 | ** ** |
|                                                                          |            |                     |            |                                             |            |                  |            |                                                                     |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-72

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedStatement of Cash Flows**

**Statement of Cash Flows forthe Year Ended December 31, 2008**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                               | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Cash flows generated by (used in) operating  activities                  |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Income before income tax                                                 |       | Ps.                 | 38,459     |                                        | Ps.        | 2,047,182        |       | Ps.                                                                 | 223,331    |                              | Ps.        | 2,308,972        |       | Ps.              | 20,276     |   | Ps. | 1,934 |   | Ps. | 2,331,182 |   |
| Items related to investing activities:                                   |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Depreciation and  amortization                                           |       | 101,294             |       | 273,349                                     |       |             |       | 374,643                                                             |       | 50,378                            |       |             |       | 425,021          |       |
| Loss (gain) on sale of property and equipment                            |       |                |       | (8,893                                      | )          |             |       | (8,893                                                              | )          | 122                               |       |             |       | (8,771           | )          |
| Interest income                                                          |       | (173,079            | )          | (615,387                                    | )          | 730,563          |       | (57,903                                                             | )          | (225,988                          | )          | 126,540          |       | (157,351         | )          |
| Items related to financing activities:                                   |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Interest expense                                                         |       | 404,279             |       | 981,505                                     |       | (730,563         | )          | 655,221                                                             |       | 135,084                           |       | (126,540         | )          | 663,765          |       |
| Valuation effects of derivative instruments                              |       | 313,962             |       |                                        |       |             |       | 313,962                                                             |       |                              |       |             |       | 313,962          |       |
| Deferred profit-sharing                                                  |       |                |       | 7,899                                       |       |             |       | 7,899                                                               |       | (4,838                            | )          |             |       | 3,061            |       |
| Exchange (gain) loss                                                     |       | 714,347             |       | (900                                        | )          |             |       | 713,447                                                             |       | 2,053                             |       |             |       | 715,500          |       |
|                                                                     |       | 1,399,262           |       | 2,684,755                                   |       | 223,331          |       | 4,307,348                                                           |       | (22,913                           | )          | 1,934            |       | 4,286,369        |       |
| Increase in trade accounts receivable                                    |       |                |       | (4,421,350                                  | )          |             |       | (4,421,350                                                          | )          | 700,582                           |       | (575,504         | )          | (4,296,272       | )          |
| Increase in trade accounts receivable from  affiliates                   |       | (5,173,903          | )          | (24,074,337                                 | )          | 28,053,096       |       | (1,195,144                                                          | )          | (4,005,031                        | )          | 5,200,175        |       |             |       |
| Increase in inventories and land held for future  developments           |       | (1,491              | )          | (3,023,230                                  | )          | 20,946           |       | (3,003,775                                                          | )          | 125,587                           |       |             |       | (2,878,188       | )          |
| (Increase) decrease in prepaid expenses and other  assets                |       | 69,194              |       | 332,578                                     |       | (244,236         | )          | 157,536                                                             |       | (66,035                           | )          | 1,110            |       | 92,611           |       |
| Interest income collected                                                |       | 173,079             |       | 615,387                                     |       | (730,563         | )          | 57,903                                                              |       | 225,988                           |       | (126,540         | )          | 157,351          |       |
| (Decrease) increase in trade accounts payable                            |       | (4,556              | )          | 206,667                                     |       |             |       | 202,111                                                             |       | (348,552                          | )          | 575,504          |       | 429,063          |       |
| Decrease in accounts payable to affiliates                               |       | 14,351,016          |       | 13,702,080                                  |       | (28,053,096      | )          |                                                                |       | 5,200,216                         |       | (5,200,216       | )          |             |       |
| Decrease in accounts payable to land suppliers                           |       |                |       | (1,016,245                                  | )          |             |       | (1,016,245                                                          | )          |                              |       |             |       | (1,016,245       | )          |
| Increase in other  liabilities                                           |       | 13,670              |       | 328,011                                     |       |             |       | 341,681                                                             |       | 76,470                            |       |             |       | 418,151          |       |
| Increase in employee benefits obligations                                |       |                |       | 20,179                                      |       |             |       | 20,179                                                              |       | 20,063                            |       |             |       | 40,242           |       |
| Payments of derivative instruments                                       |       | (340,912            | )          |                                        |       |             |       | (340,912                                                            | )          |                              |       |             |       | (340,912         | )          |
| Income tax recovered  (paid)                                             |       | 2,244               |       | (82,866                                     | )          |             |       | (80,622                                                             | )          | (39,865                           | )          | (3,044           | )          | (123,531         | )          |
| Net cash flows from operating activities                                 |       | 10,487,603          |       | (14,728,371                                 | )          | (730,522         | )          | (4,971,290                                                          | )          | 1,866,510                         |       | (126,581         | )          | (3,231,361       | )          |
|                                                                     |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Cash flows generated by (used in) investing  activities                  |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Increase in the investment in associate                                  |       |                |       |                                        |       |             |       |                                                                |       | (27,727                           | )          |             |       | (27,727          | )          |
| Acquisition of property and equipment                                    |       |                |       | (467,318                                    | )          |             |       | (467,318                                                            | )          | (96,405                           | )          |             |       | (563,723         | )          |
| Proceeds from sale of property and equipment                             |       |                |       | 98,421                                      |       |             |       | 98,421                                                              |       | 299                               |       |             |       | 98,720           |       |
| Net cash flows from investing activities                                 |       |                |       | (368,897                                    | )          |             |       | (368,897                                                            | )          | (123,833                          | )          |             |       | (492,730         | )          |
|                                                                     |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Cash flows generated by (used in) financing  activities                  |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Proceeds and payments from affiliates                                    |       | (12,760,369         | )          | 14,309,035                                  |       |             |       | 1,548,667                                                           |       | (1,548,667                        | )          |             |       |             |       |
| Proceeds from new  borrowings                                            |       | 5,593,465           |       | 3,551,493                                   |       |             |       | 9,144,958                                                           |       | 322                               |       |             |       | 9,145,280        |       |
| Payments of notes payable                                                |       | (2,915,465          | )          | (2,940,485                                  | )          |             |       | (5,855,950                                                          | )          | (5,111                            | )          |             |       | (5,861,061       | )          |
| Interest paid                                                            |       | (406,523            | )          | (981,270                                    | )          | 730,522          |       | (657,271                                                            | )          | (135,117                          | )          | 126,581          |       | (665,807         | )          |
| Net cash flows from financing activities                                 |       | (10,488,892         | )          | 13,938,773                                  |       | 730,522          |       | 4,180,404                                                           |       | (1,688,573                        | )          | 126,581          |       | 2,618,412        |       |
| Net increase (decrease) of cash and cash equivalents                     |       | (1,289              | )          | (1,158,495                                  | )          |             |       | (1,159,783                                                          | )          | 54,104                            |       |             |       | (1,105,679       | )          |
| Translation adjustment                                                   |       |                |       |                                        |       |             |       |                                                                |       | 10,940                            |       |             |       | 10,940           |       |
| Cash, cash equivalents and restricted cash at the  beginning of the year |       | 1,724               |       | 2,168,389                                   |       |             |       | 2,170,113                                                           |       | 192,811                           |       |             |       | 2,362,924        |       |
| Cash, cash equivalents and restricted cash at the  end of the year       | ** ** | **Ps.**             |  435  | ** **                                  | **Ps.**    | 1,009,894        | ** ** | **Ps.**                                                             | ** ** | **Ps.**                           | 1,010,330  | ** **       | **Ps.**    | 257,855          |       |   | ** ** | **Ps.** | 1,268,185 | ** ** |
|                                                                          |            |                     |            |                                             |            |                  |            |                                                                     |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-73

----

 

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Statement of Changes inFinancial Position for the Year Ended December 31, 2007**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                        | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Operating activities:                             |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Consolidated net income                           |       | Ps.                 | 2,361,678  |                                        | Ps.        | 2,051,427        |       | Ps.                                                                 | (2,528,279 | )                                 | Ps.        | 1,884,826        |       | Ps.              | 308,014    |   | Ps. | 168,838 |   | Ps. | 2,361,678 |   |
| Add items that did not require resources:         |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Depreciation                                      |       | —              |       | 156,117                                     |       | —           |       | 156,117                                                             |       | 40,190                            |       | —           |       | 196,307          |       |
| Equity in income  subsidiaries                    |       | (2,398,610          | )          | 621                                         |       | 2,397,989        |       | —                                                              |       | —                            |       | —           |       | —           |       |
| Amortization of BETA trademark and backlog        |       | 105,410             |       | —                                      |       | —           |       | 105,410                                                             |       | —                            |       | —           |       | 105,410          |       |
| Labor obligations                                 |       |                |       | 11,696                                      |       |             |       | 11,696                                                              |       | 6,720                             |       |             |       | 18,416           |       |
| Deferred income taxes                             |       | 43,267              |       | 719,270                                     |       | —           |       | 762,537                                                             |       | 55,870                            |       | —           |       | 818,407          |       |
|                                              |       | 111,745             |       | 2,939,131                                   |       | (130,290         | )          | 2,920,586                                                           |       | 410,794                           |       | 168,838          |       | 3,500,218        |       |
| Changes in operating assets and liabilities       |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| (Increase) decrease in:                           |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Trade accounts receivable                         |       | —              |       | (1,205,585                                  | )          | —           |       | (1,205,585                                                          | )          | (962,441                          | )          | 159,854          |       | (2,008,172       | )          |
| Accounts receivable from  affiliates              |       | 149,018             |       | 890,556                                     |       | (1,429,106       | )          | (389,532                                                            | )          | (6,326                            | )          | 395,858          |       | —           |       |
| Inventories and land held for future development  |       | (4,883              | )          | (2,310,372                                  | )          | (20,946          | )          | (2,336,201                                                          | )          | 246,114                           |       | —           |       | (2,090,087       | )          |
| Other assets                                      |       | 21,230              |       | (89,045                                     | )          | (51,046          | )          | (118,861                                                            | )          | (5,514                            | )          |             |       | (124,375         | )          |
| Increase (decrease) in:                           |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Trade accounts payable                            |       | (4,944              | )          | 1,310,562                                   |       | —           |       | 1,305,618                                                           |       | 175,367                           |       | (159,854         | )          | 1,321,131        |       |
| Land suppliers                                    |       | (2,306              | )          | 230,688                                     |       | 52,275           |       | 280,657                                                             |       | (34,845                           | )          |             |       | 245,812          |       |
| Accrued expenses and  taxes                       |       | (109,054            | )          | (26,871                                     | )          | 150,007          |       | 14,082                                                              |       |                              |       | (168,911         | )          | (154,829         | )          |
| Due to related parties                            |       | 172,290             |       | (1,601,396                                  | )          | 1,429,106        |       | —                                                              |       | 395,785                           |       | (395,785         | )          | —           |       |
| Other liabilities                                 |       | —              |       | (11,511                                     | )          | —           |       | (11,511                                                             | )          | (18,018                           | )          |             |       | (29,529          | )          |
| Net resources used in operating activities        |       | 333,096             |       | 126,157                                     |       | —           |       | 459,253                                                             |       | 200,916                           |       | —           |       | 660,169          |       |
|                                              |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Financing activities:                             |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Proceeds from new borrowings, net                 |       | (232,131            | )          | 328,088                                     |       | —           |       | 95,957                                                              |       | (5,396                            | )          | —           |       | 90,561           |       |
| Shares repurchased for employee stock option plan |       | (99,342             | )          | —                                      |       | —           |       | (99,342                                                             | )          | —                            |       | —           |       | (99,342          | )          |
| Dividends paid by subsidiary company              |       | —              |       | (9,133                                      | )          | —           |       | (9,133                                                              | )          | —                            |       | —           |       | (9,133           | )          |
| Net resources generated by financing activities   |       | (331,473            | )          | 318,955                                     |       | —           |       | (12,518                                                             | )          | (5,396                            | )          | —           |       | (17,914          | )          |
|                                              |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Investing activities:                             |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Restricted cash                                   |       | —              |       | —                                      |       | —           |       | —                                                              |       | (118,493                          | )          | —           |       | (118,493         | )          |
| Investment in associates                          |       | —              |       | —                                      |       | —           |       | —                                                              |       | (17,869                           | )          | —           |       | (17,869          | )          |
| Acquisition of property and equipment             |       | —              |       | (600,961                                    | )          | —           |       | (600,961                                                            | )          | (79,787                           | )          | —           |       | (680,748         | )          |
| Net resources used in investing activities        |       | —              |       | (600,961                                    | )          | —           |       | (600,961                                                            | )          | (216,149                          | )          | —           |       | (817,110         | )          |
|                                              |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Cash, cash equivalents and restricted cash:       |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Net increase (decrease)                           |       | 1,623               |       | (155,849                                    | )          | —           |       | (154,226                                                            | )          | (20,629                           | )          | —           |       | (174,855         | )          |
| Balance at beginning of year                      |       | 101                 |       | 2,324,238                                   |       | —           |       | 2,324,339                                                           |       | 57,350                            |       | —           |       | 2,381,689        |       |
| Balance at end of year                            | ** ** | **Ps.**             | 1,724      |                                        | **Ps.**    | 2,168,389        | ** ** | **Ps.**                                                             | —     |                              | **Ps.**    | 2,170,113        | ** ** | **Ps.**          | 36,721     |   | — | ** ** | **Ps.** | 2,206,834 |   |
|                                                   |            |                     |            |                                             |            |                  |            |                                                                     |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

F-74

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Reconciliation of Mexican Financial Reporting Standards (MFRS) to**

**US GAAP**

**As of and for the Year EndedDecember 31, 2009**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                                          | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **       | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|------------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Consolidated net income according to MFRS                                           |       | Ps.                 | 1,829,927  |                                        | Ps.        | 2,081,845        |       | Ps.                                                                   |  (1,833,133 | )                                 | Ps.        | 2,078,639        |       | Ps.              | (276,584   | ) | Ps. | 27,872 |   | Ps. | 1,829,927 |   |
| US GAAP adjustments:                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       |                |       | (2,180,672                                  | )          |             |       | (2,180,672                                                            | )                | 413,130                           |       |             |       | (1,767,542       | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       |                |       | 1,498,583                                   |       |             |       | 1,498,583                                                             |             | (283,908                          | )          |             |       | 1,214,675        |       |
| Capitalization of  interest                                                         |       | 115,420             |       | 43,795                                      |       |             |       | 159,215                                                               |             |                              |       |             |       | 159,215          |       |
| Amortization of Backlog                                                             |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Labor obligations                                                                   |       |                |       | (4,407                                      | )          |             |       | (4,407                                                                | )                | (2,285                            | )          |             |       | (6,692           | )          |
| Deferral of unsecured homebuyers’ receivables                                  |       |                |       | (35,772                                     | )          |             |       | (35,772                                                               | )                | (1,940                            | )          |             |       | (37,712          | )          |
| Deferral of future  involvement                                                     |       |                |       | (365                                        | )          |             |       | (365                                                                  | )                |                              |       |             |       | (365             | )          |
| Fair value adjustment to financial instruments                                      |       | (72,285             | )          |                                        |       |             |       | (72,285                                                               | )                |                              |       |             |       | (72,285          | )          |
| Other                                                                               |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Prepaid sales commissions                                                           |       |                |       | 39,895                                      |       |             |       | 39,895                                                                |             | (7,558                            | )          |             |       | 32,337           |       |
| Total US GAAP adjustments before tax effects                                        |       | 43,135              |       | (638,943                                    | )          |             |       | (595,808                                                              | )                | 117,439                           |       |             |       | (478,369         | )          |
| Tax effects on US GAAP adjustments                                                  |       | (13,386             | )          | 198,278                                     |       |             |       | 184,892                                                               |             | (36,444                           | )          |             |       | 148,448          |       |
| Total US GAAP adjustments                                                           |       | 29,749              |       | (440,665                                    | )          |             |       | (410,916                                                              | )                | 80,995                            |       |             |       | (329,921         | )          |
| Net income according to US GAAP                                                     |       | **Ps.**             | 1,859,676  |                                        | **Ps.**    | 1,641,180        |       | **Ps.**                                                               | (1,833,133       | )                                 | **Ps.**    | 1,667,723        |       | **Ps.**          | (195,589   | ) | **Ps.** | 27,872 |   | **Ps.** | 1,500,006 |   |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Consolidated equity according to MFRS U.S. GAAP  adjustments                        |       | Ps.                 | 12,799,467 |                                        | Ps.        | 14,079,735       |       | Ps.                                                                   | (13,937,163      | )                                 | Ps.        | 12,942,039       |       | Ps.              | 978,368    |   | Ps. | (697,444 | ) | Ps. | 13,222,963 |   |
| US GAAP adjustments:                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       |                |       | (11,413,970                                 | )          |             |       | (11,413,970                                                           | )                | (1,190,886                        | )          |             |       | (12,604,856      | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       |                |       | 8,287,919                                   |       |             |       | 8,287,919                                                             |             | 864,727                           |       |             |       | 9,152,646        |       |
| Goodwill, net                                                                       |       | 86,754              |       |                                        |       |             |       | 86,754                                                                |             |                              |       |             |       | 86,754           |       |
| Backlog                                                                             |       | (237,001            | )          |                                        |       |             |       | (237,001                                                              | )                |                              |       |             |       | (237,001         | )          |
| Labor obligations                                                                   |       |                |       | (10,741                                     | )          |             |       | (10,741                                                               | )                | (12,701                           | )          |             |       | (23,442          | )          |
| Prepaid sales commissions                                                           |       |                |       | 206,066                                     |       |             |       | 206,066                                                               |             | 21,500                            |       |             |       | 227,566          |       |
| Deferral of future  involvement                                                     |       |                |       | (2,291                                      | )          |             |       | (2,291                                                                | )                |                              |       |             |       | (2,291           | )          |
| Acquisition of non controlling interest                                             |       |                |       | 79,437                                      |       |             |       | 79,437                                                                |             |                              |       |             |       | 79,437           |       |
| Fair value adjustment to financial instruments                                      |       | (72,285             | )          |                                        |       |             |       | (72,285                                                               | )                |                              |       |             |       | (72,285          | )          |
| Capitalization of  interest                                                         |       | 125,999             |       | 47,809                                      |       |             |       | 173,808                                                               |             |                              |       |             |       | 173,808          |       |
| Deferral of unsecured homebuyers’ receivables of the  year                     |       |                |       | (101,848                                    | )          |             |       | (101,848                                                              | )                | (7,480                            | )          |             |       | (109,328         | )          |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Total US GAAP adjustments before tax effects                                        |       | (96,533             | )          | (2,907,619                                  | )          |             |       | (3,004,152                                                            | )                | (324,840                          | )          |             |       | (3,328,992       | )          |
| Tax effects on US GAAP adjustments                                                  |       | 28,714              |       | 864,876                                     |       |             |       | 893,590                                                               |             | 96,624                            |       |             |       | 990,214          |       |
| Total U.S. GAAP adjustments                                                         |       | (67,819             | )          | (2,042,743                                  | )          |             |       | (2,110,562                                                            | )                | (228,216                          | )          |             |       | (2,338,778       | )          |
| Equity according to US GAAP                                                         |       | **Ps.**             | 12,731,648 |                                        | **Ps.**    | 12,036,992       |       | **Ps.**                                                               | (13,937,163      | )                                 | **Ps.**    | 10,831,477       |       | **Ps.**          | 750,152    |   | **Ps.** | (697,444 | ) | **Ps.** | 10,884,185 |   |

 

F-75

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Reconciliation of Mexican Financial Reporting Standards (MFRS) toUS GAAP**

**As of and for the Year EndedDecember 31, 2008**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                                          | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **       | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|------------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Consolidated net income according to MFRS                                           |       | Ps.                 | 1,619,007  |                                        | Ps.        | 1,436,742        |       | Ps.                                                                   |  (1,483,693 | )                                 | Ps.        | 1,572,056        |       | Ps.              | 45,017     |   | Ps. | 1,934 |   | Ps. | 1,619,007 |   |
| US GAAP adjustments:                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       |                |       | (4,017,365                                  | )          |             |       | (4,017,365                                                            | )                | 60,287                            |       |             |       | (3,957,078       | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       |                |       | 2,657,250                                   |       |             |       | 2,657,250                                                             |             | (39,877                           | )          |             |       | 2,617,373        |       |
| Capitalization of interest                                                          |       | (154,903            | )          | (49,011                                     | )          |             |       | (203,914                                                              | )                |                              |       |             |       | (203,914         | )          |
| Amortization of backlog                                                             |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Labor obligations                                                                   |       |                |       | (23,780                                     | )          |             |       | (23,780                                                               | )                | 34,889                            |       |             |       | 11,109           |       |
| Deferral of unsecured homebuyers’ receivables                                  |       |                |       | (8,003                                      | )          |             |       | (8,003                                                                | )                | (702                              | )          |             |       | (8,705           | )          |
| Deferral of future  involvement                                                     |       |                |       | 3,529                                       |       |             |       | 3,529                                                                 |             |                              |       |             |       | 3,529            |       |
| Other items                                                                         |       |                |       | 38,240                                      |       |             |       | 38,240                                                                |             | (8,573                            | )          |             |       | 29,667           |       |
| Prepaid sales commissions                                                           |       |                |       | 72,537                                      |       |             |       | 72,537                                                                |             | (1,088                            | )          |             |       | 71,449           |       |
| Effects of inflation on US GAAP adjustments                                         |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Tax effects on US GAAP adjustments                                                  |       | 44,739              |       | 394,192                                     |       |             |       | 438,931                                                               |             | (15,455                           | )          |             |       | 423,476          |       |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Total US GAAP adjustments                                                           |       | (110,164            | )          | (932,411                                    | )          |             |       | (1,042,575                                                            | )                | 29,481                            |       |             |       | (1,013,094       | )          |
| Net income according to US GAAP                                                     |       | **Ps.**             | 1,508,843  |                                        | **Ps.**    | 504,331          |       | **Ps.**                                                               | (1,483,693       | )                                 | **Ps.**    | 529,480          |       | **Ps.**          | 74,499     |   | **Ps.** | 1,934 |   | **Ps.** | 605,913 |   |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Consolidated equity according to MFRS                                               |       | Ps.                 | 10,955,706 |                                        | Ps.        | 11,358,871       |       | Ps.                                                                   | (11,105,964      | )                                 | Ps.        | 11,208,613       |       | Ps.              | 1,256,902  |   | Ps. | (948,258 | ) | Ps. | 11,517,257 |   |
| US GAAP adjustments:                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Reversal of revenue recognized under percentage-of-completion  method of accounting |       |                |       | (9,233,245                                  | )          |             |       | (9,233,245                                                            | )                | (1,604,069                        | )          |             |       | (10,837,314      | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       |                |       | 6,763,044                                   |       |             |       | 6,763,044                                                             |             | 1,174,927                         |       |             |       | 7,937,971        |       |
| Goodwill, net                                                                       |       | 86,754              |       |                                        |       |             |       | 86,754                                                                |             |                              |       |             |       | 86,754           |       |
| Backlog                                                                             |       | (237,001            | )          |                                        |       |             |       | (237,001                                                              | )                |                              |       |             |       | (237,001         | )          |
| Labor obligations                                                                   |       |                |       | (14,779                                     | )          |             |       | (14,779                                                               | )                | (16,810                           | )          |             |       | (31,589          | )          |
| Prepaid sales commissions                                                           |       |                |       | 166,332                                     |       |             |       | 166,332                                                               |             | 28,897                            |       |             |       | 195,229          |       |
| Deferral of future  involvement                                                     |       |                |       | (1,926                                      | )          |             |       | (1,926                                                                | )                |                              |       |             |       | (1,926           | )          |
| Acquisition of non controlling interest                                             |       |                |       | 79,437                                      |       |             |       | 79,437                                                                |             |                              |       |             |       | 79,437           |       |
| Capitalization of  interest                                                         |       | 11,085              |       | 3,508                                       |       |             |       | 14,593                                                                |             |                              |       |             |       | 14,593           |       |
| Deferral of unsecured homebuyers’ receivables of the  year                     |       |                |       | (66,077                                     | )          |             |       | (66,077                                                               | )                | (5,539                            | )          |             |       | (71,616          | )          |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |             |                              |       |             |       |             |       |
| Total US GAAP adjustments before tax effects                                        |       | (139,162            | )          | (2,303,706                                  | )          |             |       | (2,442,868                                                            | )                | (422,594                          | )          |             |       | (2,865,462       | )          |
| Tax effects on US GAAP adjustments                                                  |       | 40,881              |       | 676,743                                     |       |             |       | 717,624                                                               |             | 124,142                           |       |             |       | 841,766          |       |
| Total US GAAP adjustments                                                           |       | (98,281             | )          | (1,626,963                                  | )          |             |       | (1,725,244                                                            | )                | (298,452                          | )          |             |       | (2,023,696       | )          |
| Equity according to US GAAP                                                         |       | **Ps.**             | 10,857,425 |                                        | **Ps.**    | 9,731,908        |       | **Ps.**                                                               | (11,105,964      | )                                 | **Ps.**    | 9,483,369        |       | **Ps.**          | 958,450    |   | **Ps.** | (948,258 | ) | **Ps.** | 9,493,561 |   |

 

F-76

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Reconciliation of Mexican Financial Reporting Standards (MFRS) to USGAAP**

**As of and for the Year EndedDecember 31, 2007**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                                          | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Consolidated net income according to MFRS                                           |       | Ps.                 | 2,361,678  |                                        | Ps.        | 2,051,427        |       | Ps.                                                                   | (2,528,279 | )                                 | Ps.        | 1,884,826        |       | Ps.              | 308,014    |   | Ps. | 168,838 |   | Ps. | 2,361,678 |   |
| US GAAP adjustments:                                                                |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       | —              |       | (1,541,648                                  | )          | —           |       | (1,541,648                                                            | )          | (825,225                          | )          | —           |       | (2,366,873       | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       | —              |       | 957,725                                     |       | —           |       | 957,725                                                               |       | 650,773                           |       | —           |       | 1,608,498        |       |
| Capitalization of interest                                                          |       | (197,377            | )          | (63,368                                     | )          |             |       | (260,745                                                              | )          | (989                              | )          | —           |       | (261,734         | )          |
| Amortization of backlog                                                             |       | (16,747             | )          |                                        |       | —           |       | (16,747                                                               | )          | —                            |       | —           |       | (16,747          | )          |
| Labor obligations                                                                   |       | —              |       | (8,382                                      | )          | —           |       | (8,382                                                                | )          | (9,034                            | )          | —           |       | (17,416          | )          |
| Deferral of unsecured homebuyers’ receivables                                  |       | —              |       | 3,451                                       |       | —           |       | 3,451                                                                 |       | —                            |       | —           |       | 3,451            |       |
| Deferral of future  involvement                                                     |       | —              |       | 2,119                                       |       | —           |       | 2,119                                                                 |       | —                            |       | —           |       | 2,119            |       |
| Prepaid sales commissions                                                           |       | —              |       | 27,461                                      |       | —           |       | 27,461                                                                |       | 9,364                             |       | —           |       | 36,825           |       |
| Effects of inflation on US GAAP adjustments                                         |       | —              |       | 153,309                                     |       | —           |       | 153,309                                                               |       | 50,325                            |       | —           |       | 203,634          |       |
| Tax effects on US GAAP adjustments                                                  |       | 49,552              |       | 139,911                                     |       | —           |       | 189,463                                                               |       | 52,948                            |       | —           |       | 242,411          |       |
| Total US GAAP adjustments                                                           |       | (164,572            | )          | (329,422                                    | )          | —           |       | (493,994                                                              | )          | (71,838                           | )          | —           |       | (565,832         | )          |
| Net income according to US GAAP                                                     |       | **Ps.**             | 2,197,106  |                                        | **Ps.**    | 1,722,005        |       | **Ps.**                                                               | (2,528,279 | )                                 | **Ps.**    | 1,390,832        |       | **Ps.**          | 236,176    |   | **Ps.** | 168,838 |   | **Ps.** | 1,795,846 |   |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Consolidated equity according to MFRS                                               |       | Ps.                 | 9,608,727  |                                        | Ps.        | 9,628,965        |       | Ps.                                                                   | (9,590,418 | )                                 | Ps.        | 9,647,274        |       | Ps.              | 1,116,358  |   | Ps. | (922,502 | ) | Ps. | 9,841,130 |   |
| US GAAP adjustments:                                                                |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       | —              |       | (5,179,898                                  | )          | —           |       | (5,179,898                                                            | )          | (1,700,339                        | )          | —           |       | (6,880,237       | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       | —              |       | 4,135,231                                   |       | —           |       | 4,135,231                                                             |       | 1,185,366                         |       | —           |       | 5,320,597        |       |
| Goodwill, net                                                                       |       | 86,754              |       | —                                      |       | —           |       | 86,754                                                                |       | —                            |       | —           |       | 86,754           |       |
| Backlog                                                                             |       | (237,001            | )          | —                                      |       | —           |       | (237,001                                                              | )          | —                            |       | —           |       | (237,001         | )          |
| Labor obligations                                                                   |       | —              |       | (33,810                                     | )          | —           |       | (33,810                                                               | )          | (33,365                           | )          | —           |       | (67,175          | )          |
| Prepaid sales commissions                                                           |       | —              |       | 92,933                                      |       | —           |       | 92,933                                                                |       | 30,849                            |       | —           |       | 123,782          |       |
| Deferral of future  involvement                                                     |       | —              |       | (5,455                                      | )          | —           |       | (5,455                                                                | )          | —                            |       | —           |       | (5,455           | )          |
| Acquisition of non controlling interest                                             |       | —              |       | 79,437                                      |       | —           |       | 79,437                                                                |       | —                            |       | —           |       | 79,437           |       |
| Capitalization of  interest                                                         |       | 164,778             |       | 52,903                                      |       | —           |       | 217,681                                                               |       | 825                               |       |             |       | 218,506          |       |
| Deferral of unsecured homebuyers’ receivables of the  year                     |       | —              |       | (62,911                                     | )          | —           |       | (62,911                                                               | )          | —                            |       | —           |       | (62,911          | )          |
|                                                                                |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Total US GAAP adjustments before tax effects                                        |       | 14,531              |       | (921,570                                    | )          | —           |       | (907,039                                                              | )          | (516,664                          | )          | —           |       | (1,423,703       | )          |
| Tax effects on US GAAP adjustments                                                  |       | 23,660              |       | 277,167                                     |       | —           |       | 300,827                                                               |       | 117,462                           |       | —           |       | 418,289          |       |
| Total US GAAP adjustments                                                           |       | 38,191              |       | (644,403                                    | )          |             |       | (606,212                                                              | )          | (399,202                          | )          |             |       | (1,005,414       | )          |
| Equity according to US GAAP                                                         |       | **Ps.**             | 9,646,918  |                                        | **Ps.**    | 8,984,562        |       | **Ps.**                                                               | (9,590,418 | )                                 | **Ps.**    | 9,041,062        |       | **Ps.**          | 717,156    |   | **Ps.** | (922,502 | ) | **Ps.** | 8,835,716 |   |

 

F-77

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedStatement of Cash Flows — US GAAP**

**Statement of Cash Flows forthe Year Ended December 31, 2009**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                 | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Operating activities                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Adjusted consolidated net  income                          |       | Ps.                 | 1,859,676  |                                        | Ps.        | 1,641,180        |       | Ps.                                                                   | (1,833,133 | )                                 | Ps.        | 1,667,723        |       | Ps.              | (195,589   | ) | Ps. | 27,872 |   | Ps. | 1,500,006 |   |
| Non-cash items:                                            |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Depreciation                                               |       |                |       | 300,472                                     |       |             |       | 300,472                                                               |       | 70,930                            |       |             |       | 371,402          |       |
| Equity income in  subsidiaries                             |       | (1,879,639          | )          | 46,506                                      |       | 1,833,133        |       |                                                                  |       |                              |       |             |       |             |       |
| Deferred income tax and statutory profit-sharing           |       | 74,882              |       | 705,190                                     |       |             |       | 780,072                                                               |       | 1,106                             |       |             |       | 781,178          |       |
| Shared-based payment  transactions                         |       | 10,638              |       |                                        |       |             |       | 10,638                                                                |       |                              |       |             |       | 10,638           |       |
| Amortization                                               |       | 91,054              |       |                                        |       |             |       | 91,054                                                                |       |                              |       |             |       | 91,054           |       |
| Exchange (gain) loss                                       |       | (182,525            | )          |                                        |       |             |       | (182,525                                                              | )          | (1,821                            | )          |             |       | (184,346         | )          |
| Changes in valuation effects of derivative  instruments    |       | 66,451              |       |                                        |       |             |       | 66,451                                                                |       |                              |       |             |       | 66,451           |       |
| Changes in operating assets and liabilities                |       | (1,276,436          | )          | (1,180,429                                  | )          | (795,023         | )          | (3,251,886                                                            | )          | 498,232                           |       | (210,725         | )          | (2,964,381       | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Net cash flows (used in) provided by operating  activities |       | (1,235,899          | )          | 1,512,919                                   |       | (795,023         | )          | (518,003                                                              | )          | 372,858                           |       | (182,853         | )          | (327,998         | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Investing activities:                                      |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Investments in:                                            |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Property and equipment                                     |       |                |       | (69,037                                     | )          |             |       | (69,037                                                               | )          | (26,428                           | )          |             |       | (95,465          | )          |
| Restricted cash                                            |       | (6,533              | )          |                                        |       |             |       | (6,533                                                                | )          | 5,236                             |       |             |       | (1,297           | )          |
| Net cash flows used in investing activities                |       | (6,533              | )          | (69,037                                     | )          |             |       | (75,570                                                               | )          | (21,192                           | )          |             |       | (96,762          | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Financing activities:                                      |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Net Proceeds from affiliates                               |       | (1,398,915          | )          | 968,636                                     |       | 795,023          |       | 364,744                                                               |       | (547,597                          | )          | 182,853          |       |             |       |
| Short-term (payments) borrowings, net                      |       | (585,434            | )          | (1,259,758                                  | )          |             |       | (1,845,192                                                            | )          | 172,936                           |       |             |       | (1,672,256       | )          |
| Proceeds from long-term borrowings                         |       | 3,232,500           |       | 908,219                                     |       |             |       | 4,140,719                                                             |       | 27,285                            |       |             |       | 4,168,004        |       |
| Repayments of long-term borrowings                         |       |                |       | (84,468                                     | )          |             |       | (84,468                                                               | )          |                              |       |             |       | (84,468          | )          |
| Share repurchased for employee stock option plan           |       | (4,586              | )          |                                        |       |             |       | (4,586                                                                | )          |                              |       |             |       | (4,586           | )          |
| Net cash flows provided by (used in) financing  activities |       | 1,243,565           |       | 532,629                                     |       | 795,023          |       | 2,571,217                                                             |       | (347,376                          | )          | 182,853          |       | 2,406,694        |       |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Net increase (decrease) in cash and cash equivalents       |       | 1,133               |       | 1,976,511                                   |       |             |       | 1,977,644                                                             |       | 4,290                             |       |             |       | 1,981,934        |       |
| Cash and cash equivalents at the beginning of the  year    |       | 435                 |       | 1,009,895                                   |       |             |       | 1,010,330                                                             |       | 129,810                           |       |             |       | 1,140,140        |       |
| Cash and cash equivalents at the end of the year           |       | **Ps.**             | 1,568      |                                        | **Ps.**    | 2,986,406        |       | **Ps.**                                                               |       |                              | **Ps.**    | 2,987,974        |       | **Ps.**          | 134,100    |   |   |   | **Ps.** | 3,122,074 |   |
|                                                            |            |                     |            |                                             |            |                  |            |                                                                       |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

F-78

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedStatement of Cash Flows — US GAAP**

**Statement of Cash Flows forthe Year Ended December 31, 2008**

**(In thousands of Mexican pesos(Ps.))**

 
| ** **                                                 | ** ** | **Parent  company** | ** ** | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Operating activities                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Adjusted consolidated net  income                          |       | Ps.                 | 1,508,843  |                                        | Ps.        | 504,331          |       | Ps.                                                                   | (1,483,693 | )                                 | Ps.        | 529,480          |       | Ps.              | 74,499     |   | Ps. | 1,934 |   | Ps. | 605,913 |   |
| Non-cash items:                                            |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Depreciation                                               |       |                |       | 273,349                                     |       |             |       | 273,349                                                               |       | 50,378                            |       |             |       | 323,727          |       |
| Equity income in  subsidiaries                             |       | (1,446,759          | )          | (36,934                                     | )          | 1,1483,693       |       |                                                                  |       |                              |       |             |       |             |       |
| Deferred income tax and statutory profit-sharing           |       | 44,803              |       | 147,800                                     |       |             |       | 192,603                                                               |       | (42,412                           | )          |             |       | 150,191          |       |
| Amortization                                               |       | 91,054              |       |                                        |       |             |       | 91,054                                                                |       |                              |       |             |       | 91,054           |       |
| Exchange (gain) loss                                       |       | 714,347             |       | (900                                        | )          |             |       | 713,447                                                               |       | 2,053                             |       |             |       | 715,500          |       |
| Changes in valuation effects of derivative  instruments    |       | 313,962             |       |                                        |       |             |       | 313,962                                                               |       |                              |       |             |       | 313,962          |       |
| Changes in operating assets and liabilities                |       | 8,909,263           |       | (16,539,560                                 | )          |             |       | (7,630,297                                                            | )          | 1,628,505                         |       | (1,934           | )          | (6,003,726       | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Net cash flows (used in) provided by operating  activities |       | 10,135,513          |       | (15,651,914                                 | )          |             |       | (5,516,401                                                            | )          | 1,713,022                         |       |             |       | (3,803,379       | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Investing activities:                                      |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Investments in:                                            |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Property and equipment                                     |       |                |       | (478,975                                    | )          |             |       | (478,975                                                              | )          | (96,404                           | )          |             |       | (575,379         | )          |
| Restricted cash                                            |       |                |       |                                        |       |             |       |                                                                  |       | 28,045                            |       |             |       | 28,045           |       |
| Net cash flows used in investing activities                |       |                |       | (478,975                                    | )          |             |       | (478,975                                                              | )          | (68,359                           | )          |             |       | (547,334         | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Financing activities:                                      |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Net Proceeds from affiliates                               |       | (12,760,368         | )          | 14,309,035                                  |       |             |       | 1,548,667                                                             |       | (1,548,667                        | )          |             |       |             |       |
| Short-term (payments) borrowings, net                      |       | 600,000             |       | 543,732                                     |       |             |       | 1,143,732                                                             |       |                              |       |             |       | 1,143,732        |       |
| Proceeds from long-term borrowings                         |       | 2,078,000           |       | 299,795                                     |       |             |       | 2,377,795                                                             |       |                              |       |             |       | 2,377,795        |       |
| Repayments of long-term borrowings                         |       | (54,434             | )          | (180,167                                    | )          |             |       | (234,601                                                              | )          | (2,907                            | )          |             |       | (237,508         | )          |
| Net cash flows provided by (used in) financing  activities |       | (10,136,802         | )          | 14,972,395                                  |       |             |       | 4,835,593                                                             |       | (1,551,574                        | )          |             |       | 3,284,019        |       |
|                                                       |       |                |       |                                        |       |             |       |                                                                  |       |                              |       |             |       |             |       |
| Net increase (decrease) in cash and cash equivalents       |       | (1,289              | )          | (1,158,494                                  | )          |             |       | (1,159,783                                                            | )          | 93,089                            |       |             |       | (1,066,694       | )          |
| Cash and cash equivalents at the beginning of the  year    |       | 1,724               |       | 2,168,389                                   |       |             |       | 2,170,113                                                             |       | 36,721                            |       |             |       | 2,206,834        |       |
| Cash and cash equivalents at the end of the year           |       | **Ps.**             | 435        |                                        | **Ps.**    | 1,009,895        |       | **Ps.**                                                               |       |                              | **Ps.**    | 1,010,330        |       | **Ps.**          | 129,810    |   |   |   | **Ps.** | 1,140,140 |   |
|                                                            |            |                     |            |                                             |            |                  |            |                                                                       |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

F-79

----

Table of Contents

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedStatement of Cash Flows — US GAAP**

**Statement of Cash Flows forthe Year Ended December 31, 2007**

**(In thousands of Mexican pesos(Ps.))**

 
|                                                       |   | **Parent  company** |      | **Wholly-  owned  guarantor  subsidiaries** |    | **Eliminations** |   | **Parent  company and  wholly-  owned  guarantor  subsidiaries** |       | **Non-  guarantor  subsidiaries** |    | **Eliminations** |   | **Consolidated** |    |
|------------------------------------------------------------|--------|---------------------|-----------|---------------------------------------------|---------|------------------|--------|-----------------------------------------------------------------------|------------|-----------------------------------|---------|------------------|--------|------------------|---------|
| Operating activities                                       |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Adjusted consolidated net  income                          |   | Ps.                 | 2,197,106 |                                        | Ps.     | 1,722,005        |   | Ps.                                                                   | (2,528,279 | )                                 | Ps.     | 1,390,832        |   | Ps.              | 236,176 |   | Ps. | 168,838 |   | Ps. | 1,795,846 |   |
| Non-cash items:                                            |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Depreciation                                               |   |                |      | 139,742                                     |    |             |   | 139,742                                                               |       | 35,975                            |    |             |   | 175,717          |    |
| Equity income in  subsidiaries                             |   | (2,398,610          | )         | 621                                         |    | 2,397,989        |   | —                                                                |       |                              |    |             |   |             |    |
| Deferred income tax and statutory profit-sharing           |   | (6,285              | )         | 579,359                                     |    |             |   | 573,074                                                               |       | 2,922                             |    |             |   | 575,996          |    |
| Amortization                                               |   | 106,566             |      |                                        |    |             |   | 106,566                                                               |       |                              |    |             |   | 106,566          |    |
| Exchange (gain) loss                                       |   | 20,000              |      |                                        |    |             |   | 20,000                                                                |       |                              |    |             |   | 20,000           |    |
| Changes in valuation effects of derivative  instruments    |   | (139,749            | )         |                                        |    |             |   | (139,749                                                              | )          |                              |    |             |   | (139,749         | )       |
| Changes in operating assets and liabilities                |   | 2,328,180           |      | (4,318,194                                  | )       | 130,290          |   | (1,859,724                                                            | )          | 76,157                            |    | (168,838         | )      | (1,952,405       | )       |
|                                                       |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Net cash flows (used in) provided by operating  activities |   | 2,107,208           |      | (1,876,467                                  | )       | —           |   | 230,741                                                               |       | 351,230                           |    | —           |   | 581,971          |    |
|                                                       |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Investing activities:                                      |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Investments in:                                            |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Property and equipment                                     |   |                |      | (600,961                                    | )       |             |   | (600,961                                                              | )          | (79,787                           | )       |             |   | (680,748         | )       |
| Restricted cash                                            |   |                |      |                                        |    |             |   |                                                                  |       | (119,855                          | )       |             |   | (119,855         | )       |
| Net cash flows used in investing activities                |   |                |      | (600,961                                    | )       |             |   | (600,961                                                              | )          | (199,642                          | )       |             |   | (800,603         | )       |
|                                                       |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Financing activities:                                      |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Net Proceeds from affiliates                               |   | (1,922,084          | )         | 2,086,828                                   |    |             |   | 164,744                                                               |       | (164,744                          | )       |             |   |             |    |
| Proceeds from long-term borrowings                         |   | 503,911             |      | 2,148,761                                   |    |             |   | 2,652,672                                                             |       | (5,396                            | )       |             |   | 2,647,276        |    |
| Repayments of long-term borrowings                         |   | (588,066            | )         | (1,820,673                                  | )       |             |   | (2,408,739                                                            | )          |                              |    |             |   | (2,408,739       | )       |
| Shares repurchased for employee stock option plan          |   | (99,342             | )         |                                        |    |             |   | (99,342                                                               | )          |                              |    |             |   | (99,342          | )       |
| Dividends paid by  subsidiary                              |   |                |      | (9,133                                      | )       |             |   | (9,133                                                                | )          |                              |    |             |   | (9,133           | )       |
| Net cash flows provided by (used in) financing  activities |   | (2,105,581          | )         | 2,405,783                                   |    |             |   | 300,202                                                               |       | (170,140                          | )       |             |   | 130,062          |    |
|                                                       |   |                |      |                                        |    |             |   |                                                                  |       |                              |    |             |   |             |    |
| Net increase (decrease) in cash and cash equivalents       |   | 1,627               |      | (71,645                                     | )       |             |   | (70,018                                                               | )          | (18,552                           | )       |             |   | (88,570          | )       |
| Cash and cash equivalents at the beginning of the  year    |   | 97                  |      | 2,240,034                                   |    |             |   | 2,240,131                                                             |       | 55,273                            |    |             |   | 2,295,404        |    |
| Cash and cash equivalents at the end of the year           |   | **Ps.**             | 1,724     |                                        | **Ps.** | 2,168,389        |   | **Ps.**                                                               |       |                              | **Ps.** | 2,170,113        |   | **Ps.**          | 36,721  |   |   |   | **Ps.** | 2,206,834 |   |
|                                                            |        |                     |           |                                             |         |                  |        |                                                                       |            |                                   |         |                  |        |                  |         |  |  |  |  |  |  |  |

 

F-80

----