**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, 2008** |
| ** ** | ** **                                                                                                                                       |
| **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)                                                                                |

 

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

 

----

 

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:
|   | 334,870,350  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

 

Note— Checking the box above will not relieve any registrant required to filereports pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934 from their obligations under those Sections.

 

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

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.

 

o Yes   o No

 

----

*              Not for trading but only inconnection with the registration of American Depositary Shares, pursuant to therequirements of the Securities and Exchange Commission.

 

----

 
| **PART I**   |                                                                          |   |
|-------------------|-------------------------------------------------------------------------------|--------|
| ITEM 1.           | IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISORS                        | 5      |
| ITEM 2.           | OFFER STATISTICS AND  EXPECTED TIMETABLE                                      | 5      |
| ITEM 3.           | KEY INFORMATION                                                               | 5      |
| ITEM 4.           | INFORMATION ON  THE COMPANY                                                   | 17     |
| ITEM 4A.          | UNRESOLVED  STAFF COMMENTS                                                    | 35     |
| ITEM 5.           | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 | 35     |
| ITEM 6.           | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   | 55     |
| ITEM 7.           | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 61     |
| ITEM 8.           | FINANCIAL  INFORMATION                                                        | 63     |
| ITEM 9.           | THE OFFER AND  LISTING                                                        | 64     |
| ITEM 10.          | ADDITIONAL  INFORMATION                                                       | 68     |
| ITEM 11.          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 82     |
| ITEM 12.          | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 83     |
|              |                                                                          |   |
| **PART II**  |                                                                          |   |
| ITEM 13.          | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              | 83     |
| ITEM 14.          | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 83     |
| ITEM 15.          | CONTROLS AND PROCEDURES                                                       | 83     |
| ITEM 16.          | (RESERVED)                                                                    | 85     |
| ITEM 16A.         | FINANCIAL EXPERT                                                              | 85     |
| ITEM 16B.         | CODE OF ETHICS                                                                | 85     |
| ITEM 16C.         | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       | 85     |
| ITEM 16D.         | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 86     |
| ITEM 16E.         | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 86     |
| ITEM 16F.         | CHANGE OF  CERTIFYING ACCOUNTANT                                              | 86     |
| ITEM 16G.         | CORPORATE  GOVERNANCE                                                         | 86     |
|              |                                                                          |   |
| **PART III** |                                                                          |   |
| ITEM 17.          | FINANCIAL  STATEMENTS                                                         | 87     |
| ITEM 18.          | FINANCIAL  STATEMENTS                                                         | 87     |
| ITEM 19.          | EXHIBITS                                                                      | 88     |

 

----

 

**PRESENTATIONOF 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 reportincludes our audited consolidated financial statements as of December 31,2007 and 2008 and for each of the three years ended December 31, 2006,2007 and 2008. Our consolidated financial statements and other financialinformation included in this annual report, unless otherwise specified, arestated in Mexican pesos.

 

We prepare our financialstatements in pesos and in accordance with Mexican Financial ReportingStandards, referred to as MFRS, which differ in certain significant respectsfrom accounting principles generally accepted in the United States, referred toas US GAAP. See Notes 28 and 29 to our audited consolidated financialstatements for information relating to the nature and effect of suchdifferences and for a quantitative reconciliation of our majority net income andmajority stockholders’ equity according to MFRS to consolidated net income, andconsolidated stockholders’ equity according to US GAAP.

 

Effective January 1,2008 the Company adopted MFRS B-10, *Effects of Inflation*.Based on this Standard, the Company did not recognize the effects of inflationin its financial statements for the year ended December 31, 2008. However,financial statements for prior periods are expressed in pesos of constantpurchasing power as of December 31, 2007. The effects of transactions thatoccurred after that date are expressed in nominal pesos.

 

According to the provisions of MFRS B-10, an inflationary environment ispresent when cumulative inflation for the three preceding years is 26% or more,in which case, the effects of inflation must be recognized in the financialstatements. Based on this standard, the economic environment in Mexico in 2008is considered non-inflationary because inflation over 2006, 2007 and 2008 wasless than 26%. Accordingly, the Company’s financial information for 2008 wasprepared without recognizing the effects of inflation. Interpretation 9 of MFRSB-10 requires that financial statements presented for comparative purposes forperiods prior to 2008 be expressed in Mexican pesos of constant purchasing poweras of December 31, 2007. Accordingly, the financialstatements as of December 31, 2008 have been presented based on nominal pesoswithout including the effects of inflation, while financial statements from December 31,2006 and 2007, as presented for comparative purposes, are expressed in pesos ofconstant purchasing power as of December 31, 2007. The factor used torestate the prior year balances was 1.037590, which is based on the NationalConsumer 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 homebuyer has submitted all requireddocuments in order to obtain financing from the mortgage lender;

 

·      the Company has established that thehomebuyer will obtain the required financing from the mortgage lender;

 

·      the homebuyer has signed a purchaseapplication for the processing and granting of a loan to buy a property to beused as housing; and

 

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

 

3

----

 

We use “deliver” andrefer to homes “delivered” in connection with homes for which title has passedto the homebuyer and for which we have received the sale proceeds.

 

***Currency Information***

 

Unless otherwisespecified, references to “US$,” “U.S. dollars” and “dollars” are to the lawfulcurrency of the United States. References to “Ps.” and “pesos” are to thelawful currency of Mexico. References to “UDI” and “UDIs” are to Unidades deInversión, units of account whose value in pesos is indexed to inflation on adaily basis by Banco de México (Mexico’s central bank) and publishedperiodically.

 

This annual reportcontains translations of various peso amounts into U.S. dollars at specifiedrates solely for the convenience of the reader. You should not understand thesetranslations as representations that the peso amounts actually represent theseU.S. dollar amounts or could be converted into U.S. dollars at the rateindicated. Unless otherwise indicated, we have translated U.S. dollar amountsin this annual report at the exchange rate of Ps.13.7738 to US$1.00, which wasthe buying rate published by Banco de México, expressed in pesos per U.S.dollar, on December 31, 2008. On June 26, 2009, such noon buying ratewas Ps. 13.3380 to US$1.00.

 

Unless otherwise indicated,references to UDIs are to UDIs at Banco de México’s UDI conversion rate of Ps.4.184316 per UDI on December 31, 2008. On June 26, 2009, the UDIconversion rate was Ps. 4.248334 per UDI.

 

**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.

 

**MARKETSHARE AND OTHER INFORMATION**

 

***Other Information Presented***

 

The standard measure ofarea in 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 10,000 m(2) (orapproximately 2.5 acres).

 

**FORWARD-LOOKINGSTATEMENTS**

 

This annual report andthe documents 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 ExchangeCommission, 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, net income(loss), earnings per share, capital expenditures, dividends, capital structureor other financial items or ratios;

 

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

 

·      statements about our future economicperformance or that of Mexico; and

 

·      statements of assumptions underlyingthese statements.

 

4

----

 

You should not placeundue reliance 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.

 

**ITEM 3.      Key Information.**

 

**SELECTEDFINANCIAL DATA**

 

The following tablespresent our selected consolidated financial information as of and for theperiods indicated. Certain information presented in these tables does notinclude our Beta subsidiary which we acquired on July 1, 2005. Informationas of December 31, 2007 and 2008 and for each of the three years ended December 31,2006, 2007 and 2008 is derived from and should be read together with ouraudited consolidated financial statements provided in this annual reportbeginning on page F-1. Our consolidated financial statements and otherfinancial information included in this annual report, unless otherwisespecified, are stated in pesos.

 

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

 

Our consolidatedfinancial statements are prepared in accordance with MFRS, which differ incertain significant respects from US GAAP. Notes 28 and 29 to our auditedconsolidated financial statements provide information relating to the natureand effect of such differences as they relate to us, and provide areconciliation to US GAAP of consolidated net income and consolidatedstockholders’ equity.

 

Pursuant to MFRS, we usethe percentage-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. Under MFRS,applying the percentage-of-completion method, we measure the progress towardscompletion in terms of actual costs incurred versus estimated expenditures foreach 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 saleof a 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.

 

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

 

·      the homebuyer has submitted all requireddocuments in order to obtain financing from the mortgage lender;

 

·      the Company has established that thehomebuyer will obtain the required financing from the mortgage lender;

 

·      the homebuyer has signed a purchaseapplication for the processing and granting of a loan to buy a property to beused as housing; and

 

5

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

 

The variations inthe Company’s gross profit, gross profit margin and ultimately operatingprofits arise due to the stated differences related to cost and revenuerecognition between MFRS and US GAAP. In 2008, revenues under MFRS werePs.18,850 million while revenues under US GAAP were Ps.14,885 million. In2007, revenues under MFRS were Ps.16,222 million while revenues under US GAAPwere Ps.13,850 million. Revenues under US GAAP 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 Note28 to the Company’s consolidated financial statements.

 

Total units closedand recognized as US GAAP revenue in 2008 were 41,679 units (39,557 in 2007)compared to 57,498 units sold under MFRS in 2008 (51,672 in 2007). The lowervolume in units closed in 2008 compared to units sold is primarily attributableto both our continued growth and therefore higher proportion ofconstructions-in-process, and our increased participation during 2008 in theconstruction of nearly-completed vertical building projects which take longerto build, sell and collect.** **In addition, the volume of totalunits closed was also impacted by the continued delay in the disbursement ofFederal Government subsidies in certain cities, which in turn impacts thetiming by which INFONAVIT and other lenders will commit to close a transaction.Further, a lower volume of units closed and recognized as US GAAP revenuecompared to units sold under MFRS is also related to a slowdown in thecollection process through FOVISSSTE, who employs sofoles to make paymentswhich result in delays in the payment process. Total units closed of 41,679 in 2008 represents a 5% increase comparedto total units closed in 2007 of 39,557. The increase is attributable to thecontinued growth in the Company’s business. In 2007, units closed increased by32% over 2006. The proportion of units sold and units closed are generallyconsistent when evaluated by operating segment during both 2008 and 2007. As ofDecember 31, 2008, approximately 15,819 units remain at various stages ofcompletion under MFRS, and thus have yet to be recognized into revenue under USGAAP.

 

Except for ratios, percentages,and per share, per ADS, and operating data, all amounts are presented inthousands of pesos.

 

For additionalinformation regarding financial information presented in this annual report,see “Presentation of Financial and Other Information.”

 

**HomexSelected Consolidated Financial Information**

 
| ** **                                              | ** ** | **Years Ended December 31,**                       | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008 (5)**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(In  thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Statement  of Operations Data:                          | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mexican Financial Reporting Standards:**              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Revenues  (1), (11)                                     |       | 18,850,496                                                        |       | 16,222,524 |   | 13,439,519 |   | 9,216,043 |   | 5,928,658 |   |
| Cost  of sales                                          |       | 13,473,257                                                        |       | 11,041,456 |   | 9,191,005 |   | 6,418,567 |   | 4,128,107 |   |
| Gross  profit                                           |       | 5,377,239                                                         |       | 5,181,068 |   | 4,248,514 |   | 2,797,476 |   | 1,800,551 |   |
| Selling  and administrative expenses                    |       | 2,377,646                                                         |       | 1,798,429 |   | 1,359,147 |   | 913,165 |   | 483,574 |   |
| Income  from operations                                 |       | 2,999,593                                                         |       | 3,382,639 |   | 2,889,367 |   | 1,884,311 |   | 1,316,977 |   |
| Other  (expenses) income, net (4)                       |       | (109,926                                                          | )          | 209,223 |   | 11,004 |   | 14,956 |   | 38,509 |   |
| Net  comprehensive financing cost (2)                   |       | 558,485                                                           |       | 278,904 |   | 790,969 |   | 494,005 |   | 178,086 |   |
| Income  before income taxes                             |       | 2,331,182                                                         |       | 3,312,958 |   | 2,109,402 |   | 1,405,262 |   | 1,177,400 |   |
| Income  tax expense                                     |       | 712,175                                                           |       | 951,280 |   | 669,843 |   | 458,902 |   | 378,897 |   |
| Consolidated  net income                                |       | 1,619,007                                                         |       | 2,361,678 |   | 1,439,559 |   | 946,360 |   | 798,503 |   |
| Net  income of majority stockholders                    |       | 1,580,876                                                         |       | 2,233,066 |   | 1,391,281 |   | 953,611 |   | 788,389 |   |
| Net  income (loss) of minority stockholders             |       | 38,131                                                            |       | 128,612 |   | 48,278 |   | (7,251 | ) | 10,114 |   |
| Weighted  average shares outstanding (in thousands)     |       | 334,870                                                           |       | 335,688 |   | 335,869 |   | 324,953 |   | 281,997 |   |
| Basic  and diluted earnings per share (in pesos)        |       | 4.72                                                              |       | 6.65 |   | 4.14 |   | 2.93 |   | 2.80 |   |
| Basic  and diluted earnings per ADS (3) (in pesos) |       | 28.32                                                             |       | 39.91 |   | 24.85 |   | 17.60 |   | 16.78 |   |
| **US GAAP:**                                            |       |                                                              |       |   |   |   |   |   |   |   |   |
| Revenues  (1)                                           |       | 14,884,701                                                        |       | 13,849,728 |   | 13,224,145 |   | 8,212,918 |   | 4,402,410 |   |
| Cost  of sales                                          |       | 10,398,464                                                        |       | 9,814,725 |   | 9,311,415 |   | 6,150,813 |   | 3,318,605 |   |
| Gross  profit                                           |       | 4,486,237                                                         |       | 4,035,003 |   | 3,912,730 |   | 2,062,105 |   | 1,083,805 |   |
| Operating  income (4)                                   |       | 2,108,793                                                         |       | 2,116,650 |   | 2,519,346 |   | 1,142,318 |   | 582,616 |   |
| Net  income                                             |       | 567,782                                                           |       | 1,667,234 |   | 1,632,577 |   | 841,792 |   | 471,062 |   |
| Weighted  average shares outstanding (in thousands)     |       | 334,870                                                           |       | 335,688 |   | 335,869 |   | 324,953 |   | 281,997 |   |
| Basic  and diluted earnings per share (in pesos)        |       | 1.70                                                              |       | 4.96 |   | 4.86 |   | 2.59 |   | 1.67 |   |
| Basic  and diluted earnings per ADS (3) (in pesos) |       | 10.20                                                             |       | 29.76 |   | 29.16 |   | 15.54 |   | 10.02 |   |

 

6

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| ** **                                              | ** ** | **As of and for the Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(In  thousands of Mexican Ps., except as otherwise specified)**                      | ** ** |
| Balance  Sheet Data:                                    |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **Mexican Financial Reporting Standards:**              |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                              |       | 1,140,140                                                                              |       | 2,206,834 |   | 2,381,689 |   | 1,423,813 |   | 570,294 |   |
| Restricted  cash                                        |       | 128,045                                                                                |       | 156,090 |   | 37,597 |   | 336 |   | 22,848 |   |
| Trade  accounts receivable                              |       | 11,845,530                                                                             |       | 7,549,258 |   | 5,541,086 |   | 5,999,812 |   | 3,537,424 |   |
| Total  current assets                                   |       | 18,647,785                                                                             |       | 14,794,575 |   | 12,572,239 |   | 11,578,697 |   | 6,573,449 |   |
| Land  held for future development                       |       | 9,254,469                                                                              |       | 7,091,074 |   | 5,180,583 |   | 1,927,217 |   | 562,338 |   |
| Property  and equipment                                 |       | 1,402,928                                                                              |       | 1,155,729 |   | 669,095 |   | 497,535 |   | 280,533 |   |
| Total  assets                                           |       | 30,505,412                                                                             |       | 24,189,256 |   | 19,620,062 |   | 15,398,691 |   | 7,558,654 |   |
| Current  debt and current portion of long-term debt     |       | 1,417,404                                                                              |       | 260,758 |   | 91,392 |   | 92,235 |   | 443,070 |   |
| Current  portion of leases                              |       | 89,255                                                                                 |       | 68,187 |   | 8,704 |   | 7,588 |   | — |   |
| Total  current liabilities                              |       | 8,761,917                                                                              |       | 6,967,592 |   | 6,268,537 |   | 4,075,951 |   | 2,437,305 |   |
| Long-term  debt and swap payable                        |       | 5,990,119                                                                              |       | 3,177,884 |   | 3,605,029 |   | 3,601,864 |   | 201,066 |   |
| Long-term  leases                                       |       | 314,639                                                                                |       | 288,857 |   | — |   | — |   | — |   |
| Land  suppliers — long-term                        |       | 405,426                                                                                |       | 992,801 |   | — |   | — |   | 22,415 |   |
| Total  long-term liabilities                            |       | 10,226,238                                                                             |       | 7,380,534 |   | 5,759,021 |   | 5,179,421 |   | 907,607 |   |
| Total  liabilities                                      |       | 18,988,155                                                                             |       | 14,348,126 |   | 12,027,558 |   | 9,255,372 |   | 3,344,912 |   |
| Common  stock                                           |       | 528,011                                                                                |       | 528,011 |   | 528,011 |   | 528,011 |   | 242,249 |   |
| Total  stockholders’ equity                        |       | 11,517,257                                                                             |       | 9,841,130 |   | 7,592,504 |   | 6,143,319 |   | 4,213,742 |   |
|                                                    |       | 30,505,412                                                                             |       | 24,189,256 |   | 19,620,062 |   | 15,398,691 |   | 7,558,654 |   |
|                                                    |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **US GAAP:**                                            |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                              |       | 1,140,140                                                                              |       | 2,206,834 |   | 2,381,689 |   | 1,423,813 |   | 570,294 |   |
| Restricted  cash                                        |       | 128,045                                                                                |       | 156,090 |   | 37,597 |   | 336 |   | 22,848 |   |
| Accounts  receivable                                    |       | 1,016,172                                                                              |       | 600,655 |   | 985,043 |   | 1,229,953 |   | 802,489 |   |
| Total  current assets                                   |       | 18,052,424                                                                             |       | 14,488,606 |   | 12,467,252 |   | 10,751,884 |   | 6,188,381 |   |
| Land  held for future development                       |       | 9,254,469                                                                              |       | 7,091,074 |   | 5,180,580 |   | 1,927,217 |   | 562,338 |   |
| Property  and equipment                                 |       | 1,402,928                                                                              |       | 1,155,729 |   | 669,095 |   | 497,535 |   | 280,533 |   |
| Total  assets                                           |       | 30,774,279                                                                             |       | 24,579,367 |   | 20,079,591 |   | 14,795,096 |   | 7,173,586 |   |
| Total  current liabilities                              |       | 14,274,161                                                                             |       | 11,054,629 |   | 9,147,783 |   | 5,589,043 |   | 3,300,268 |   |
| Total  majority stockholders’ equity               |       | 9,247,218                                                                              |       | 8,627,504 |   | 7,082,989 |   | 5,509,272 |   | 3,604,828 |   |
| Other  Financial Data:                                  |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **Mexican Financial Reporting Standards:**              |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Depreciation                                            |       | 323,727                                                                                |       | 196,307 |   | 130,829 |   | 66,626 |   | 27,050 |   |
| Gross  margin (6)                                       |       | 28.5                                                                                   | %          | 31.9 | % | 31.6 | % | 30.4 | % | 30.4 | % |
| Operating  margin (7)                                   |       | 15.9                                                                                   | %          | 20.8 | % | 21.5 | % | 20.4 | % | 22.2 | % |
| Net  margin (8)                                         |       | 8.6                                                                                    | %          | 14.5 | % | 10.7 | % | 10.3 | % | 13.5 | % |
| Other  Financial Data:                                  |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA (9)                                    |       | 4,351,923                                                                              |       | 4,031,097 |   | 3,173,119 |   | 2,151,208 |   | 1,392,043 |   |
| Net  debt (10)                                          |       | 6,596,753                                                                              |       | 1,513,305 |   | 1,245,825 |   | 2,196,822 |   | 73,842 |   |
| Ratio  of total debt to total stockholders’ equity |       | 67.2                                                                                   | %          | 37.8 | % | 47.7 | % | 58.9 | % | 15.3 | % |
| Ratio  of total debt to total assets                    |       | 25.4                                                                                   | %          | 15.4 | % | 18.5 | % | 23.5 | % | 8.5 | % |
| **US GAAP:**                                            |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Gross  margin (6)                                       |       | 30.1                                                                                   | %          | 29.1 | % | 29.6 | % | 25.1 | % | 24.6 | % |
| Operating  margin (7)                                   |       | 14.1                                                                                   | %          | 15.2 | % | 19.1 | % | 13.9 | % | 13.2 | % |
| Net  margin (8)                                         |       | 3.8                                                                                    | %          | 12.0 | % | 12.3 | % | 10.2 | % | 10.7 | % |
| Other  Financial Data:                                  |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA (9)                                    |       | 1,357,188                                                                              |       | 2,855,834 |   | 2,715,514 |   | 1,701,859 |   | 736,830 |   |

 

7

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(1)     For US GAAP purposes,sales are recognized when title passes to thehomebuyer and the homebuyer has the legal right to occupy the home,as opposed to the percentage-of-completion methodof accounting used for MFRS purposes, under which werecognize income from homes we sell as we incur the cost of their construction.See (11) below for a discussion of certain accounting pronouncements not yetadopted.

 

(2)     Represents interest income,interest expense, monetary position gains and losses (for 2007, 2006,2005 and 2004), valuation effects of derivative instruments and foreignexchange gains and losses.

 

(3)     Assumes all common shares arerepresented by ADSs. Each ADS represents six common shares. Any discrepanciesbetween per share and per ADS amounts in the tables are due to rounding.

 

(4)     Employee statutory profit-sharingexpense is classified as an operating expense under US GAAP, and as other(expenses) income, net under MFRS.

 

(5)     Interest capitalized as part of the costof inventories is included in cost of sales under US GAAP and MFRS. Dueto the application of MFRS D-6 during 2008 and 2007,the net comprehensive financing cost capitalized related to qualifiedassets for the same periods was Ps.1,250,080 and Ps.179,304, of whichPs.976,707 and Ps.119,286 related to inventories sold and subsequently wereapplied to cost of sales of the same periods, respectively. The averageperiod for the amortization of the capitalized comprehensive financing cost is6 months. The annual capitalization rates are 24.3% and 7.6%, respectively.

 

(6)     Represents gross profit divided by totalrevenues.

 

(7)     Represents operating income divided bytotal revenues.

 

(8)     Represents net income divided by totalrevenues.

 

(9)     Adjusted EBITDA is not a financialmeasure computed under Mexican or US GAAP. Adjusted EBITDA derived fromour MFRS financial information means MFRS net income excluding (i) depreciationand amortization; (ii) net comprehensive financing costs (“CFC”) (whichare 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 costof sales; and (iii) income tax expense and employee statutoryprofit-sharing expense.

 

Adjusted EBITDA derivedfrom our U.S. GAAP financial information means US GAAP net income excluding (i) depreciationand amortization; (ii) interest expense and monetary position gain orloss; and (iii) income tax expense. Adjusted EBITDA does not excludeinterest income (Ps.63,141 in 2008, Ps.100,874 in 2007, Ps. 61,407 in2006, Ps. 25,799 in 2005 and Ps. 19,085 in 2004).

 

Adjusted EBITDA underMFRS excludes the effect of CFC capitalized to land balances that issubsequently charged to cost of 

 

8

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sales.  TheCompany’s computation of Adjusted EBITDA under US GAAP includes such expense inthe computation of Adjusted EBITDA for all periods. Accordingly, the twocomputations are not comparable.

 

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

 

Adjusted EBITDA is also auseful basis for comparing our results with those of other companies because itpresents operating results on a basis unaffected by capital structure. Youshould review Adjusted EBITDA, along with net income and cash flow fromoperating activities, investing activities and financing activities, whentrying to understand our operating performance. While Adjusted EBITDA mayprovide a useful basis for comparison, our computation of Adjusted EBITDA isnot 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 theexplanations that accompany it. While Adjusted EBITDA is a relevant and widelyused measure of operating performance, it does not represent cash generatedfrom operating activities in accordance with MFRS or US GAAP and should not beconsidered as an alternative to net income, determined in accordance with MFRSor US GAAP, as an indication of our financial performance, or to cash flow fromoperating activities, determined in accordance with MFRS or US GAAP, as ameasure of our liquidity, nor is it indicative of funds available to fund ourcash needs.

 

Adjusted EBITDA hascertain material limitations: (i) it does not include interestexpense, which, because we have borrowed money to finance some of ouroperations, is a necessary and ongoing part of our costs and assisted us ingenerating revenue; (ii) it does not include taxes, which are a necessaryand ongoing part of our operations; and (iii) it does not includedepreciation, which, because we must utilize property and equipment in order togenerate revenues in our operations, is a necessary and ongoing part of ourcosts. 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 Computedfrom Our MFRS Financial Information***

 
| ** **                                                                       | ** ** | **Years Ended December 31,**                       | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(In  thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Net  income                                                                      |       | 1,619,007                                                         |       | 2,361,678 |   | 1,439,559 |   | 946,360 |   | 798,503 |   |
| Depreciation                                                                     |       | 323,727                                                           |       | 196,307 |   | 130,829 |   | 66,626 |   | 27,050 |   |
| Net  comprehensive financing cost                                                |       | 558,485                                                           |       | 278,904 |   | 790,969 |   | 494,005 |   | 178,086 |   |
| Amortization  of backlog (intangible)                                            |       | —                                                            |       | — |   | 10,714 |   | 125,808 |   | — |   |
| Amortization  of Beta trademark                                                  |       | 91,054                                                            |       | 92,958 |   | 94,477 |   | 49,153 |   | — |   |
| Employee  statutory profit-sharing                                               |       | 70,768                                                            |       | 30,684 |   | 36,728 |   | 10,354 |   | 9,507 |   |
| Comprehensive  financing cost capitalized and subsequently charged cost of sales |       | 976,707                                                           |       | 119,286 |   | — |   | — |   | — |   |
| Income  tax expense                                                              |       | 712,175                                                           |       | 951,280 |   | 669,843 |   | 458,902 |   | 378,897 |   |
| Adjusted  EBITDA                                                                 |       | 4,351,923                                                         |       | 4,031,097 |   | 3,173,119 |   | 2,151,208 |   | 1,392,043 |   |

 

***Reconciliation of Net Income to Adjusted EBITDA Computedfrom Our US GAAP Financial Information***

 
| ** **                             | ** ** | **Years Ended December 31,**                       | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(In  thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Net  income                            |       | 567,782                                                           |       | 1,667,234 |   | 1,632,577 |   | 841,792 |   | 471,062 |   |
| Depreciation                           |       | 323,727                                                           |       | 196,307 |   | 130,829 |   | 66,626 |   | 27,050 |   |
| Interest  expense and inflation effect |       | 85,926                                                            |       | 173,719 |   | 47,631 |   | 49,653 |   | 9,503 |   |
| Amortization  of backlog (intangible)  |       | —                                                            |       | 16,747 |   | 58,397 |   | 296,445 |   | — |   |
| Amortization  of Beta trademark        |       | 91,054                                                            |       | 92,958 |   | 94,477 |   | 49,153 |   | — |   |
| Income  tax expense                    |       | 288,699                                                           |       | 708,869 |   | 751,603 |   | 398,190 |   | 229,215 |   |
| Adjusted  EBITDA                       |       | 1,357,188                                                         |       | 2,855,834 |   | 2,715,514 |   | 1,701,859 |   | 736,830 |   |

 

9

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(10)   Net debt is not a financial measurecomputed under MFRS. We compute net debt as the sum of all debt less cash andcash equivalents, each of which is computed in accordance with MFRS. Managementuses net debt as a measure of our total amount of leverage, as it gives effectto cash accumulated on our balance sheets. Management believes net debtprovides useful information to investors because it reflects our actual debt aswell as our available cash and cash equivalents that could be used to reducethis debt. Net debt has certain material limitations in that it assumes the useof our cash and cash equivalents to repay debt that is actually stilloutstanding and not to fund operating activities or for investment.

 

***Reconciliation of Total Debt to Net Debt Derived from OurMFRS Financial Information***

 
| ** **                         | ** ** | **As of December 31,**                             | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(In  thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Current  portion of long-term debt |       | 1,342,880                                                         |       | 185,211 |   | 13,781 |   | 11,183 |   | 443,070 |   |
| Current  portion of leases         |       | 89,255                                                            |       | 68,187 |   | 8,704 |   | 7,588 |   | — |   |
| Long-term  debt                    |       | 6,304,758                                                         |       | 3,466,741 |   | 3,605,029 |   | 3,601,864 |   | 201,066 |   |
| Total  debt                        |       | 7,736,893                                                         |       | 3,720,139 |   | 3,627,514 |   | 3,620,635 |   | 644,136 |   |
| Cash  and cash equivalents         |       | 1,140,140                                                         |       | 2,206,834 |   | 2,381,689 |   | 1,423,813 |   | 570,294 |   |
| Net  debt                          |       | 6,596,753                                                         |       | 1,513,305 |   | 1,245,825 |   | 2,196,822 |   | 73,842 |   |

 

(11)  In December 2008, IMFRS 14 wasissued by the CINIF to complement Bulletin D-7’s regulation, *Construction Agreements and Manufacturing of Certain Capital Assets*.This Interpretation is applicable to the recognition of revenues, costs andexpenses for all entities that undertake the construction of capital assetsdirectly or through sub contractors. This Interpretation will be adopted as of January 1,2010, with retrospective application to prior accounting periods presented withits 2010 consolidated financial statements. Management is evaluating whateffect this new accounting pronouncement will have on the Company’s results ofoperations and financial position. While differences in revenue recognitionmight still exist between MFRS and US GAAP upon the adoption of INIF 14, it isanticipated that the Company’s MFRS revenue recognition will more closelyapproximate its US GAAP revenue recognition at that time. The Company’s US GAAPrevenue recognition is disclosed further in Note 28.

 

**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 been recovered.

 

We have not paiddividends since we were formed in 1989 and we do not currently expect to paydividends. We intend to devote a substantial portion of our future cash flow tofunding working capital requirements and purchasing land following a conservative replacement strategy for landbank acquisitions. We may consider adopting a dividend policy in thefuture based on a number of factors, including our results of operations,financial condition, cash requirements, tax consideration, future prospects,and other factors that our board of directors and our shareholders may deemrelevant, including the terms and conditions of future debt instruments thatmay limit our ability to pay dividends. On April 29, 2009 the Company heldits ordinary annual shareholders’ meeting, where shareholders renewed a sharerepurchase program for up to US$250 through market transactions.

 

**EXCHANGERATE 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 ratespresented in the following table were calculated by using the average of theexchange rates on the last day of each month during the relevant period. Thedata provided in this table is based on buying rates published by Bank of NewYork. All amounts are stated in pesos, and we have not restated the rates inconstant currency units. We make no representation that the Mexican pesoamounts referred to in this annual report could have been or could be convertedinto U.S. dollars at any particular rate or at all.

 

10

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| ** **                                  | ** ** | **Noon Buying Rate (Ps. Per US$)** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Years Ended December 31,** | ** ** | **Low (1)**                                            | ** ** | **High (1)** | ** ** | **Average********(2)** | ** ** | **Period-********End** | ** ** |
| 2004                                        |       | 10.79                                                       |       | 11.66 |   | 11.29 |   | 11.15 |   |
| 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 |   |

 
| **Month Ended**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| December 31,  2008 |       | 13.09      |       | 13.83      |       | 13.42      |       | 13.77      |       |
| January 31,  2009  |       | 13.33      |       | 14.33      |       | 13.88      |       | 14.33      |       |
| February 29,  2009 |       | 14.13      |       | 15.09      |       | 14.61      |       | 15.09      |       |
| March 31,  2009    |       | 14.02      |       | 15.41      |       | 14.65      |       | 14.21      |       |
| April 30,  2009    |       | 13.05      |       | 13.89      |       | 13.40      |       | 13.80      |       |
| May 31,  2009      |       | 12.88      |       | 13.82      |       | 13.19      |       | 13.18      |       |
| June 26,  2009     |       | 13.16      |       | 13.64      |       | 13.38      |       | 13.34      |       |

 

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(1)                 Rates shown are the actual low and high, on aday-by-day basis for each period.

 

(2)                 Average of daily rates.

 

On June 26, 2009,Banco de México’s UDI conversion rate was Ps. 4.248334 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 segment entities(such as us) to meet their foreign currency obligations. Nevertheless, in theevent of renewed shortages of foreign currency, it is possible that foreigncurrency will not continue to be available to private segment companies or thatforeign currency that we may need to service foreign currency obligations or toimport goods will not be available for purchase in the open market withoutsubstantial additional cost.

 

**RISKFACTORS**

 

**RiskFactors Related to Our Business**

 

***Decreases in the Amount of Mortgage Financing Provided byMexican Housing Funds on Which We Depend, or Disbursement Delays, Could Resultin a Decrease in Our Sales and Revenues***

 

The home buildingindustry in 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, orINFONAVIT (*Instituto del Fondo Nacional parala Vivienda de los Trabajadores*), which is financed primarilythrough mandatory contributions from the gross wages of private segmentworkers, and securitization of mortgages in the capital markets;

 

·                     the Social Security and Services Institute PublicSegment Workers’ Housing Fund, or FOVISSSTE (*Fondopara la Vivienda y la Seguridad y Servicios Sociales para los Trabajadores delEstado* ), which is financed primarily through mandatorycontributions from the gross wages of public sector workers; and

 

·                     public mortgage providers such as the Federal MortgageSociety, or SHF (*Sociedad HipotecariaFederal, S.N.C., Institucion de Banca de Desarrollo*), which isfinanced through its own funds as well as funds provided by the World Bank anda trust managed by Banco de México.

 

11

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See “Item 4. Informationon the 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 HousingFunds have 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 77.0% of our revenuesand 77.0% of our operating income for 2008 and 77.3% of our revenues and 77.3%of our operating income for 2007.

 

Accordingly, ourfinancial results are affected by policies and administrative procedures ofINFONAVIT, FOVISSSTE, SHF, and a federal housing subsidy program, as well as bythe Mexican government’s housing policy. The availability of mortgage financinggranted by INFONAVIT and FOVISSSTE has increased significantly during the pastsix years as compared to historical levels, while financing from SHF hasdecreased due to a change in its policy in 2005. However, financing from SHFmay increase due to a Mexican governmental policy initiative that promotesdirect financing to Limited Purpose Financing Companies and Multiple PurposeFinancing Companies (*Sociedades Financierasde Objeto Limitado y Sociedades Financieras de Objeto Múltiple*or “sofoles”and “sofomes”). This policy initiative was designed to help sofoles and sofomescontinue lending despite liquidity constraints related to sofoles’ and sofomes’exposure to mortgage backed securities. The Mexican governmental policyinitiative may provide an additional source of future financing to Homex’smiddle-income clients. The future Mexican government housing finance policy maylimit or delay the availability of mortgage financing provided by theseagencies or otherwise institute changes, including changes in the methods bywhich these agencies grant mortgages and, in the case of INFONAVIT, thegeographic allocation of mortgage financing, that could result in a decrease inour sales and 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. This year,disruptions included a delay in the disbursement of 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 inthe amount of funds available from INFONAVIT, FOVISSSTE, SHF or other sources,or substantially increased competition for these funds, could result in adecrease in our sales and revenues. These funds may not continue to beallocated at their current levels or in regions in which we have or can quicklyestablish a significant presence.

 

The currentadministration of President Felipe Calderón has initiated a National HousingProgram (*Programa Nacional de Vivienda*)2007-2012, through which the government expects that Mexican Housing Funds willprovide six million mortgages by 2012, mainly to low-income families. For 2009,the government believes that Mexican Housing Funds will provide 1.3 millionresidential mortgages.

 

***A Slowdown in the Mexican Economy Could Limit theAvailability of Private-Segment Financing in Mexico, on Which We Depend for OurSales of Middle-Income Housing, Which Could Result in a Decrease in Our Salesand Revenues***

 

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 privatesegment 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 segment 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 current recession andeconomic slowdown in the United States have begun to negatively affect theMexican economy and the availability of private sector mortgage financing. As aresult, commercial lenders have begun to change their criteria for mortgageorigination. Additionally, sofoles and sofomes have begun to face liquidityconstraints due to increased exposure to non-performing loans. As a result, ourprofitability could be reduced and financial performance could be negatively affected.

 

12

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***Our Strategy for Expansion in the Tourism/Resort HousingMarket  may be Affected by a Slowdown in U.S. General Economic Conditions,Which Could Adversely 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 European 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 currentrecession and economic slowdown.

 

***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 also tend to recognize significantly higher levels of revenuein the third and fourth quarters and our debt levels tend to be highest in thefirst and second quarters. We anticipate that our quarterly results ofoperations and our level of indebtedness will continue to experiencevariability from quarter to quarter in the future.

 

***We May Experience Difficulty in Finding Desirable LandTracts or Increases in the Price of Land May Increase Our Cost of Salesand Decrease Our Earnings***

 

Our continued growthdepends in large part on our ability to continue to be able to acquire land andto do so at a reasonable cost. As more developers enter or expand theiroperations in the Mexican home building industry, land prices could risesignificantly and suitable land could become scarce due to increased demand ordecreased supply. A resulting rise in land prices may increase our cost ofsales and decrease our earnings. We may not be able to continue to acquire suitableland at reasonable prices in the future.

 

***Increases in the Price of Raw Materials May IncreaseOur Cost of Sales and Reduce Our Net Earnings***

 

The basic raw materialsused in 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 Homes Under thePercentage-of-Completion Method of Accounting Before Receiving Cash Revenue,Failed Closings Could Result in a Shortfall of Actual Cash Received and Requirean Adjustment to Revenue Previously Recorded***

 

In accordance with MFRS,and consistent with industry practice in Mexico, we recognize income from the saleof homes based on the percentage-of-completion method of accounting, which inMexico requires us to recognize income as we incur the cost of construction.See Note 3 to our consolidated financial statements for a discussion of thepercentage-of-completion method. However, we do not receive the considerationfrom these sales until the homes are titled. As a result, there is a risk thatrevenue in respect of the income recognized for accounting purposes will not bereceived due to the failure of a sale to close.

 

***Loss of the Services of Our Key Management Personnel CouldResult in Disruptions 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 couldresult in disruptions to our business operations.

 

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

 

The home buildingindustry in Mexico is highly competitive. Our principal competitors includepublic companies like Corporación GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. deC.V., URBI Desarrollos Urbanos, S.A.B. de C.V. and SARE, S.A.B. de C.V. Ourability to 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 todecrease as some smaller and medium-sized homebuilding companies in Mexico areexperiencing limited growth opportunities due to: (1) their dependence onbridge loans and short-term credit lines; (2) increases in the range of300 to 400 bps in these companies interest rates for short-term credit lines;and (3) tighter lending restrictions from commercial banks to renewexisting credit lines. We may experience pressure to reduce our prices incertain regions if some of our competitors are forced to sell their inventoryin distressed sales upon exiting the market. In addition, competitiveconditions may prevent us from achieving our goal of increasing our salesvolume, or result in a decrease in our sales and revenues.

 

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

 

The Mexican housingindustry is subject to extensive building and zoning regulation by variousfederal, state and municipal authorities. These authorities oversee landacquisition, development and construction activities, and certain dealings withcustomers. The costs associated with obtaining building and zoning permits,paying purchase or development fees and taxes, securing utility service rightsand titling new homes are substantially higher in Mexico than in othercountries and vary significantly from region to region in Mexico. We arerequired to obtain the approval of numerous federal, state and localgovernmental authorities for our development activities. Changes in localcircumstances or applicable law or regulations of such entities may requiremodifying or applying for additional approvals or changing our processes andprocedures to comply with them. It is possible that these factors could causedelays in construction and result in increased costs.

 

***Changes to Environmental Laws and Regulations to Which Weare Subject Could Cause Delays in Construction and Result in Increased Costs***

 

Our operations aresubject to Mexican federal, state and municipal environmental laws andregulations. Changes to environmental laws and regulations, or stricterinterpretation or enforcement of existing laws or regulations, could causedelays in construction and result in increased costs.

 

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

 

We do not generallyobtain liability insurance to cover housing developments under constructionunless it is required by providers of construction financing. In the event thatour uninsured housing developments suffer unforeseen casualties, we may experiencesignificant losses.

 

***A Reduction in Distributions from Our Operating SubsidiariesCould Limit 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.

 

**RiskFactors Related to Mexico**

 

***We Face RisksRelated to Health Epidemics and Other Outbreaks***

 

Our business could beadversely affected by the effects of any epidemic or contingency. In April 2009,an outbreak of Influenza AH1N1 flu occurred in Mexico and the United States andthere have been recent cases in China and elsewhere in Asia. Any prolongedoccurrence or recurrence or other adverse public health developments in Mexicomay have a material adverse effect on our business operations. Our operationsmay be impacted 

 

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by a number ofhealth-related factors, including, among other things, quarantines or closuresof our facilities, which could disrupt our operations, and a general slowdownin the Mexican economy. Any of the foregoing events or other unforeseenconsequences of public health problems could adversely affect our business andresults of operations. We have not adopted any written preventive measures orcontingency plans to combat any type of epidemic.

 

***Adverse Economic Conditions in Mexico May Result in aDecrease in Our Sales and Revenues***

 

We are a Mexican companywith substantially most of our assets located in Mexico and all of our revenuesderived from operations in Mexico. As such, our business may be significantlyaffected by the general conditions of the Mexican economy.

 

Mexico experienced aperiod of slow growth from 2001 through 2003 primarily as a result of thedownturn in the U.S. economy. In 2005, GDP grew by 3% and inflation decreasedto 3.3%; in 2006, GDP grew by 4.5% and inflation increased to 4.1%; in 2007,GDP grew by 5.6% and inflation decreased to 3.7%; and in 2008, GDP grew by 1.3%and inflation increased to 6.5%.

 

Mexico also has, and isexpected to continue to have, high real and nominal interest rates. Theinterest rates on 28-day Mexican government treasury securities (*Certificados de la Tesoreria de la Federación*)averaged approximately 7.00%, 7.44% and 7.97% for 2006, 2007 and 2008,respectively. Accordingly, if we incur peso-denominated debt in the future, itcould be at high interest rates.

 

As a consequence of theglobal recession and economic slowdown during 2008, the Mexican economy enteredinto a recession.  In Mexico, GDP growthduring the first three months of 2009 contracted 8.2% compared to the firstthree months of 2008.  As of April 30,2009, twelve-month accumulated inflation had increased to 6.2% compared to 4.5%during the same period in 2008. As a consequence, consumer confidence decreasedto an eight-year low of 82.1, with a corresponding impact on consumption. Thecurrent recession could affect our operations to the extent that we are unableto reduce our costs and expenses in response to falling demand.  These factors could result in a decrease inour sales and revenues.

 

***Fluctuations of the Peso Relative to the U.S. Dollar CouldResult in an Increase in Our Cost of Financing and Limit Our Ability to MakeTimely Payments on Foreign Currency-Denominated Debt***

 

Because substantially allof our revenues are and will continue to be denominated in pesos, if the valueof the 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 toOur Business 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 mortgage providers comprised of Mexican HousingFunds, for a large portion of our business. As a result, the actions of theMexican government concerning the economy and regulating certain industriescould have a significant effect on Mexican private segment entities, includingHomex, 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.

 

Elections for the MexicanSenate, House of Representatives and for the governorship of certain states ofthe Republic are scheduled for July 5, 2009.  No political party in Mexico has a majorityin the Congress or Senate. The lack of a majority party in the legislature, thepotential lack of alignment between the legislature and the President and anychanges that result from the congressional elections could result ininstability or deadlock, and prevent the timely implementation of political andeconomic reforms, which in turn could have a material adverse effect on Mexicaneconomic policy and on our business.

 

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.

 

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***Developments in Other Countries May Result in Decreasesin the Price of Our Securities***

 

As is the case withrespect to securities of issuers from other emerging markets, the market valueof securities 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 conditionsin Mexico, investors’ reactions to developments in any of these other countriesmay have an adverse effect on the market value of securities of Mexicanissuers. In recent years, for example, prices of both Mexican debt securitiesand Mexican equity securities dropped substantially as a result of developmentsin Russia, Asia and Brazil.

 

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 andAccounting Standards than U.S. Companies***

 

A principal objective ofthe securities laws of the United States, Mexico and other countries is topromote full and fair disclosure of all material corporate information.However, there may be less or different publicly available information aboutforeign issuers of securities than is regularly published by or about U.S.issuers of listed securities.

 

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

 

***Future Issuances of Shares May Result in a Decrease inthe Prices of Our ADSs and Common Shares***

 

In the future, we mayissue additional 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 Shareholders May Resultin a Decrease in the Prices of Our Securities***

 

Our principalshareholder, the de Nicolás family, holds 35% of our outstanding share capital.Actions by these shareholders with respect to the disposition of the sharesthey beneficially own, or the perception that such actions might occur, maydecrease the trading price of our shares on the Mexican Stock Exchange and theprice of the ADSs on the New York Stock Exchange. Our principal shareholdersare not subject to any contractual restrictions that limit their right todispose of their common shares.

 

***Pre-emptive Rights May be Unavailable to Holders of OurADSs, Which May Result in a Dilution of ADS Holders’ Equity Interest inOur Company***

 

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, wewill evaluate the costs and potential liabilities associated with filing aregistration statement with the SEC, the benefits of enabling U.S. holders ofADSs to exercise pre-emptive rights, and any other factors that we considerimportant in determining whether to file a registration statement to permit theexercise of mandatory pre-emptive rights. It is possible that we will not filesuch a registration statement. As a result, the equity interests of ADS holderswould be diluted to the extent that ADS holders cannot participate in a futurecapital increase.

 

Under the terms of theADSs, you may instruct the depositary, JPMorgan Chase Bank, to vote theordinary shares underlying the ADSs, but only if we request the depositary toask for your instructions. Otherwise, you will not be able to exercise yourright to vote unless you withdraw the common shares underlying the ADSs andvote such common shares. However, you may not receive sufficient notice of ashareholders’ meeting to permit you to withdraw your common shares to allow youto cast your vote with respect to any specific matter. In addition, thedepositary and its agents may not be able to send out or receive your votinginstructions on time or carry them out in the manner you have instructed. As aresult, you may not be able to exercise your right to 

 

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vote.

 

In addition, Mexican lawand our 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, OurDirectors, 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 LiabilitiesAgainst Us or Our Directors, Executive Officers and Controlling Persons***

 

We are organized underthe laws of Mexico. A majority of our directors, executive officers andcontrolling persons reside outside the U.S.; all or a significant portion ofthe assets of our directors, executive officers and controlling persons, andsubstantially all of our assets, are located outside the U.S.; and certain ofthe experts named in this annual report also reside outside the U.S. As aresult, it may be difficult for you to effect service of process within theU.S. upon these persons or to enforce against them or us in U.S. courtsjudgments predicated upon the civil liability provisions of the federalsecurities laws of the U.S. We have been advised by our Mexican counsel,Cortes, Muñiz y Núñez Sarrapy, S.C., that there is doubt as to theenforceability, in original actions in Mexican courts, of liabilitiespredicated solely on U.S. federal securities laws and as to the enforceabilityin Mexican courts of judgments of U.S. courts obtained in actions predicatedupon the civil liability provisions of U.S. federal securities laws.

 

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

 

**BUSINESSOVERVIEW**

 

**HISTORYAND DEVELOPMENT**

 

Desarrolladora Homex,S.A.B. de C.V. is a corporation (*sociedadanónima bursátil de capital variable*) registered in Culiacán,Sinaloa, Mexico under the Mexican Companies Law (*Ley General de Sociedades Mercantiles* ) on March 30,1998 with an indefinite corporate existence. Our full legal name isDesarrolladora Homex, S.A.B. de C.V. Our principal executive offices arelocated at Boulevard Alfonso Zaragoza M. 2204 Norte, Fraccionamiento Bonanza,80020 Culiacán, Sinaloa, Mexico. Our telephone number is +52 (667) 758-5800.Our legal domicile is Boulevard Alfonso Zaragoza Maytorena 2204 Norte, 80020Culiacán, Sinaloa, Mexico.

 

Our Company traces itsorigins to 1989 and established its current structure in 1998. Beginning in1999, various strategic investors and, in 2002, Equity InternationalProperties, Ltd., or EIP, an entity affiliated with Equity Group Investments,L.L.C., or EGI, an investment company founded by Samuel Zell, chairman of EIP,made equity investments in our Company. These strategic investors assisted usto develop and refine our operating and financial strategies. On June 29,2004 we obtained financing through a public equity offering and dual listing onthe Bolsa Mexicana de Valores and the New York Stock Exchange. Since ourinitial public offering, our annual revenues have grown 218%, and we haveexpanded our operations into three states and four cities in México, as well astwo 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. In2008 we spent Ps.564 million on capital expenditures, primarily topurchase construction equipment and to support growth and to partially fund ourcorporate headquarters. Our purchases of land are treated as additions to inventoryand not as capital expenditures.

 

**Our Company**

 

We are avertically-integrated home development company engaged in the development,construction and sale of affordable entry-level, middle-income and upper-incomehousing in Mexico. During 2008, we sold 57,498 homes, an increase of 11.3% over2007, when we sold 51,672 homes, an increase of 17.1% over the 44,132 homes wesold in 2006. As of December 31, 2008, we had 

 

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112 developments underconstruction in 32 cities located in 20 Mexican states. We had total landreserves under title of approximately 79.3 million m(2) as of December 31,2008, on which we estimate we could build approximately 358,011 affordableentry-level homes, approximately 30,713 middle-income homes and approximately1,403 homes for the tourism and resort market.

 

We believe our geographicdiversity is one of the strongest among home builders in Mexico, reflected byour operations as of December 31, 2008 in 32 cities located in 20 Mexicanstates. Furthermore, our sales are not concentrated in a limited number ofareas as compared to our competitors. In 2008, 35% of our revenues were derivedfrom the 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 planthe development of the homes we build through Proyectos Inmobiliarios deCuliacán, S.A. de C.V., or PICSA, Casas Beta del Centro, S. de R.L. de C.V.,Casas Beta del Norte, S. de R.L. de C.V. and Casas Beta del Noroeste, S. deR.L. de C.V. Desarrolladora de Casas del Noroeste, S.A. de C.V. or DECANObuilds the developments 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$14,157 and US$39,205); middle-income homes to range in price between Ps.541,000and Ps.1,885,000 (US$39,277 and US$136,854); and residential homes to have aprice above Ps.1,885,000 (US$136,854). We currently focus on providingaffordable entry-level and middle-income housing for our customers. For 2008,we launched a new market focused on houses in tourist and resort areas. Thishousing ranges in price between US$450,000 and US$750,000.

 

Our affordableentry-level developments range in size from 500 to 20,000 homes and aredeveloped in stages typically comprising 300 homes each. During 2008, ouraffordable entry-level homes had an average sale price of approximatelyPs.276,000 (US$20,038). A typical affordable entry-level home consists of akitchen, living, dining area, one to three bedrooms, and one bathroom. We areable to deliver a completed affordable entry-level home in approximately 7 to10 weeks from the time a homebuyer obtains mortgage approval. Currently, ourlargest affordable entry-level housing developments are located in the citiesof Guadalajara, Monterrey, Nuevo Laredo, Tijuana, Puebla and the State ofMexico.

 

Our middle-incomedevelopments range in size from 400 to 2,000 homes and are developed in stagestypically comprising 200 homes each. During 2008, our middle-income homes hadan average sale price of approximately Ps. 817,000 (US$59,316). A typicalmiddle-income home consists of a kitchen, dining room, living room, two orthree bedrooms, and two bathrooms. We are able to deliver a completedmiddle-income home in approximately 12 to 16 weeks from the time a homebuyerobtains mortgage approval. In response to continued demand for middle-incomehousing in Mexico and financing available through INFONAVIT’s and FOVISSSTE’scofinancing products, we launched twelve new middle-income developments intwelve cities in 2008. In 2008, 23.0% of our revenues were attributable tosales of middle-income housing compared to 22.6% in 2007.

 

In early 2008, wecommenced the development of the first stage of the new tourism/resort divisioncalled “Las Villas de Mexico.”  As part of Homex’s entry into thedevelopment of housing targeting the tourist market, our developments will belocated in the three major tourism centers in Mexico, namely Los Cabos, PuertoVallarta and Cancún. Developments in each of the three areas will have threedifferent housing styles: residential villas of up to 2,150 square feet intypical lots of 3,230 square feet, townhouses of up to 1,725 square feet intypical lots of 2,690 square feet and apartments or condominiums of up to 1,500square feet in buildings with five to 10 floors on average. Each style hasbeen developed to maximize space but provide privacy and avoid the perceptionof high density.  The developments in each area will feature architecturaland landscaping elements unique to the geographical region.  Owners willhave the opportunity to choose from among the different layouts and a widevariety of architectural and landscaping designs, as well as to tailor aproperty to their individual tastes. Each development will feature eithera private beach or country club (with priority golf club access), as well as aday spa, state-of-the-art fitness facilities, full-time concierge services, andspace for exclusive commercial and service areas.

 

In targeting the newtourism resort division to foreign investors who will not live at theirresidences full-time, we have included a number of importantamenities. All of the developments will feature double gates, year-round,24-hour security, and a choice of two branded property services: Casa Care andOpendoor. Casa Care will handle the maintenance and bill payments for theproperty while residents are away. The services include payment of monthlyexpenses, property management, and individually customized packages tailored toresidents’ specific needs. Opendoor will allow residents to share or renttheir home within the Las Villas private property partnership. Owners willbe able to travel throughout Mexico to stay at the different Las Villasdevelopments, use the amenities, and pay the same amount they would for theirown residence.

 

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During2008 the tourism division did not contribute to the Company’s consolidatedrevenues.

 

**LandReserves**

 

We have developedspecific procedures to identify land that is suitable for our needs and performongoing market research to determine regional demand for housing. Suitable landmust be located near areas with sufficient demand, generally in areas where atleast 500 homes can be built, and must be topographically amenable to housingdevelopment. We also consider the feasibility of obtaining required governmentallicenses, permits, authorizations, and adding necessary improvements andinfrastructure, include sewage, roads and electricity in keeping with apurchase price that will maximize margins within the limits of availablemortgage financing. We conduct engineering and environmental assessments, andin some cases urbanization and land composition studies, of land we considerfor purchase in order to determine whether it is suitable for construction. Webudget the majority of our land purchases for the second half of the year tocoincide with peak cash flow. Historically, our total land reserves fluctuatedbetween 36 to 42 months of future home deliveries depending upon the time ofyear. During the second half of 2008, the Company increased its land inventoryto 5.5 years of future home deliveries by pursuing land investmentopportunities.

 

As of December 31,2008, we had total land reserves under title of approximately 79.3 millionm(2), which includes both the titled land and land in process of being titled.This is equivalent to 390,127 homes, of which 358,011 will be in the affordableentry-level segment, 30,713 in the middle-income segment and 1,403 in thetourism/resort housing market. For 2009, we anticipate minimizing investmentsby following a conservative replacement strategy for land bank acquisitions.

 

**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 31,2009 EIP had an ownership interest equivalent to 1.0% of the Company’s commonshares.

 

**BusinessStrengths**

 

***Standardized Business Processes***

 

Over several years, wehave developed and refined scalable and standardized business processes thatallow us to enter new markets rapidly and efficiently. We have designedproprietary information technology systems that are intended to integrate andmonitor our operations, including land acquisition, construction, payroll,purchasing, sales, quality control, financing, delivery, and maintenance. Oursystems connect every one of our branch locations and help us monitor andcontrol the home building process, to administer our customer relations, and tooversee the financing process for our customers. This standardized model drivesour growth, geographic diversification, and profitability, and is an integralcomponent of our culture.

 

***Efficient Working Capital Management***

 

Our standardizedprocesses allow us to time the construction and delivery of our homes andpayment to our suppliers efficiently, which has allowed us to reduce ourborrowing needs and minimize working capital requirements. We do not commenceconstruction on a development stage until prospective buyers representing atleast 10% of the planned number of homes in that stage have qualified toreceive mortgage financing. We seek to maintain a short construction period ofless than 10 weeks for affordable entry-level housing and less than 16 weeksfor middle-income housing by using our systems to maximize the efficiency ofour standardized methods. This speed allows us to maximize our working capitalby minimizing overhead and coordinating payables with receivables, whichgreatly reduce our borrowing needs, and to minimize our costs.

 

***Geographic Diversification***

 

We believe that we areone of the most geographically diversified housing development companies inMexico. As of December 31, 2008, our operations included 112 developmentsin 32 cities located in 20 Mexican states, which represent 74.4% of Mexico’spopulation, according to the Mexican Institute of Statistics, Geography andComputer Sciences, or INEGI (*InstitutoNacional de Estadistica, Geografia e Informática*). Many of ourdevelopments are located in markets where no major competitors currentlyoperate. For instance, our sales are not concentrated in limited areas ascompared to our competitors. In 2008, 35% of our revenues originated in theMexico City Metropolitan Area, the largest city in Mexico, and 8% inGuadalajara, the second-largest city. The remaining revenues originated in 30cities. We believe that this geographic diversification reduces our riskprofile as compared to 

 

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our less-diversifiedcompetitors.

 

***Experienced and Committed Management Team***

 

Eustaquio Tomás deNicolás Gutiérrez, our Chairman, co-founded Homex’s predecessor in 1989, andGerardo de Nicolás Gutiérrez, our CEO, joined us in 1993. Our senior managementteam is comprised of executives with an average of 15 years’ experience intheir respective areas of responsibility. Senior management owns an aggregateof 29.45% of our common shares. Consistent with our standardized business processesand geographic diversification, we delegate significant managerialresponsibility to our seasoned team of branch managers. Upon completion of adevelopment, we typically relocate our branch managers to another developmentin order to capitalize on their significant experience.

 

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

 

Our affordableentry-level segment continues to succeed primarily due to the availability ofmortgage financing provided by the main mortgage suppliers in Mexico: INFONAVITand FOVISSSTE which provided mortgage financing for 494,073 and 90,140mortgages during 2008 respectively. Additionally, we continue to experiencehigh demand for affordable entry-level homes in Mexico due to the large deficitof housing stock, a growing young population, high rates of urban growth, newhousehold formation, and a decreasing number of occupants per home. In Mexico,ninety percent of the population earns a monthly income of approximately Ps.6,000 making an affordable entry-level home valued at Ps. 400,000 an affordableoption. Our focus and expertise in the affordable entry-level segment hasenabled us to increase our market share compared to our competitors. As of December 31,2008 our market share had increased to 32.4% compared to 31.9% for the previousyear. Additionally 90.8% of the homes that we sold during 2008 fell into theaffordable-entry level category.

 

**BusinessStrategies**

 

***Maintain a Conservative Financial Position***

 

We operate our businesswith the goal of reducing our exposure to interest rate and financing risk. Webegin construction only when an approved homebuyer has qualified for a mortgageand, if applicable, made a down payment, thereby reducing our working capitalneeds. We believe the resulting financial flexibility enhances our ability torespond quickly to market opportunities and minimizes any negative effects thatmight result from a downturn in the economy.

 

***Focus on Growth Consolidation and High-Return Opportunities***

 

Our strategy is toconsolidate our growth and to identify and target high-return opportunitiessuch as middle-income home sales. For the year ended December 31, 2008,23.0% of our revenues came from middle-income home sales as compared to 22.6%in the same period in 2007. We have developed an operating model that webelieve allows us to enter underserved markets quickly and efficiently in orderto take advantage of attractive opportunities offered by increased availabilityof public and private segment mortgage financing.

 

***Tourism Housing’s Strategic Growth***

 

On February 7, 2008the Company announced plans to strengthen its position in the tourism market bydeveloping communities for the second-home market in key tourist destinationswithin Mexico for potential customers in the United States, Canada and Mexico.(See “—Our Products”).

 

The first stage ofdevelopment involves launches of three “Las Villas de Mexico” developments inthe cities of Cancún, Los Cabos and Puerto Vallarta. These private communities,with a superior product and service offerings, will reflect the architectureand culture of Mexico adapted to the customs and living traditions of ourtarget markets. The developments will include residential villas, townhouses,and apartments.

 

In October 2008, theCompany started construction of the model homes and initial infrastructure atCancún and Los Cabos in order to commence sales efforts for the first stage ofthese developments. Nonetheless, we anticipate a reduction in potentialcustomers for our tourism market due to softer demand from our targeted customersrelated to the current recession and economic slowdown in the United States,Canada and Europe.  As a result of theexpected decrease in demand, the Company has adjusted its strategy and cutcosts in order to remain profitable by subcontracting  out its sales employees, reducing the numberof administrative personnel, streamlining the phases for approval of customerfinancing and increasing the density of our tourism projects.  However, the sharp decline in the value ofthe Peso compared to the U.S. Dollar, Canadian Dollar and Euro during the finalquarter of 2008 may

 

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have the effect ofincreasing demand for this segment by making Mexico more attractive toforeigners.

 

Tourist developments havenot seen significant growth during 2009. In particular, development of thePuerto Vallarta project located in the Nayarit Riviera is currently on standbydue to the current recession and economic slowdown, although we expect to begindevelopment of this project during 2010.

 

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

 

Our ability to identify,acquire and improve land is critical to our success. Because the success of ouroperations depends, among other things, on managing our reserves efficiently,we continually review our portfolio and seek new development opportunities.During the second half of 2008, the Company increased its land inventory to 5.5years of future home deliveries by pursuing land investment opportunities. For2009, we anticipate minimizing investments by following a conservativereplacement strategy for land bank acquisitions.

 

We generally purchaselarge parcels of land in order to amortize our acquisition and infrastructurecosts over a large number of homes, minimize competition, and take advantage ofeconomies of scale. As of December 31, 2008, we had total land reservesunder title of approximately 79.3 million m(2), which includes both thetitled land and land in process of being titled. This is equivalent to 390,127homes, of which 358,011 will be in the affordable entry-level segment, 30,713in the middle-income segment and 1,403 in the tourism/resort housing market.

 

***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 byproviding other social services to residents of the housing we develop. We arecommitted to fulfilling our customers’ needs by responding to and meeting theirdemands. In 2008, we responded to our clients’ needs by launching acustomization program that allows our clients to choose from a full array ofcustom options, which are included in the home purchase price, adding apersonal touch to clients’ homes. At the same time, we seek to become the bestemployer to our employees through training and educational opportunities. Weseek to hire and keep talented employees and invest in training our workforceat all levels by offering programs such as middle-school equivalency coursesfor our construction laborers. We are committed to becoming the best customerto our suppliers by offering various payment alternatives and opportunities forcooperative growth, and through our factoring structure and other initiatives,including electronic ordering and payment systems. We believe that thesefactors make us a preferred home builder, employer and customer and ultimatelyenhance our overall business.

 

***Mold Construction System***

 

During 2007, the Companyacquired cutting-edge construction technology based on aluminum molds; which itwill use in some, but not all, of its projects. This new technology willimprove the efficiency of the construction process. Among the advantages of thenew molds are:

 

·                     shorter construction time;

 

·                     better quality and reduced reprocessing;

 

·                     the ability to re-use the same mold forseveral prototypes of homes, with an estimated life of 2,000 usages per mold;

 

·                     versatility, because it permitsconstruction ranging from simple floors to apartment buildings using the samesystem;

 

·                     labor savings;

 

·                     compatibility among internationalsuppliers;

 

·                     eco-friendliness because, unliketraditional construction methods, mold construction does not utilize timber;and

 

·                     durability, due to the use of concrete.

 

As of December 31,2008 we had used this technology in the construction of 25,874 homes. TheCompany intends to continue using this technology in the future.

 

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***Our Markets***

 

We operate in geographicallydiverse markets throughout Mexico, from Tijuana in the north to Tapachula inthe south, which represent 20 states and 32 cities as of December 31,2008. In 2008, 35% of our revenues originated in the Mexico City MetropolitanArea, the largest city in Mexico, and 8% in Guadalajara, the second-largestcity. The remaining revenues were originated in 30 cities.

 

We operate ingeographically diverse markets throughout Mexico, including 112 developments in20 states and 32 cities as of December 31, 2008, which statesrepresent 74.4% of Mexico’s population, according to the Mexican Institute ofStatistics, Geography and Computer Sciences, or INEGI (Instituto Nacional deEstadística, Geografia e Informática). In 2008, 35% of Homex’s revenuesoriginated in the Mexico City Metropolitan Area, the largest city in Mexico,and 8% in Guadalajara, the second largest city. The remaining revenues wereoriginated throughout 30 cities. As a diversified homebuilder our national footprintcovers: 1) capital cities, where we benefit from a stable demand fromgovernment employees; 2) industrial cities, including Puebla, Monterrey,Guanajuato, Saltillo and Chihuahua, where we benefit from Mexico’sexport-oriented economy; and 3) tourism and service-oriented cities. During 2008,México’s service sector accounted for 60% of the country’s GDP, as the industryemploys approximately 58% of the active population. Our geographic diversitywithin México has enabled the Company to mitigate our risk exposure to any oneregion.

 

We seek to continueoperations in markets where we have a strong presence and to expand intounderserved markets where demand for housing is high.

 

***Total Homes Sold***

 

The following table setsforth information on our historical sales by state. During 2005, 89.3% and10.7% of the homes we sold were affordable entry-level and middle-income,respectively; during 2006, 90.5% and 9.5% of the homes we sold were affordableentry-level and middle-income, respectively, during 2007, 90.4% and 9.6% of thehomes we sold were affordable entry-level and middle-income, respectively, andduring 2008, 90.8% and 9.2% of the homes we sold were affordable entry-leveland middle-income, respectively.

 
| ** **             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **State**              | ** ** | **Affordable********entry-level**           | ** ** | **Middle-********income** | ** ** | **Affordable********entry-level** | ** ** | **Middle-********income** | ** ** | **Affordable********entry-level** | ** ** | **Middle-********Income** | ** ** | **Affordable********entry-level** | ** ** | **Middle-********income** | ** ** |
| Baja  California       |       | 3,509                                       |       | 355 |   | 2,810 |   | 387 |   | 2,170 |   | 423 |   | 1,682 |   | 350 |   |
| Baja  California Sur   |       | 2,165                                       |       | 520 |   | 2,514 |   | 733 |   | 1,188 |   | 178 |   | 894 |   | 33 |   |
| Chiapas                |       | 2,127                                       |       | 297 |   | 1,071 |   | 287 |   | 1,369 |   | 192 |   | 1,126 |   | — |   |
| Chihuahua              |       | 219                                         |       | 122 |   | 188 |   | 62 |   | 481 |   | 96 |   | 562 |   | 37 |   |
| Coahuila               |       | 641                                         |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Guanajuato             |       | 453                                         |       | 32 |   | 1,236 |   | — |   | 209 |   | 134 |   | 376 |   | 637 |   |
| Estado  de México |       | 19,842                                      |       | 1,688 |   | 15,815 |   | 1,224 |   | 15,666 |   | 554 |   | 6,403 |   | 715 |   |
| Guerrero               |       | 1,030                                       |       | 686 |   | 956 |   | 467 |   | 1,321 |   | 5 |   | 759 |   | — |   |
| Hidalgo                |       | —                                      |       | 53 |   | — |   | 263 |   | — |   | 161 |   | 156 |   | 93 |   |
| Jalisco                |       | 7,745                                       |       | 769 |   | 8,090 |   | 582 |   | 9,623 |   | 1,147 |   | 5,184 |   | 926 |   |
| Michoacán         |       | 983                                         |       | 1 |   | 890 |   | — |   | 646 |   | 323 |   | 821 |   | 105 |   |
| Nuevo  Leon            |       | 3,704                                       |       | 30 |   | 4,532 |   | — |   | 2,834 |   | — |   | 3,394 |   | — |   |
| Oaxaca                 |       | —                                      |       | — |   | 64 |   | — |   | 467 |   | — |   | 273 |   | — |   |
| Puebla                 |       | 942                                         |       | — |   | 2,360 |   | — |   | — |   | 82 |   | — |   | — |   |
| Querétaro         |       | 1,284                                       |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Quintana  Roo          |       | 331                                         |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Sinaloa                |       | 3,442                                       |       | 174 |   | 1,641 |   | 160 |   | 1,356 |   | 331 |   | 2,146 |   | 238 |   |
| Sonora                 |       | 535                                         |       | 292 |   | 341 |   | 379 |   | 375 |   | 153 |   | 968 |   | 13 |   |
| Tamaulipas             |       | 621                                         |       | — |   | 714 |   | 58 |   | 427 |   | 306 |   | 2,188 |   | 244 |   |
| Veracruz               |       | 2,636                                       |       | 270 |   | 3,468 |   | 380 |   | 1,808 |   | 107 |   | 1,271 |   | — |   |
| Total                  |       | 52,209                                      |       | 5,289 |   | 46,690 |   | 4,982 |   | 39,940 |   | 4,192 |   | 28,203 |   | 3,391 |   |

 

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**THEMEXICAN 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 (*ConsejoNacional de Población*), INEGI, INFONAVIT, SHF, the Mexican HomeBuilding and Development Industry Chamber of Commerce, or CANADEVI (*Cámara Nacional de la Industria de Desarrollo yPromoción de la Vivienda*), CONAVI (*ComisiónNacional de Vivienda*) and SOFTEC, S.C. We have not independentlyverified any of the information provided in this section.

 

**General**

 

The housing market inMexico is influenced by several social, economic, industrial, and politicalfactors, including demographics, housing supply, market segmentation,government policy, and available financing.

 

**Demographics**

 

National demographictrends drive demand for housing in Mexico. These trends include:

 

·            sustained growth of a relatively young population;

 

·            a high rate of new household formation;

 

·            a high urban area growth rate; and

 

·            a decrease in number of occupants per home.

 

According to INEGI,Mexico had a population of approximately 103.5 million in 2005, orapproximately 25.1million households. CONAPO estimates that there will beapproximately 27.5 million households by 2009, approximately 28.1 millionby  2010, and approximately 31.1 millionby 2015.

 

Mexico experienced aperiod of particularly high population growth during the 1970s and 1980s. Thechildren born during this boom are contributing to the current increased demandfor housing. The target consumer group for our homes is typically between 25and 50 years old. In 2008, the 25-54 year-old age group representedapproximately 38.3 million people or 37% of Mexico’s population. CONAPOestimates that by 2020, this age group will represent 44 million or 38% ofMexico’s population. The growth of this group is expected to contribute toincreased housing demand in Mexico.

 

**HousingSupply**

 

In 2006, CONAVI’s housingstatistics indicated there was a shortage of 4.4 million homes in Mexico.This figure included the need for:

 

·                       2.1 million new homes to accommodatemultiple households currently living in a single home and households living inhomes that must be replaced; and

 

·                       2.3 million substandard homes inneed of extensive repair and possible replacement.

 

CONAVI estimates that thegrowth of the Mexican population will generate a sustained demand for new homesof at least 633,742 units per year into the near future. To address theimmediate shortage of million homes as well as the anticipated new 

 

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demand, the Mexicangovernment has committed to financing and/or building at least 1.3 millionunits a year in 2009.

 

*Institutode Vivienda del Distrito 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 forthe Federal District (*Ley de Vivienda del DistritoFederal*).

 

The mission of INVI is tosatisfy the need for housing of families with limited economic resourceslocated in the Federal District through the granting of mortgages foraffordable entry-level homes, with the goal of creating 200,000 new housingunits in the years 2007-2012. The Company entered into contracts of Ps. 298,620during 2008 with this institution.

 

**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, any necessary financingcommitments from lenders, and install infrastructure.

 

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$14,157-US$39,205)    |       | 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$39,277-US$136,854) |       | 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$136,854)                        |       | 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 thedeveloper-built market depends to a great extent on the availability ofmortgage financing. Due to liquidity issues over the last 20 years, Mexico hasexperienced fluctuations in the availability of mortgage financing,particularly from private segment sources. As a result, the supply ofaffordable entry-level and middle-income housing has also remained low duringthis period.

 

During the 1980s, Mexicangovernment policy focused on encouraging investment by the private sector,reducing development costs, and stimulating construction. Mexican Housing Fundsprovided mortgage loan guarantees and direct payment and savings procedures. In1994, Mexico experienced an economic crisis that led to the devaluation of theMexican peso and a steep rise in 

 

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interest rates. Smallerhousing development companies went out of business, and the industryexperienced a sharp fall in home sales between 1995 and 1996 due to diminishedcommercial bank lending.

 

Following the 1994economic crisis, government policy sought to counterbalance the shortage ofavailable financing and the increases in interest rates that resulted by focusingprimarily on providing mortgages and construction financing via Mexican HousingFunds in the affordable entry-level segment. Government funds no longerprovided development or sales activities and functioned instead as truesavings-and-loan programs. Legislative reforms with regard to community-ownedagricultural territories (*ejidos*),which made it possible to sell these formerly restricted properties, alsoincreased the potential supply of land available for development. During thisperiod, the government authorized sofoles, which underwrite mortgages withfunds and guarantees provided by government agencies, private investment,national, foreign or development bank loans, or through the Mexican capitalmarkets. Furthermore, the government encouraged industry growth and privatesegment lending by supporting consolidation in the housing developmentindustry.

 

Between 1997 and 1998,home sales stabilized, growing slightly in 1997 due to improving economicconditions. 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 2008, 3.2 million mortgages have already been financed,satisfying 51% of the administration’s goal. Out of the 3.2 million mortgagesthat have been financed, 66% are related to mortgages granted for new homes.President Calderón’s administration has supported four objectives for thehomebuilding industry originally set forth by President Fox:

 

·                   make more adequate land available,including infrastructure such as sewage and utilities;

 

·                   increase deregulation of the housingindustry;

 

·                   encourage consolidation within theindustry; and

 

·                   increase financing opportunitiesavailable to qualified homebuyers.

 

In conjunction with theseefforts, the Mexican legislature amended existing tax regulations in order toallow individuals to deduct a portion of their mortgage loan interest paymentsfrom their personal income taxes beginning in 2003, which the administrationexpects will lead to increased mortgage financing activity.

 

Recently, the Mexicangovernment implemented a new program to meet the housing needs of families inthe very low end of the economic spectrum, a sector of the population whosemonthly income would otherwise be insufficient for them to be able to affordthe lower valued homes in the market. This program demonstrates the commitmentof the Mexican Federal government to improving the quality of life for familiesin Mexico by providing affordable housing.

 

According to CONAVI, forthe year ended December 31, 2008, 1,084,333 mortgages were granted bythe Mexican Housing Funds.

 

The current President,Felipe Calderón, has indicated that he will continue to support and promote thehousing industry on three main lines: urban development, very affordablehousing through the federal housing subsidy program for low income families,and home improvement. His administration’s goal is for the Mexican HousingFunds to provide six million mortgages by 2012.

 

**Sourcesof Mortgage Financing**

 

Principal sourcesproviding mortgage financing for Mexico’s housing market are:

 

·                     mortgage providers financed by mandatoryemployer or member contributions to public funds, including INFONAVIT &FOVISSSTE, serving private and public segment employees;

 

·                     SHF, which provides financing tocredit-qualified homebuyers through financial intermediaries such as commercialbanks, sofoles and sofomes through funds from the World Bank, the Mexicangovernment, and its own portfolio;

 

·                     commercial banks and sofoles using theirown funds; and

 

·                     direct subsidies from public housingagencies and state housing trusts, including the Mexican Fund for Popular 

 

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Housing, or FONHAPO (*Fideicomiso Fondo Nacional de Habitaciones Populares*).

 

According to CONAVI,these mortgage providers originated 1,084,333 home mortgages in 2008 from which716,915 mortgages were granted for new homes.

 

***INFONAVIT***

 

INFONAVIT was establishedby the Mexican government, labor unions, and private segment employees in 1972as a mutual fund for the benefit of private segment employees. INFONAVITfunctions as a savings and loan that 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 segmentemployers on behalf of their employees equal to 5% 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.

 

INFONAVIT is phasing in arequirement that mortgage loan applicants make a down payment of between 5% to10% of a home’s total value, depending on price. The total loan amount mayequal 100% of the cost of a home up to a maximum of 350 times the monthlyminimum wage. Repayment is calculated based on the borrower’s wages, for a termof up to 30 years, and is made by direct wage deductions by employers.INFONAVIT generally grants loans at variable annual interest rates, which areindexed to inflation and based 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 segment lenders. In addition, these customerscan apply their monthly INFONAVIT contributions toward the monthly mortgagepayments owed to private segment 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 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.

 

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.

 

Early in 2009, INFONAVITlaunched a guarantee program (*GarantíaInfonavit*)**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 aminimum fee of 2% of their monthly mortgage and are protected for up to 6months every 5 years. The guarantee program also provides relief to borrowerswho have had their wages reduced by allowing these borrowers to take advantageof mortgage payment reductions of up to 25% monthly, reductions correspondingto the borrowers’ 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.

 

INFONAVIT providedapproximately 35.2% of all home mortgage financing in Mexico during the yearended December 31, 2008.

 

INFONAVIT has made acommitment to provide 450,000 new mortgages in 2009. 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 segment, and implementinga voluntary savings program. INFONAVIT has also recently continued securitizingits loan portfolio in order to contribute to the growth of the secondarymortgage market in Mexico and expand its available sources of

 

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funds.

 

The forecasted INFONAVITlending goal for 2009-2013 period has been recently announced as follows:

 
| **Year** | ** ** | **Mortgages** | ** ** |
|----------|------------|---------------|------------|
| 2009     |       | 450,000       |       |
| 2010     |       | 500,000       |       |
| 2011     |       | 550,000       |       |
| 2012     |       | 600,000       |       |
| 2013     |       | 600,000       |       |

 

***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 mortgagefinancing is typically available for housing ranging from the affordableentry-level segment through the lower end of the middle-income segment.Eligible applicants can obtain FOVISSSTE mortgage loans to purchase new or usedhomes, remodel or repair existing homes, finance construction of self-builthomes, and make down payments on homes not financed through FOVISSSTE.FOVISSSTE loans are granted based on seniority within the public sector andallocated on a first-come first-served basis that also takes into accountwages, number of dependents, and geographic location. Once the programestablishes a number of approved applicants, it allocates mortgage loans bystate based on historical demand.

 

FOVISSSTE generally grantsloans at variable interest rates, indexed to inflation, for a maximum amount ofapproximately Ps.504,533 (US$36,616). Repayment is calculated based on theborrower’s wages, for a term of up to 30 years, and is made by direct wagedeductions.

 

FOVISSSTE providedapproximately 6.4% of all home mortgage financing in Mexico during the yearended December 31, 2008.

 

***SHF***

 

SHF was created in 2002as a public 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 hasbeen an 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 US$50,613 as of December 31, 2008). In lieu offunding bridge loans for homes with a higher purchase price of up to UDI500,000 (approximately US$151,838 as of December 31, 2008), SHF willprovide guarantees to support efforts by commercial banks and sofoles to raisecapital for the financing of bridge loans to 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 US$151,838 as of December 31, 2008). Beginning in2005, however, in order to maximize the availability of affordable entry-levelmortgages, SHF has replaced its financing of mortgages for homes with apurchase price greater than UDI 150,000 (approximately US$45,551 as of December 31,2008) with credit enhancements and loan guarantees for commercial banks andsofoles to support their capital-raising efforts for the financing of suchindividual mortgage loans. In terms of total homes financed, SHF (throughcommercial banks and sofoles) provided approximately 9.1% of all home mortgagefinancing in Mexico during the year ended December 31, 2008.

 

Inconnection with its mortgage financing operations, SHF also took an active rolein issuing mortgage backed securities (*BonosRespaldados Por Hipotecas* or “BORHIS”) as well as market making inthese securities during 2008.  Inaddition, SHF reviews issuances of BORHIS to ensure that they comply withmarket eligibility requirements and criteria, and provides information 

 

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and analysis regarding historicalinformation, risk of default, and market evolution concerning BORHIS issuances.By engaging in market-making activities and providing mortgage financing tounderserved segments of the population, SHF also provided liquidity to theMexican housing market. Additionally, SHF has committed to focus its strategyon the promotion of Self-Sustainable Housing Environments (*Desarrollos Urbanos Integrales Sustentales*or “DUIS”) and in the re-population of urban areas.

 

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

 

Commercial banksgenerally target the middle-income and residential markets while sofolesgenerally target the affordable entry-level housing market and a portion of themiddle-income housing market using SHF financing, and the balance of themiddle-income housing market as well as the residential housing market usingother sources of funding. Sofoles and sofomes provide mortgage loans toborrowers using funds from securities offerings on the Mexican stock market, loansfrom Mexican and foreign lenders, their own portfolios, and public agenciessuch as SHF. They are not allowed to accept deposits from the public.

 

Although commercialbanks, sofoles and sofomes provide mortgage financing directly to homebuyers,the financing is commonly coordinated through the home builder. In order toobtain funding for construction, a home builder must submit proposals,including evidence of title to the land to be developed, architectural plans,necessary licenses and permits, and market studies demonstrating demand for theproposed housing. On approval, lenders provide construction financing anddisburse funds at each stage of the housing development.

 

Commercial bank, sofoland sofom mortgage loans are typically available for housing ranging from theupper tier of the affordable entry-level segment through the residentialsegment. Nevertheless, during 2008 homebuyers qualifying for these privatesegment mortgages were generally assumed to be those purchasing homes with avalue in excess of Ps.250,000 (US$18,144). Private segment lenders require downpayments of approximately 20% of a home’s total value and make loans at fixedor variable annual interest rates based on the consumer index and inflation.

 

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

 

Commercial banks, sofolesand sofomes provided approximately 14.7% of all home mortgage financing in Mexicoduring the year ended December 31, 2008.

 

***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 housingagencies provided approximately 34.6% of all home mortgage financing in Mexicoduring the year ended December 31, 2008.

 

**Competition**

 

The Mexican homedevelopment and construction industry is highly fragmented and includes a largenumber of regional participants and a few companies with a more national marketpresence, including publicly traded companies like Corporación GEO, S.A.B. deC.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 2,000 different companies operate approximately5,097 new home developments in Mexico at any one time. The following table setsforth the approximate operating information of the largest home builders inMexico with which we compete based on public information and our estimates:

 
| **Competitor** | ** ** | **2008  Home Sales** | ** ** | **2008  Sales********(millions of Ps.)** | ** ** | **Location  in Mexico**                   | ** ** |
|----------------|------------|----------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|
| GEO            |       | 51,879               |       | 17,453                                   |       | National                                  |       |
| URBI           |       | 42,844               |       | 15,003                                   |       | North, Mexico City and  Guadalajara areas |       |
| ARA            |       | 20,972               |       | 8,912                                    |       | National                                  |       |
| SARE           |       | 11,377               |       | 4,626                                    |       | Mexico City region                        |       |

 

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Source: Companies’ 2008fourth 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 experience variabilityfrom quarter to quarter in the future. Mortgage commitments from commercialbanks, sofoles and sofomes for middle-income housing are generally not subjectto significant seasonality. We do not expect significant changes in the overallseasonality of our results.

 

**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 advertisingand promotional campaigns principally through print media, includingbillboards, fliers, and brochures designed specifically for the target market,as well as local radio and television. Moreover, we complement these campaignswith additional advertising efforts, including booths at shopping centers andother high traffic areas, to promote open houses and other events. In somelocations, we work with local employers and other groups to offer our homes totheir employees 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, 2008, we operated 95 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 salesoffices in 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 

 

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securing mortgage loansfrom housing funds, commercial banks, and sofoles.

 

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

 

·                   a potential homebuyer enters into anagreement by signing a purchase application and furnishes the necessarydocumentation to us;

 

·                   we review the documentation to determinewhether all the requirements of the relevant mortgage provider have been met;

 

·                   we create an electronic credit file foreach homebuyer and submit it to the relevant mortgage provider for approval;

 

·                   we supervise and administer each clientfile via our database through all the phases of its processing and arrange forsigning the required documentation once approval has been obtained;

 

·                   the homebuyer makes any required downpayment;

 

·                   once the home has been completed, thehomebuyer signs the deed of transfer of title and the mortgage agreement; and

 

·                   we deliver the home to the homebuyer andregister the title.

 

For sales ofmiddle-income homes, the process of obtaining customer financing occurs asabove, except that we collect a down payment of between 10% to 25% of a home’stotal sale price immediately following the homebuyer’s execution of thepurchase application, and the homebuyer signs the deed of transfer of title andthe mortgage agreement when the home is at least 95% complete.

 

In all cases, theprocedures and requirements for obtaining mortgage financing are determined bythe mortgage provider.

 

We have not experiencedand do not expect to experience losses resulting from rejections by homebuyersof their purchase applications because we generally have been able to locateother buyers immediately in these cases.

 

The purchase price of thehomes we sell is denominated in pesos and is subject to an upward adjustmentfor the effects of inflation. In cases where the price of a home is subject toadjustment and increases due to inflation, any difference is payable by thehomebuyer.

 

**Design**

 

Most of the designs thatwe use in our construction we develop internally. Our architects and engineersare trained to design structures to maximize efficiency and minimize productioncosts. Our standardized modular designs, which focus on quality and size ofconstruction, allow us to build our homes quickly and efficiently. By allowingour customers to upgrade finishing details on a custom basis after homes aredelivered, we experience savings that allow us to build larger homes than ourcompetitors.

 

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 theconstruction of each development directly, coordinate the activities of ourlaborers and suppliers, oversee quality and cost controls, and ensurecompliance with zoning and building codes. We have developed efficient,durable, and low-cost construction techniques, based on standardized tasks,which we are able to replicate at all of our developments. We pay each laboreraccording to the number of tasks completed. We generally subcontractpreliminary site work and infrastructure development such as roads, sewage andutilities. Currently, we also subcontract the construction of a limited numberof multi-unit middle-income apartment buildings in the Mexico City MetropolitanArea.

 

Our designs are based onmodular forms with defined parameters at each stage of construction, which areclosely controlled 

 

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by our centralinformation technology systems. Our methods result in low construction costsand high quality products. We use substantially similar materials to build ourmiddle-income homes, with higher quality components for certain finishingdetails 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, moldconstruction does not utilize timber; and durability, due to the use ofconcrete. As of December 31, 2008 we had used this technology in theconstruction of 25,874 homes.

 

**Materialsand Suppliers**

 

We maintain strictcontrol over 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 contracting for materialsand services in every situation and seek to establish excellent workingrelationships 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 directly with funds received when homes are delivered,which allows us to ensure suppliers are paid on time while minimizing our needto secure construction financing.

 

Our main suppliers include Cemex, S.A. de C.V., Lámina y Placa Comercial,S.A. de C.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 31,2008 we had a total of approximately 17,280 employees, of whom 17,251 wereemployed in Mexico and 29 were employed in India. Our total employees for theyears ended 2007 and 2006 were 15,127 and 11,948 respectively. The Company didnot have any employees outside Mexico for the years ended December 31,2007 and 2006. Approximately 5,524 of our employees as of December 31,2008 were administrative and managerial personnel.

 

We hire local laborforces for specific housing developments in each region that we operate in, aswell as experienced in-house personnel for supervisory and highly skilled work.We have an efficient information technology system that controls payroll costs.Our systems, using bar-coded identification cards, track the number of taskscompleted by each employee according to the parameters of our modularconstruction designs, assign salaries according to tasks and homes completed,and award incentives for each stage of the development based on teamperformance. We also streamline governmental and social security costs for ourworkforce using a strict attendance control system that captures informationfed via our system through workers’ identification cards.

 

We have implementedprograms throughout 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.

 

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As of December 31,2008, approximately 42% of our construction employees were members of anational labor union of construction workers. The economic terms of ourcollective bargaining agreements are negotiated on an annual basis. All otherterms and conditions of these agreements are negotiated every other year. Webelieve that we have an excellent working relationship with our workforce. Wehave not experienced a labor strike or any significant labor-related delay todate.

 

**CustomerServices and Warranties**

 

The Company holdsinsurance that covers defects, hidden or visible, during construction and whichalso covers the warranty period provided by the Company to homebuyers. Asmentioned in Note 25 to the financial statements, we provide a two-year warrantyto all of our customers. This warranty could apply to damages derivedeither from our operations or from defects in materials supplied by thirdparties (such as electrical installations, plumbing, gas, waterproofing,etc.) or other circumstances outside our control.

 

For manufacturingdefects, we do not recognize a warranty accrual in our consolidated financialstatements since we obtain a security bond from our contractors that covers theclaims related to the quality of their work. We withhold a guaranteedeposit from them, 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, 2008 we had nounrecorded losses with respect to these warranties.

 

**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.

 

**InternationalInvestments**

 

InMarch 2008, the Company set up a subsidiary in India, Homex India PrivateLimited (formerly known as Daksh Builders and Developers Private Limited),through which it intends to develop land for the construction of affordableentry-level and middle-income housing. The Company has complied with theapplicable Indian investment laws, which require that our subsidiary maintainadequate capital inthe amount of US$10 million. During 2008, our subsidiary cancelled its intended investment in the state of Jammu andKashmir and is currently evaluating several other projects. As of December 31,2008 the company had 29 employees in India, all of whom are administrative.These employees assist the company in evaluating the feasibility of other projectsin the region.

 

InNovember 2008, the Company resolved to initiate operations in Brazil andreached an agreement with its original partner to acquire its equity share inHomex Brasil Empreendimentos e Participacoes, Ltda. In April 2009, theCompany started its first pilot project in the city of San Jose dos Campos, anindustrial city near Sao Paulo. The initial phase of the project will consist of 700affordable entry-level units of an average price of US$33,000.

 

Effective September 2007,Homex owns 15% of the outstanding stock of Orascom Housing Communities “S.A.E.”,an associated company located in Cairo, Egypt that performs construction anddevelopment of entry-level and middle-income housing in Egypt.****Assetsand revenues from this associated company****arenot material to the consolidated financial position and statement ofoperations.

 

**RiskManagement**

 

The Company is exposedboth to general entrepreneurial risks and to industry-specific risks. Key areasof exposure are capacity and utilization risks, strategy-related risks,political risks, operational risks, procurement risks, wage policy risks, ITrisks and financial and treasury management risks. The Company’s riskmanagement strategy permits the exploitation of business opportunities thatpresent themselves as long as a risk-return ratio in line with marketconditions can be realized and the associated risks are an appropriate andsustainable component value 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. 

 

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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 Executive Board, that risks are identifiedand assessed continuously across functions and processes. It is responsible forthe system’s constant further refinement and for verifying its effectiveness.It reports to the board of directors. The Committee further develops the basic principlesof risk policy and oversees their compliance. It also communicates the Company’srisk policy, defines the documentation requirements and initiates any necessaryreviews of specific aspects of the risk management system by the internal auditdepartment.

 

All major potential risksto the Company’s profitability or continued existence are documented in a riskmap. This risk map is regularly updated and extended. Potentialinterdependencies between different risks are duly noted. This measure is designedto ensure that the timely detection, limitation and elimination of these risksystems are regularly reviewed and reinforced.

 

Over and aboveappropriate insurance solutions, contingency plans tailored to each individualrisk situation are in place for the purpose of combating and controlling risks.An analysis of risks, together with the possibilities of limiting andovercoming them, also forms an integral part of the Company’s strategydevelopment process and is incorporated into the Company’s operationalplanning.

 

**Regulation**

 

***General***

 

Our operations aresubject to Mexican federal, state and local regulation as a corporation doingbusiness in Mexico. Some of the most relevant statutes, regulations andagencies that govern our operations as a housing development company includethe following:

 

·       the Mexican General Human Settlements Law (*Ley General de Asentamientos Humanos*),which regulates urban development, planning and zoning and delegates to theMexico City and state governments the authority to promulgate urban developmentlaws 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 Housing Law (*Ley Federal de Vivienda*), whichcoordinates the activities of states, municipalities and the private sectorwithin the context of the housing industry. As in effect, the Federal HousingLaw seeks to encourage and promote the construction of affordable entry-levelhousing.

 

·       local Building Regulations (*Reglamentos de Construcción*) and urbandevelopment plans promulgated by the states, Mexico City, and localmunicipalities, which control building construction, establish the requiredlicenses and permits, and define local zoning and land-use requirements.

 

·       the Mexican INFONAVIT Law (*Ley del Instituto del Fondo Nacional de la Vivienda para losTrabajadores*), which requires that financing provided by INFONAVITbe granted only to homebuyers of registered developers that participate inpublic INFONAVIT bidding processes.

 

·       the Federal Mortgage Society Organizational Law (*Ley Orgánica de la Sociedad Hipotecaria Federal*),which encourages the development of the primary and secondary home mortgagemarkets by authorizing SHF to grant home mortgage loans pursuant to the FederalMortgage Society General Financing Conditions (*CondicionesGenerales de Financiamiento de Sociedad Hipotecaria Federal*), whichregulate the general terms and conditions on which these loans may be granted.

 

·       the Mexican Federal Consumer Protection Law (*Ley Federal de Protección al Consumidor*),which promotes and protects consumer rights and seeks to establish equality andlegal certainty in relationships between consumers and commercial suppliers.

 

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***Environmental***

 

Our operations aresubject to the Mexican General Environmental Protection Law (*Ley General del Equilibrio Ecológico y la Protecciónal Ambiente*), the Mexican General Waste Prevention and ManagementLaw (*Ley General para la Prevención yGestión Integral de los Residuos*), and the related regulations. TheMexican Ministry of the Environment and Natural Resources (*Secretaría del Medio Ambiente y Recursos Naturales*)and the Mexican Federal Environmental Protection Agency (*Procuraduría Federal de Protección al Ambiente*)are the federal government authorities responsible for enforcing environmentalregulations in Mexico, including environmental impact studies, which arerequired for obtaining land-use permits, investigations and audits, as well asto provide guidelines and procedures regarding the generation, handling,disposal and treatment 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 aluminum mouldmetal instead of wooden beams and treat waste water. We plant trees on the landof 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.

 

**SignificantSubsidiaries**

 

We are a holding companyand conduct our operations through subsidiaries. The table below sets forth ourprincipal subsidiaries as of December 31, 2008.

 
| ** **                                                                  | ** ** | **Jurisdiction******** of** | ** ** | **Ownership******** percentage** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------|
| **Name of Company**                                               | ** ** | **Incorporation**                | ** ** | **2008**                              | ** ** | **2007**   | ** ** | **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. (4)                                   |       | 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                                   | %          | —     |   | Promotion,  design, construction and sale of upper-income tourism housing |
| Homex Central Marcaria, S.A. de C.V. (5)                                    |       | Mexico                           |       | 100                                   | %          | —     |   | Administration  of industrial and intellectual property |

 

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(1)      Casas Beta del Centro, S. de R.L. de C.V. owns 100% ofthe outstanding stock of Comercializadora Cántaros, S.A. de C.V. and 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.

 

(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 with theguidance 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 theoutstanding stock of the following companies:

 

(a)       EffectiveMarch 2008, Homex Global owns 100% of the outstanding stock of Homex IndiaPrivate Limited, a subsidiary located in India and engaged in the constructionand development of entry-level and middle-income housing in India. This companyhad no significant operations during 2008.

 

(b)       EffectiveSeptember 2007, Homex Global owns 15% of the outstanding stock of OrascomHousing Communities “S.A.E.”, an associated company located in Cairo, Egyptthat performs the construction and development of entry-level and middle-incomehousing in Egypt.

 

(c)       EffectiveFebruary 2008, Homex Global owns 100% of the outstanding stock ofDesarrolladora de Sudamérica, S.A. de C.V., a Mexican company that had nooperations during 2008.

 

(d)       EffectiveNovember 2008, Homex Global owns 100% of the outstanding common stock ofHomex Brasil Incorporacoes a Construcoes Limitada (“Homex Brasil”), through itssubsidiaries Éxito Construcoes e Participacoes Limitada and HMX EmpreendimentosImobiliarios Limitada. Homex Brasil intends to perform construction anddevelopment of entry-level and middle-income housing in Sao Paulo, Brazil.However, it had no significant operations during 2008.

 

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

 

(5)      These companies were incorporated in 2008; however,they had no significant operations during 2008.

 

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

 

Not applicable.

 

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

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionshould be read in conjunction with our audited consolidated financialstatements and their 

 

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accompanying notesincluded elsewhere herein. Our consolidated financial statements and otherfinancial information included in this annual report, unless otherwisespecified, are stated in pesos for the year ended December 31, 2008 and in constant pesos as of December 31,2007 for the years ended December 31, 2007 and 2006. Ourconsolidated financial statements have been prepared in accordance with MexicanFinancial Reporting Standards (MFRS), which differ in certain respects from USGAAP as described in Notes 28 and 29 to our audited consolidated financialstatements.

 

This annual reportcontains forward-looking statements that reflect our plans, estimates andbeliefs. Our actual results could differ materially from those discussed in theforward-looking statements. Factors that could cause or contribute to thesedifferences include, but are not limited to, those discussed below andelsewhere in this annual report, particularly in “Forward-Looking Statements”and “Item 3. Key Information.”

 

***Critical Accounting Estimates***

 

Our consolidatedfinancial statements have been prepared in accordance with MFRS, which requirethat we make certain estimates and use certain assumptions that affect theamounts reported in our consolidated financial statements and the accompanyingnotes. Although these estimates are based on our best knowledge of currentevents, actual results may differ. Our critical accounting estimates are listedbelow:

 

***Goodwill and Intangible Assets***

 

We are required to applythe purchase method of accounting for all business combinations, which requiresthe recognition 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 31,2008, the net book value of the Beta trademark was Ps.136.6 million. Thebacklog has been completely amortized as of December 31, 2008 and 2007.The valuation of these intangible assets required us to use our judgment. Wealso recorded goodwill related to the acquisition of Controladora Casas Beta,S.A. de C.V. of Ps.731.8 million. The annual impairment testing requirementsrequire us to use our judgment and could require us to write down the carryingvalue of our goodwill and other intangible assets in future periods.

 

***Revenue and Cost Recognition***

 

Pursuant to MFRS, we usethe percentage-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. Under MFRS,applying the percentage-of-completion method, we measure the progress towardscompletion in terms of actual costs incurred versus estimated expenditures foreach 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.

 

Thepercentage-of-completion method of accounting requires us to determine on amonthly basis the percentage-of-completion of each stage of a development basedon actual expenditures incurred to date versus estimated expenditures. Tothe extent that the actual costs of a development stage differ from theestimated costs incurred, our recognized revenues could change.  Inaddition, to the extent that estimated revenues derived from home sales perdevelopment stage differ from revenues derived from home deliveries perdevelopment stage, our recognized revenues could change.

 

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

 

·       the homebuyer has submitted all required documents inorder to obtain financing from the mortgage lender;

 

·       the Company has established that the homebuyer willobtain the required financing from the mortgage lender;

 

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·       the homebuyer has signed a purchase application forthe processing and granting of a loan to buy a property to be used as housing;and

 

·       the homebuyer has made a down payment, where downpayments are required.

 

The variations in theCompany’s gross profit and operating profit arise due to the stated differencesrelated to cost and revenues recognition between MFRS and US GAAP. In2008, revenues under MFRS were Ps.18,850 million while revenues under US GAAPwere Ps.14,885 million. In 2007, revenues under MFRS were Ps.16,222million while revenues under US GAAP were Ps.13,850 million. See Notes 27and 28 to our audited consolidated financial statements for a furtherdiscussion of differences between MFRS and US GAAP as they relate to ourconsolidated financial statements.

 

In 2008, totalunits closed were 41,679 units compared to 57,498 units sold. The lower volumein units closed compared to units sold is primarily due to our increasedparticipation in the construction of nearly-completed vertical buildingprojects which take longer to build, sell and collect.****In addition, the volume of total unitsclosed was also impacted as a result of the continued delay in the disbursementof Federal Government subsidies in certain cities. Further, our volume of unitsclosed is related to a slowdown in the collection process through FOVISSSTE,who employs sofoles to make payments which result in delays in the paymentprocess.

 

***Income Taxes***

 

We recognize deferred taxassets and liabilities based on the differences between the financialstatements, carrying amounts and the tax bases of assets and liabilities. Weregularly review our deferred tax assets for recoverability and, if necessary,establish a valuation allowance based on historical taxable income, projectedfuture taxable income and the expected timing of the reversals of existingtemporary differences. If these estimates and related assumptions change in thefuture, we may be required to record a valuation allowance against deferred taxassets resulting in additional income tax expense. See Notes 3 and 23 to ourconsolidated financial statements.

 

**OPERATINGRESULTS**

 

The following table setsforth selected data for the periods indicated, stated in nominal pesos for theyear ended December 31, 2008 and in constant pesos as of December 31,2007 for the years ended December 31, 2007 and 2006. The table also setsforth the data as a percentage of our total revenues:

 
| ** **                            | ** ** | **2008**                                                   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **(in  thousands of  Mexican pesos (Ps.))** | ** ** |
| **MFRS:**                             |       |                                                       |       |       |       |       |       |
| Revenues                              |       | Ps.                                                        | 18,850,496 |       | Ps.        | 16,222,524 |       | Ps. | 13,439,519 |   |
| Costs                                 |       | 13,473,257                                                 |       | 11,041,456 |       | 9,191,005  |       |
| Gross  profit                         |       | 5,377,239                                                  |       | 5,181,068  |       | 4,248,514  |       |
| Selling  and administrative expenses  |       | 2,377,646                                                  |       | 1,798,429  |       | 1,359,147  |       |
| Income  from operations               |       | 2,999,593                                                  |       | 3,382,639  |       | 2,889,367  |       |
| Other  (expenses) income, net         |       | (109,926                                                   | )          | 209,223    |       | 11,004     |       |
| Net  comprehensive financing cost (1) |       | 558,485                                                    |       | 278,904    |       | 790,969    |       |
| Income  tax expense                   |       | 712,175                                                    |       | 951,280    |       | 669,843    |       |
| Net  income                           |       | Ps.                                                        | 1,619,007  |       | Ps.        | 2,361,678  |       | Ps. | 1,439,559 |   |

 
| ** **                           |   | **(as a percentage of sales)** |   |
|--------------------------------------|--------|----------------------------------------------------|--------|
| **MFRS:**                            |   |                                               |   |   |   |   |   |
| Revenues                             |   | 100.0                                              | %      | 100.0 | % | 100.0 | % |
| Costs                                |   | 71.5                                               | %      | 68.0 | % | 68.4 | % |
| Gross  profit                        |   | 28.5                                               | %      | 31.9 | % | 31.6 | % |
| Selling  and administrative expenses |   | 12.6                                               | %      | 11.0 | % | 10.1 | % |
| Income  from operations              |   | 15.9                                               | %      | 20.8 | % | 21.5 | % |
| Other  (expenses) income, net        |   | (0.6                                               | )%     | 1.2 | % | 0.0 | % |
| Net  comprehensive financing cost    |   | 3.0                                                | %      | 1.7 | % | 5.9 | % |
| Income  tax expense                  |   | 3.7                                                | %      | 5.8 | % | 4.9 | % |
| Net  income                          |   | 8.6                                                | %      | 14.6 | % | 10.7 | % |

 

37

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(1)    Represents interest income, interest expense, monetaryposition gains and losses (for 2007 and 2006), foreign exchange gains andlosses and valuation effects of derivative instruments.

 

***Results of Operations for the Year Ended December 31,2008 Compared to the Year Ended December 31, 2007 - MFRS***

 

***Revenues***

 

Total housing revenues in 2008 increased 16.2% toPs.18,850.4 million from Ps.16,222.5 million in 2007, primarily due to higheraffordable-entry level sales volume and higher average prices in themiddle-income segment, where prices increased 4.6% to Ps.817 thousand as of December 31,2008 from Ps.781 thousand in the same period in the previous year. Affordableentry-level homes represented 77.0% of total revenues in 2008 compared to 77.3%in 2007. Middle-income homes represented 23.0% of total revenues in 2008compared to 22.6% in 2007. In 2008, other revenues (included in revenues above)decreased 34.9% to of Ps.100 million, compared to Ps. 153.6 million in 2007.The reduction is mainly due to increased internal use of our prefabricatedconstruction materials, ready-mix concrete and concrete blocks, consequently leading to lower sales of these products to third parties.

 

Units sold in 2008 increased 11.3% to 57,498 homes, from51,672 homes in 2007 primarily due to the Company’s focus on affordable-entrylevel and low-cost products and the availability of mortgage financing in thissegment through INFONAVIT and FOVISSSTE. Affordable entry-level sales volumeincreased to 52,209 homes in 2008 or 90.8% of total sales volume compared to90.4% in 2007. Middle-income sales volume increased 6.2% to 5,289 homes in 2008compared to 4,982 homes in 2007 primarily due to the availability of mortgagesfor this segment through co-financing products from INFONAVIT, FOVISSSTE andcommercial banks.

 

***Gross Profit***

 

Grossprofit decreased to 28.5% in 2008 from 31.9% in 2007, due to the effects ofMFRS D-6.  Pursuant to the application ofMFRS D-6 in 2007, the Company is required to capitalize its ComprehensiveFinancing Cost (“CFC”), which includes the interest expense, exchange loss andmonetary position (until December 31, 2007). In 2008, the Company’sforeign exchange loss increased 970% to Ps.714 million compared to a foreignexchange gain of Ps.82 million in 2007, which  was caused by the depreciation of the Mexicanpeso relative to the US dollar. Likewise,interest expense increased 28% to Ps. 765 million in 2008 compared to Ps. 597million in 2007. The increase in our capitalization during 2008 ultimatelycaused the Company’s CFC to increase 721% to Ps. 977 million compared to Ps.119million in 2007.

 

Costs of sales increased by22.0% in 2008 to Ps.13,473.3 million from Ps.11,041.5 million in 2007, dueprimarily to higher CFC capitalization in 2008 as explained above. As apercentage of total revenues, gross profit decreased 3.4% to 28.5% in 2008 from31.9% in 2007, primarily due to higher CFC capitalization in 2008. In 2008, theCompany’s gross margin measured without considering the application of MFRS D-6increased 1.0% to 33.7% compared to 32.7% in 2007. The higher margin was mainlydue to the increased implementation of aluminum molds in the Company’sprojects.

 

***Selling, General and Administrative Expenses***

 

Selling, general and administrative expenses increasedby 32.3% to Ps.2,378 million in 2008 compared to Ps.1,798 million in 2007. As apercentage of total revenues, SG&A expenses increased 1.6% to 12.6% in 2008compared to 11.0% in 2007. The increase in SG&A-as a percentage of saleswas primarily due to severance payments the Company made in connection with arestructuring of our personnel. Further, the Company expanded its marketingefforts, including a nation-wide brandrecognition campaign, and the addition of a marketing consultant to apply a new sales technique****designed toincrease the Company’s market-share.

 

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***Income from Operations***

 

In 2008, income from operationsdecreased by 11.3% to Ps.2,999.6 million compared to Ps.3,382.6 millions in2007. Including the non-cash items, income from operations as a percentage of revenueswas 15.9% in 2008 compared to 20.8% in 2007, as a result of the increase inSG&A explained above.

 

***NetComprehensive Financing Cost***

 

Netcomprehensive financing cost (comprised of interest income, interest expense,foreign exchange gains and losses, valuation effects of derivative instrumentsand monetary position gains and losses for 2007) increased****toPs.558 million in 2008 compared to Ps.279 million in 2007. The increase isprimarily due to the depreciation of the Mexican peso relative to the US dollar,which resulted in a significant increase in the cost of servicing our foreigncurrency-denominated debt. In 2008, we also incurred a non-recurring loss ofPs.314 million in connection with a foreign-exchange derivative transaction.This foreign-exchange derivative transaction has been terminated as of December 31,2008. As a percentage of revenues, net CFC increased 1.3% to 3.0% in  2008 compared with 1.7% in 2007.

 

Net interest expense decreased to Ps. 80 million in 2008from Ps. 205 million in 2007.  Thedecrease was primarily due to a reduction in interest expense in connectionwith the capitalization of CFC previously expensed on a current basis, as wellas  an increase of 12.2% in interestincome to Ps.157 million in 2008 compared to Ps.140 million in 2007.

 

Foreign exchange loss increased 511% in 2008 to Ps.165million compared to Ps.27 million in 2007. The increase is due to the depreciation of the Mexican peso relative to the US dollar,which resulted in a significant increase in the cost of servicing our foreigncurrency-denominated debt.

 

***ForeignExchange exposure and currency derivatives***

 

As of December 31, 2008, Homex’ USDollar-denominated debt was mainly limited to a US$250 million bond issued in2005, with a single principal payment at maturity in 2015. The Company has aninterest-only swap that effectively minimizes short and mid-term exchange riskin interest payments. As of December 31, 2008 the fair value of thisinstrument was a favorable asset position of Ps.66 million.

 

During 2008 the Company had net liabilities positionin 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 therisk associated with the exchange loss in the acquisition of foreigncurrencies. However due to the recent devaluation of the Mexican peso, theCompany decided to cancel these derivative instruments. During the year, anamount of Ps.404,601 was debited into the valuation effect of financialinstruments accounts.

 

The net accumulated effect in the statement of income ofthe Principal-Only Swap and Interest-Only Swap for the years ended December 31,2008 was Ps. (90,639).

 

The net valuation effects of financial instruments forthe years ended December 31, 2008, 2007 and 2006, were Ps. 313,962, Ps.(147,977) and Ps. 101,895, respectively.

 

***Income Tax Expense***

 

Income tax expensedecreased by 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 increasein the income tax effective rate between 2008 and 2007 is mainly a result of arecovery of VAT taxes during 2007 for Ps. 395 million that generatednon-taxable income.

 

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***Majority Net Income***

 

Majority net income decreased by 29.2% to Ps.1,580.9million in 2008 from Ps.2,233.1 million in 2007 as a result of the factorsdescribed above.

 

***Results of Operations for the Year Ended December 31,2007 Compared to the Year Ended December 31, 2006 - MFRS***

 

***Revenues***

 

Totalrevenues increased by 20.7% to Ps.16,222.5 million in 2007 from Ps.13,439.5million in 2006, primarily driven by a 16.9% increase in the number of homessold and 3.1% higher average prices. Affordable entry-level represented 77.3%of total revenues in 2007 compared to 78.4% in 2006, and middle-incomerepresented 22.6% of total revenues in 2007 compared to 21.5% in 2006. We sold46,690 affordable entry-level homes in 2007, compared to 39,940 affordableentry-level homes in 2006, and sold 4,982 middle-income homes in 2007, comparedto 4,192 homes in 2006. In 2007, Homex reported other revenues (included in revenuesabove) of Ps.153.6 million compared to Ps.194.6 million in 2006. This declinewas mainly driven by increased internal use of existing production capacity ofour prefabricated construction materials such as block and concrete. Thisresulted in a reduction of third party sales of block and concrete.

 

***Gross Profit***

 

Homexgenerated a gross profit margin of 31.9% in 2007, an increase of 0.3 basispoints compared to 31.6% in 2006. The higher margin was mainly driven by theimplementation and progressive use of aluminum molds in some of the Company’sprojects. Gross profit increased by 22.0% to Ps.5,181.1 million in 2007 fromPs.4,248.5 million in 2006.

 

***Selling, General and Administrative Expenses (SG&A)***

 

Selling,general and administrative expenses increased by 32.3% to Ps.1,798.4 million in2007 compared to Ps.1,359.1 million in 2006. The amortization of the “CasasBeta” brand in 2007 resulted in a non-cash impact on SG&A of Ps. 92.9million, compared to Ps.94.5 million in 2006. As a percentage of total revenues,and excluding the amortization effect of the “Casas Beta” brand, selling,general and administrative expenses increased to 10.5% in 2007 from 9.4% in2006. The yearly increase was principally the result of our expansion programs.

 

***Income from Operations***

 

In 2007, income from operationsincreased by 17.1% to Ps.3,382.6 million compared to Ps.2,889.4 millions in2006. Including the non-cash items, income from operations as a percentage ofrevenues was 20.8% in 2007 compared to 21.5% in 2006, as a result of theincrease in the SG&A explained above.

 

***Net Comprehensive Financing Cost***

 

Net comprehensive financingcost or CFC (comprised of interest income, interest expense, monetary positiongains and losses, and foreign exchange gains and losses) decreased by 64.7% toPs.278.9 million in 2007 compared to Ps.790.9 million in 2006. The resultreflects the application of the new Mexican Financial Reporting Standard, underBulletin D-6, which requires the Company to capitalize CFC previously expensedon a current basis. It also reflects the favorable position resulting from thechange in the fair value of our SWAP payable, registered in the exchange (gain)loss caption as part of CFC. Net comprehensive financing cost as a percentageof sales decreased to 1.7% in 2007 from 5.9% in 2006.

 

Netinterest expense decreased to Ps.204.7 million in 2007 from Ps.565.8 million in2006, mainly driven by areduction in interest expense derived from the capitalization of interestincluded in CFC previously expensed on a current basis and a reduction in theCompany’s interest expense as a result of the average debt from our revolvingcredit lines, as well as an increase in interest income. Interest income increased by 28.9% to Ps. 140.2 million  in 2007 from Ps. 108.8 million in 2006.

 

We had a foreign exchange gainof Ps.121.2 million in 2007 compared to a foreign exchange loss of Ps.148.4million in 2006, derived mainly from the net changes in the translation of ourforeign currency-denominated debt.

 

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Monetary position lossincreased from Ps.76.8 million in 2006 to Ps.195.4 million in 2007 as aresult of the capitalization of CFC and a decrease in our net monetaryliability position.

 

***Income Tax Expense***

 

Income tax expense increasedby 42.0% from Ps.669.8 million in 2006 to Ps.951.3 million in 2007 dueprincipally to increased revenues and income before taxes. The 29% effectiveincome tax rate in 2007 decreased 2% from the 31% effective income tax rate in2006.

 

The income tax effectiverate decreased from 31% in 2006 to 29% in 2007 as a result of the reduction ofmandatory income tax rates from 29% in 2006 to 28% in 2007 as well as thebenefits associated with VAT recoveries. See Note 23 to our consolidatedfinancial statements.

 

***Employee Statutory Profit-Sharing Expense***

 

Employee statutoryprofit-sharing expense decreased by 16.3% to Ps. 30.7 million in 2007 fromPs. 36.7 million in 2006 as a result of lower generated revenues from thesubsidiaries that share profits with employees. The employee statutoryprofit-sharing expense was reclassified to other expenses (income) in 2007.

 

***Majority Net Income***

 

Majority net income increased by 60.5% toPs.2,233.1 million in 2007 from Ps.1,391.3 million in 2006 as a result of thefactors described above.

 

***Resultsof Operation — Years ended December 31, 2007 and 2008 — US GAAP***

 

As disclosed inNote 28 to the Company’s consolidated financial statements, the primarydifferences between the Company’s financial statements prepared under MFRS andUS GAAP relate to revenue and cost recognition for construction projects,although certain smaller differences exist for other accounts.

 

In 2008, revenuesunder MFRS were Ps.18,850 million while revenues under US GAAP were Ps.14,885million. In 2007, revenues under MFRS were Ps.16,222 million whilerevenues under US GAAP were Ps.13,850 million. Revenues under US GAAP 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, progresstowards completion is measured in terms of comparing the actual costs incurredto the estimated total cost of a project. For a further discussion of revenuerecognition policies under US GAAP, refer to Note 28 to the Company’sconsolidated financial statements.

 

Total units closedand recognized as US GAAP revenue in 2008 were 41,679 units (39,557 in 2007)compared to 57,498 units sold under MFRS in 2008 (51,672 in 2007). The lowervolume in units closed in 2008 compared to units sold is primarily attributableto both our continued growth and therefore our higher construction-in-process,and our increased participation during 2008 in the construction ofnearly-completed vertical building projects which take longer to build, selland collect.** **In addition, the volume of total units closed was alsoimpacted by the continued delay in the disbursement of Federal Governmentsubsidies in certain cities, which in turn impacts the timing by whichINFONAVIT and other lenders will commit to close a transaction. Further, alower volume of units closed and recognized as US GAAP revenue compared tounits sold under MFRS is also related to a slowdown in the collection processthrough FOVISSSTE, who employs sofoles to make payments which result in delaysin the payment process. Total units closed of 41,679 in 2008 represents a 5%increase compared to total units closed in 2007 of 39,557. The increase isattributable to the continued growth in the Company’s business. In 2007, unitsclosed increased by 32% over 2006. The proportion of units sold and unitsclosed are generally consistent when evaluated by operating segment during both2008 and 2007. As of December 31, 2008, approximately 15,819 units remainat various stages of completion under MFRS, and thus have yet to be recognizedinto revenue under US GAAP.

 

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Gross profitmargins were 29% for MFRS in 2008, compared to 30% for US GAAP. Gross profitmargins were 32% for MFRS in 2007, compared to 29% for US GAAP. The primarydifference between gross profit margins under MFRS and US GAAP is attributableto the differences in accounting policies with respect to the capitalization ofcomprehensive financing costs (“CFC”).  MFRS provides for the capitalization of foreign exchange gains andlosses on borrowings. However US GAAP only provides for the capitalization of interestcosts. In 2008, foreign exchange losses were capitalized into constructioninventory. When the underlying projects were sold, greater amounts of CFC wererecognized in cost of sales, which had the effect of reducing gross profitmargins in 2008 compared to 2007 under MFRS. The capitalization of CFC in 2008also resulted in reduced gross profit margins under MRFS as compared, to USGAAP. Conversely, foreign exchange gains on borrowings in 2007 ultimatelyresulted in higher gross profit margins under MFRS in 2007 than in 2006, and inhigher gross profit margins under MFRS as compared to US GAAP.

 

As disclosed inNote 26 to the Company’s consolidated financial statements, IMFRS 14 will beadopted as of January 1, 2010, with retrospective application to prioraccounting periods presented with its 2010 consolidated financialstatements.  Management is evaluatingwhat effect this new accounting pronouncement will have on the Company’sresults of operations and financial position. 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 2008 and 2007 are consistentwith those described for MFRS discussed above.

 

Comprehensive financingcosts (“CFC”) are different between MFRS and US GAAP for the reasons discussedabove. These differences result in periodic fluctuations in gross profitmargins and CFC levels between the two accounting frameworks.

 

The Company’s effectivetax rate is not significantly impacted by the differences between MFRS and USGAAP. The Company’s effective tax rate under MFRS was 31% in 2008 compared to32% under US GAAP and 29% under MFRS in 2007 compared to 28% under US GAAP.

 

Refer to Note 28 for acomplete reconciliation of net income between MFRS and US GAAP.

 

**GovernmentPolicy and Available Financing**

 

The size of thedeveloper-built market depends to a great extent on the availability ofmortgage financing. Due to liquidity issues over the last 20 years, Mexico hasexperienced fluctuations in the availability of mortgage financing,particularly from private segment sources. As a result, the supply ofaffordable entry-level and middle-income housing has also remained low duringthis period.

 

During the 1980s, Mexicangovernment policy focused on encouraging investment by the private sector,reducing development costs, and stimulating construction. Mexican Housing Fundsprovided mortgage loan guarantees and direct payment and savings procedures. In1994, Mexico experienced an economic crisis that led to the devaluation of theMexican peso and a steep rise in interest rates. Smaller housing developmentcompanies went out of business, and the industry experienced a sharp fall inhome sales between 1995 and 1996 due to diminished commercial bank lending.

 

Following the 1994economic crisis, government policy sought to counterbalance the shortage ofavailable financing and the increases in interest rates that resulted byfocusing primarily on providing mortgages and construction financing viaMexican Housing Funds in the affordable entry-level segment. Government fundsno longer provided development or sales activities and functioned instead astrue savings-and-loan programs. Legislative reforms with regard tocommunity-owned agricultural territories (*ejidos* ), which made it possible to sell these formerly restrictedproperties, also increased the potential supply of land available fordevelopment. During this period the government authorized sofoles, whichunderwrite mortgages with funds and guarantees provided by government agencies,private investment, national, foreign or development bank loans, or through theMexican capital markets. Furthermore, the government encouraged industry growthand private sector lending by supporting consolidation in the housingdevelopment industry.

 

Between 1997 and 1998,home sales stabilized, growing slightly in 1997 due to improving economicconditions. During 

 

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1999 and 2000, mortgage financingincreased due to stabilizing economic conditions. The level of availablefinancing has continued to grow as a result of Mexican government policies.President Calderón’s administration’s goal is to finance six million mortgagesduring his administration. As of 2008, 3.2 million mortgages have already beenfinanced, satisfying 51% of the administration’s goal. Out of the 3.2 millionmortgages that have been financed, 66% are related to mortgages granted for newhomes. President Calderón’s administration has supported four objectives forthe homebuilding industry originally set forth by President Fox:

 

·                   make more adequate land available,including infrastructure such as sewage and utilities;

 

·                   increase deregulation of the housingindustry;

 

·                   encourage consolidation within theindustry; and

 

·                   increase financing opportunitiesavailable to qualified homebuyers.

 

In conjunction with theseefforts, the Mexican legislature amended existing tax regulations in order toallow individuals to deduct a portion of their mortgage loan interest paymentsfrom their personal income taxes beginning in 2003, which the administrationexpects will lead to increased mortgage financing activity.

 

Recently, the Mexicangovernment implemented a new program to meet the housing needs of families inthe very low end of the economic spectrum, a sector of the population whosemonthly income would otherwise be insufficient for them to be able to affordthe lower valued homes in the market. This program demonstrates the commitment of Mexican Federal governmentto improving the quality of life for families in Mexico by providing affordablehousing.

 

The actions taken byPresident Calderón’s administration to accelerate the housing and mortgagesupply in Mexico has resulted in the emergence of a very active housingindustry supported by solid private and public institutions. The developer-builtmarket has continued to expand due to higher levels of available mortgagefinancing, especially through Mexican Housing Funds such as INFONAVIT, SHF andFOVISSSTE. According to CONAVI, from 2000 to 2008 mortgage providers in Mexicogranted 3,880,194 mortgages, a 116.4% growth from 331,880 in 2000 to 718,255 in2008. Between 2003 and 2008, CONAPO estimates that the housing stock increasedby 2.0 million homes.

 

President Calderón hasindicated that he will continue to support and promote the housing industry onthree main lines: urban development, very affordable housing and homeimprovement. His administration’s goal is for the Mexican Housing Funds toprovide six million mortgages by 2012.

 

In early 2009, theMexican federal government announced a stimulus bill, the “National Agreementin Favor of Personal Finance and Employment” (*AcuerdoNacional en Favor de la Economía Familiar y el Empleo*), thatcontains assistance for the homebuilding industry. Under the bill, thegovernment will increase aid from Ps5.2 billion to Ps.7.4 billion for a federalhousing subsidy program designed to provide assistance to low-income families.In addition, the Mexican federal government, homebuilders and suppliers signeda separate agreement, the “National Housing Program” that confirms the housingindustry’s importance to the Mexican economy during the current recession andeconomic slowdown.

 

Changes in theavailability of mortgage financing from government agencies could adverselyaffect us. See “Item 3. Key Information—Risk Factors—Risk Factors Related toOur Business—Decreases in the Amount of Mortgage Financing Provided by MexicanHousing Funds on Which We Depend, or Disbursement Delays, Could Result in aDecrease in Our Sales and Revenues.”

 

**LIQUIDITYAND 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 conditions in the U.S. mortgage banking sector arecurrently affecting the homebuilding industry in the U.S. Recently, thesenegative conditions have impacted the financial positions of a majority of U.S.homebuilders. Our domestic mortgage system, as explained herein, differs fromthat of the U.S. The Mexican housing market differs from the U.S. housingindustry in several significant respects. The housing market in Mexico is in anearly stage of development compared to the U.S. housing industry, 

 

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which, accordingto some economists, has been subjected to heightened price speculation that hasled to an excess supply of housing and a lack of liquidity stemming fromexcessive mortgage lending activity. The Mexican housing market on the otherhand is characterized by a large deficit of housing stock driven in part by agrowing young population, high rates of urban growth, new household formation,and a decreasing number of occupants per home. Additionally, the Mexican governmenthas implemented housing policies and created agencies designed to address thehousing deficit by making funds available to a large segment of the population.As a result, in the past few years, a significant market for companies likeHomex in the affordable entry-level segment has emerged. Accordingly, Homexdoes not believe that the housing market in Mexico is suffering from the sameimpairment and liquidity issues currently facing the U.S. housing industry.Moreover, while it may be reasonably possible that the impairment and liquidityissues currently facing the U.S. housing industry may deteriorate further,Homex does not have any current reason to believe these specific problems willmaterially affect its operations and liquidity directly.

 

The decreasing liquidity trends noted in Homex’sconsolidated financial results have not been primarily driven by macro-leveleconomic factors, but rather, reflect company-specific factors. For example, inresponse to local market demands, Homex’s implementation in 2008 of morevertical high-rise construction has resulted in somewhat longer completiontimes, more inventory and greater demands for working capital. Additionally,Homex’s decision to migrate the principal source of its customers’ mortgagefinancing not provided by INFONAVIT from sofoles to commercial banks led to atemporary delay in the collection process. At the same time, a delay in thedisbursement of Federal Government subsidies in certain cities delayed thetiming by which INFONAVIT commits to closing a transaction. Further, Homexbelieves that as a result of its focus on the lower affordable entry-levelsegment, which benefits from government sponsored financing, its business isless subject to the effects of the general lack of available credit fromtraditional sources stemming from the ongoing global economic slowdown.

 

As of December 31,2008, we had Ps.1,140.1 million of cash and cash equivalents and Ps. 7,811.4million of outstanding indebtedness for money borrowed (none of which wasconstruction financing provided by sofoles for developments underconstruction), as compared to Ps. 2,206.8 million of cash and cash equivalentsand Ps. 3,795.6 million of outstanding indebtedness as of December 31,2007.

 

Although we do notcommence construction of any development until the availability of mortgagefinancing for qualified homebuyers is determined, we do acquire land andperform licensing, permit-securing, and certain infrastructure developmentactivities prior to receiving confirmation of the availability of mortgagefinancing. Historically, we have financed our development and constructionactivities through internally generated funds, commercial paper programs, andbridge loans.

 

Our primary sources ofliquidity are:

 

·                     cash flow from operations;

 

·                     financing from sellers of land and, to alesser extent, suppliers of materials;

 

·                     commercial banks and other financialinstitutions; and

 

·                     down payments from homebuyers.

 

We believe that ourworking capital will be sufficient during the next 12 months to meet ourliquidity requirements.

 

The table below setsforth information regarding our outstanding debt as of December 31, 2008:

 

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**DebtOutstanding as of December 31, 2008**

 
| **Homex Debt**                                                                                                                                                                                  | ** ** | **Aggregate Lender********Principal Amount** | ** **      | **Interest********Rate** | ** ** | **Maturity**                          | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|-----------------|--------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(in thousands of******** pesos)**     | ** **      | ** **               | ** ** | ** **                            | ** ** |
| Senior  Guaranteed Notes (1)                                                                                                                                                                         |       | Ps.                                                    |  3,443,450 |                     |       |                                  |       |   |
| Grupo Financiero Inbursa, S.A.                                                                                                                                                                       |       |                                                   |            |                     |       |                                  |       |
| A  credit line of Ps. 2,078 million granted on June 26, 2008.                                                                                                                                   |       | 2,078,000                                              |            | TIIE+1.50                | %(2)       | June 26,  2013                   |       |
| HSBC  Mexico, S.A.                                                                                                                                                                                   |       |                                                   |            |                     |       |                                  |       |
| A line of credit  for Ps.1,081 million granted on July 1, 2005, with semi-annual payments  beginning on March 14, 2008.                                                                    |       | 360,334                                                |            | TIIE+1.00                | %(2)       | Sept. 14, 2010                        |       |
| 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.                                                                         |       | 11,136                                                 |            | 7.40                     | %          | July 29,  2010                   |       |
| Hipotecaria  Nacional, S.A. de C.V.                                                                                                                                                                  |       |                                                   |            |                     |       |                                  |       |
| Three separate  lines of credit granted on November 6, 2008. November 20, 2008 and  December 11, 2008. These lines of credit are guaranteed by five of the  Company’s land lots. |       | 299,795                                                |            | TIIE+4.00                | %(2)       | November and  December 2010 |       |
| HSBC  México, S.A.                                                                                                                                                                              |       |                                                   |            |                     |       |                                  |       |
| Revolving credit  line granted on December 26, 2008.                                                                                                                                            |       | 50,000                                                 |            | TIIE+4.10                | %(2)       | Jan. 23,  2009                   |       |
| Banco Regional de Monterrey, S.A.                                                                                                                                                                    |       |                                                   |            |                     |       |                                  |       |
| Revolving credit  line granted on December 1, 2008.                                                                                                                                             |       | 90,284                                                 |            | TIIE+4.00                | %(2)       | Jan. 8,  2009                    |       |
| Grupo Financiero Inbursa, S.A.                                                                                                                                                                       |       |                                                   |            |                     |       |                                  |       |
| Revolving credit  line granted on December 19, 2008.                                                                                                                                            |       | 600,000                                                |            | TIIE+4.50                | %(2)       | Jan. 19,  2009                   |       |
| Banco Mercantil del Norte, S.A.                                                                                                                                                                      |       |                                                   |            |                     |       |                                  |       |
| Revolving credit  line granted on December 30, 2008.                                                                                                                                            |       | 300,000                                                |            | TIIE+3.25                | %(2)       | Jan. 29,  2009                   |       |
| Banco Santander México, S.A.                                                                                                                                                                    |       |                                                   |            |                     |       |                                  |       |
| Revolving credit  line granted on November 12, 2008.                                                                                                                                            |       | 100,000                                                |            | TIIE+1.00                | %(2)       | May 7, 2009                      |       |
| BBVA  Bancomer                                                                                                                                                                                       |       |                                                   |            |                     |       |                                  |       |
| Financial  leases of machinery and equipment                                                                                                                                                         |       | 288,857                                                |            | TIIE+ 0.80               | %(2)       | Jan. 2,  2013                    |       |
| BBVA  Bancomer                                                                                                                                                                                       |       |                                                   |            |                     |       |                                  |       |
| Financial  leases of machinery and equipment                                                                                                                                                         |       | 53,725                                                 |            | TIIE+ 0.80               | %(2)       | Oct.1, 2013                           |       |
| BBVA  Bancomer                                                                                                                                                                                       |       |                                                   |            |                     |       |                                  |       |
| Financial  leases of machinery and equipment                                                                                                                                                         |       | 56,525                                                 |            | TIIE+ 3.50               | %(2)       | Jan. 2,  2014                    |       |
| Other  financial leases                                                                                                                                                                              |       | 2,315                                                  |            | 7.40                     | %          | Sept.15, 2008                         |       |
| Interest  payable                                                                                                                                                                                    |       | 76,996                                                 |            |                     |       |                                  |       |
|                                                                                                                                                                                                 |       |                                                   |            |                     |       |                                  |       |
| Total  debt                                                                                                                                                                                          |       | Ps.                                                    |  7,811,417 |                     |       |                                  |       |   |
|                                                                                                                                                                                                      |            |                                                        |                 |                          |            |                                       |            |  |  |

 

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| (1)    | 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                             |
| (2)    | TIIE refers to the  28-day Mexican interbank rate (*Tasa de  Interés Interbancaria de Equilibrio*), which was 8.6886% as of  December 31, 2008.                                                                                                                                                                                                        |

 

Our total indebtednessincreased to Ps. 7,811.4 million as of December 31, 2008 from Ps. 3,795.6million as of December 31, 2007, mainly as a result of our extensivepurchase of land reserves, working capital requirements and the effects of thedepreciation of the Mexican Peso relative to the U.S. dollar on our U.S.dollar-denominated debt.

 

As of December 31,2008, our short-term debt was Ps. 1,506.7 million, mainly as a result of Ps.1,143.7 million of various revolving credit lines granted by financialinstitutions. Our long-term debt was Ps.6,304.8 million, which includes thelong-term portion of our equipment lease obligations in the amount of Ps.314.6 million, the remaining balance of the medium-term loan facility withHSBC of Ps.360.3 million, a line of credit with Inbursa for Ps. 2,078.0,three separate lines of credit with Hipotecaria Nacional for Ps. 299.8 and ourSenior Guaranteed Notes in the aggregate principal amount of Ps.3,443.5 million.

 

On September 28,2005, we issued US$250 million of Senior Guaranteed Notes due 2015 with acoupon rate of 7.50%.

 

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As of December 31, 2008, Homex’ USdollar-denominated debt was mainly limited to the Company’s Senior Guaranteed Notes due 2015, with a single principal payment atmaturity. The Company has an interest-only swap that effectively minimizesshort and mid-term exchange risk in interest payments. As of December 31,2008 the fair value of this instrument was a favorable asset position of Ps. 66million.

 

During2008, the Company’s short and long-term net liabilities resulted in a negativeforeign exchange. As a result, the Company entered into hedging transactions,including foreign exchange derivative instruments designated to mitigate therisk associated with foreign currency exchange rates. As a result of the recentdevaluation of the Mexican peso relative to the US dollar, the Company decidedto cancel these derivative instruments. The Company’s statement of incomereflects a loss of Ps.404,601 related to these foreign exchange derivativetransactions.

 

The net accumulated effect in the statement of income of thePrincipal-Only Swap and Interest-Only Swap for the years ended December 31,2008 was Ps. (90,639).

 

The net valuation effects of financial instruments for theyears ended December 31, 2008, 2007 and 2006, were Ps. 313,962, Ps.(147,977) and Ps. 101,895, respectively.

 

We have not paiddividends since the inception of the Company in 1998 and we do notforesee paying dividends in the near future.

 

**Covenants**

 

Loan covenants requirethe Company 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 stockholders’ equity unlessthey are made between the guarantor subsidiaries. In addition, the Companycannot pledge any of its assets or properties to guarantee any additional debtuntil certain limits.

 

Financial covenants,derived from the Senior Guaranteed Notes, the credit line with HSBC, Inbursaand Hipotecaria Nacional require the Company to maintain:

 

·       a ratio of total debt to total stockholders’ equity ofless than 1.0 to 1.0. The actual ratio as of December 31, 2008 was 0.68 to1.00;

 

·       a ratio of earnings before interest, taxes,depreciation and amortization (EBITDA) to the current portion of long-term debt(including the interest payable) of at least 3.0 to 1.0. The actual ratio as ofDecember 31, 2008 was 4.40 to 1.0;

 

·       a total of stockholders’ equity of at least Ps.8,000,000; the actual stockholders’ equity as of December 31, 2008 was Ps.11,517,257;

 

·       a ratio of interest coverage (EBITDA) to the netfinancing expense of at least 2.5 to 1.0. The actual ratio as of December 31,2008 was 7.63 to 1.00;

 

·       a ratio of leverage (liabilities with cost) to EBITDAof less than 2.50 to 1. The actual ratio as of December 31, 2008 was 1.75to 1.0; and

 

·       operational restrictions on working capital.

 

There are alsorestrictions applicable to additional debt based on EBITDA levels, such asEBITDA to interest expense, including payment of dividends, which should not beless than 2.25 to 1. The actual ratio as of December 31, 2008 was 6.01x.

 

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

 

46

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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.Acceleration or cross-default under any of our credit agreements could have amaterial adverse effect upon our business, financial condition, results ofoperations and prospects.

 

As of December 31,2008 and 2007, the Company was in compliance with the financial covenants ofits debt agreements.

 

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

 

·       a liquidity ratio of current assets toshort-term liabilities no less than 1.50 to 1.0. The actual ratio as of December 31,2008 was 3.11 to 1.0;

 

·       a financing ratio of total liabilities tostockholders’ equity no greater than 1.70 to 1.0. The actual ratio as of December 31,2008 was 1.33 to 1.0; and

 

·       a relation of operational income to netcomprehensive financing cost at a minimum level of 2.0 to 1.0. The actual ratioas of December 31, 2008 was 4.09 to 1.0.

 

As of December 31,2008 and 2007, the Company was in compliance with these financial covenants.

 

TheCompany will utilize cash from operations and new debt financings to financeworking capital needs throughout 2009.

In 2009, the Company intends to follow a conservative strategy to improvecash generation and maintain a stable debt level while minimizing landinvestments and capital expenditures.

 

**TRENDINFORMATION**

 

The current recession and economic slowdown in the U.S. and globalmarkets is affecting the global economy and causing uncertainty in the Mexicaneconomy that could negatively affect performance of the housing market. Therecession, rising unemployment and the occurrence of H1N1 flu may result insofter demand for housing in Mexico, which could have a negative impact onsales and revenue. In addition, our profitability may be negatively affected bythe liquidity restraints facing sofoles, sofomes and other sources of mortgagefinancing, as well as delays in disbursements from these agencies similar tothe delays that occurred during 2008. At the same time, as a result of thecurrent recession, commercial banks, sofoles and sofomes have implementedtighter origination criteria and restricted commercial credit lending affectingour suppliers. This could also affect the Company’s profitability to the extentthat the Company is unable to cut costs to compensate for softer demand andless credit from suppliers. Accordingly, we may need to adjust our business andfinancial models to account for the foregoing factors, which may have anegative effect on our revenues.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

We have no off-balancesheet arrangements as of December 31, 2008.

 

**CONTRACTUALOBLIGATIONS**

 

The following table sets forth information regardingour contractual obligations as of December 31, 2008:

 
| ** **                       | ** ** | **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.                                        | 7,332,999  |   | Ps. | 1,342,880 |   | Ps. | 468,669 |   | Ps. | 2,078,000 |   | Ps. | 3,443,450 |   |
| Capital  (finance) lease         |       | 401,422                                    |       | 86,783 |   | 287,712 |   | 26,927 |   |   |   |
| Total  debt                      |       | 7,734,421                                  |       | 1,429,663 |   | 756,381 |   | 2,104,927 |   | 3,443,450 |   |
| Estimated  interest (1)          |       | 2,960,192                                  |       | 578,562 |   | 1,542,169 |   | 635,787 |   | 203,674 |   |
| Operating  lease obligations (2) |       | 211,014                                    |       | 53,874 |   | 137,498 |   | 19,359 |   | 283 |   |
| Land  suppliers                  |       | 2,731,462                                  |       | 2,326,036 |   | 405,426 |   |   |   |   |   |
| Total                            |       | Ps.                                        | 13,637,089 |   | Ps. | 4,388,135 |   | Ps. | 2,841,474 |   | Ps. | 2,760,073 |   | Ps. | 3,647,407 |   |
|                                  |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

47

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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, 2008. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                       |
| (2)    | Operating leases are  calculated in the nominal bases or future cash flows at the rate as of  December 31, 2008.                                      |

 

Contractual obligationsincreased by 34% from Ps.10,147,856 as of December 31, 2007 toPs.13,637,089 as of December 31, 2008. This change was mainly due to thepurchase of land reserves at the end of 2008, our new capitalized leasefinancing of several prototypes of aluminum molds and their spare parts and operatingleases financing different kinds of equipment related to our concrete and blockproduction.

 

48

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**NewAccounting Pronouncements**

 

***Mexican Financial Reporting Standards (MFRS)***

 

The most relevantstandards that came into force in 2008 are described below:

 

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

 

In November 2007, MFRS B-2 was issued by the Consejo Mexicano parala Investigación y Desarrollo de Normas de la Información Financiera, A.C.(Mexican Financial Information Standards Research Development Board or “CINIF”)to replace 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 shows theentity’s cash receipts and disbursements for the period, while the statement ofchanges in financial position showed the changes in the entity’s financialstructure rather than its cash flows. In an inflationary environment, theamounts of both financial statements are expressed in constant Mexican pesos.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 are not eliminated.

 

MFRS B-2 establishes that in the statement of cash flows, the entitymust first present cash flows derived from operating activities, then frominvesting activities, the sum of these activities and finally cash flowsderived from financing activities. The statement of changes in financialposition first shows the entity’s operating activities, then financingactivities and finally its investing activities. Under this new standard, thestatement of cash flows may be determined by applying the direct or indirectmethod.

 

The transitory rules ofMFRS B-2 establish that the application of this standard is prospective.Therefore, the financial statements for years ended prior to 2008 include astatement of changes in financial position, as previously established byMexican accounting Bulletin B-12.

 

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

 

InJuly 2007, the CINIF issued MFRS B-10, *Effectsof Inflation*. MFRS B-10 defines the two economic environments inMexico that will determine whether or not entities must recognize the effectsof inflation on financial information: i) inflationary, when inflation is equalto or higher than 26%; accumulated in the preceding three fiscal years (an 8%annual average); and ii) non-inflationary, when accumulated inflation for thepreceding three fiscal years is less than the aforementioned accumulated 26%.Based on these definitions, the effects of inflation on financial informationmust be recognized only when entities operate in an inflationary environment.

 

Thisstandard also establishes the accounting rules applicable whenever theeconomy changes from any type of environment to another. When the economychanges from an inflationary environment to a non-inflationary one, the entitymust maintain in its financial statements the effects of inflation recognizedthrough the immediate prior year, since the amounts of prior periods are takenas the base amounts of the financial statements for the period of change andsubsequent periods. Whenever the economy changes from a non-inflationaryenvironment to an inflationary one, the effects of inflation on the financialinformation are recognized retrospectively, meaning that all information for priorperiods must be adjusted to recognize the accumulated effects of inflation ofthe periods in which the economic environment was considered non-inflationary.

 

Thisstandard also abolishes the use of the specific-indexation method for thevaluation of imported fixed assets and the replacement-cost method for thevaluation of inventories, thus eliminating the result from holding non-monetaryassets.

 

49

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TheInterpretation 9 of MFRS establishes that comparative financial statements foryears prior to 2008 must be expressed in Mexican pesos with purchasing power atDecember 31, 2007, which was the last date on which the effects ofinflation were recognized.

 

Therealized result from holding non-monetary assets must be reclassified toretained earnings, while the unrealized portion must be maintained as suchwithin stockholders’ equity, and reclassified to results of operations when theasset giving rise to it is realized. Whenever it is deemed impractical to separatethe realized from the unrealized result from holding non-monetary assets, thefull amount of this item may be reclassified to the retained earnings.

 

Theeffect of the adoption of this standard on the Company’s 2008 financialstatements is the Company’s ceasing to recognize the effects of inflation onits financial information; therefore no monetary result was determined. Theaccumulated monetary position as of December 31, 2007 that was Ps. 346,641was reclassified to the retained earnings.

 

**MFRS B-15, Foreign Currency Translation**

 

MFRS B-15 incorporatesthe concepts of recording currency, functional currency and reporting currency,and establishes the methodology to translate financial information of a foreignentity, based on those terms. Additionally, this rule is aligned with NIFB-10, which defines translation procedures of financial information fromsubsidiaries that operate in inflationary and non-inflationary environments.Prior to the application of this rule, translation of financial informationfrom foreign subsidiaries was according to inflationary environmentsmethodology.

 

The Company’s foreignoperations are insignificant at this time and thus the impact of the adoptionof this MFRS on the Company’s consolidated financial statements was alsoinsignificant.

 

**MFRS D-3, Employee Benefits**

 

MFRSD-3, *Employee Benefits* replacesthe previous MFRS accounting Bulletin D-3, *LaborObligations*. The most significant changes contained in MFRS D-3 areas follows:

 

i)shorter periods for the amortization of unamortized items such as transitionobligations, with the option to credit or charge actuarial gains or lossesdirectly to results of operations, as they accrue. As further disclosed in Note13, during 2008 the Company prospectively changed the amortization periods forits transition liability from those of 10-22 year periods in prior years, to afour year period starting in 2008, resulting in Ps. 5,559 in additional laborcosts being recognized in its 2008 statement of income as compared to prior periods;

 

ii)elimination of the recognition of an additional liability and resultingrecognition of an intangible asset and comprehensive income item. As furtherdisclosed in Note 13, upon the adoption of MFRS D-3 the Company reversed itsintangible asset of Ps. 30,092 and additional liability of Ps. 34,189 resultingin a credit to shareholders equity of Ps. 4,097 in 2008;

 

iii)accounting treatment of current-year and deferred employee profit-sharing,requiring that deferred employee profit-sharing be recognized using the assetand liability method established under MFRS D-4. The Company recorded adeferred profit sharing asset of Ps. 29,667 upon adoption of MFRS D-3. Thatasset has been adjusted to a value of Ps. 26,606 as of December 31, 2008;and

 

iv)current-year and deferred employee profit-sharing expense is to be presented asan ordinary expense in the income statement rather than as part of taxes onprofits.

 

Theimpact of the adoption of MFRS D-3 is as indicated above.

 

50

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

 

TheCINIF also issued Mexican FRS D-4, *Taxes onProfits* which replacesMexican accounting Bulletin D-4 *Accountingfor Income Taxes, asset Tax and Employee Profit-sharing*. Themost significant 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 on all differences in balance sheet  accounts for financial and tax reporting purposes, regardless of whether they  are permanent or temporary; |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ii)  | because current and  deferred employee profit-sharing is now considered as an ordinary expense  under MFRS D-3, it is excluded from this standard;                                                                                                                              |
| iii) | asset taxes are  required to be recognized as a tax credit and, consequently, as a deferred  income tax asset only in those cases in which there is certainty as to its  future realization; and                                                                                |
| iv)  | the cumulative effect of adopting Mexican accounting Bulletin D-4 is  to be reclassified to retained earnings, unless it is identified with  comprehensive items in stockholders’ equity not yet taken to income.                                                          |

 

Theapplication of this standard is prospective in nature; therefore thecomparative financial statements from prior years were not modified. Theadoption of this MFRS did not have any effect on the Company’s consolidatedfinancial statements.

 

Themost important new pronouncements that came into force in 2009 are as follows:

 

**MFRS B-7,Business Acquisitions**

 

ThisMFRS substitutes MFRS B-7 *Business Acquisitions*,and establishes general rules for the initial recognition of net assets,non-controlling interests and other items, as of the acquisition date.

 

Accordingto this statement, purchase and restructuring expenses resulting fromacquisition process, should not be part of the consideration, because theseexpenses are not an amount being shared by the business acquired.

 

Inaddition, MFRS B-7 requires a company to recognize non-controlling interests inthe acquiree at fair value as of the acquisition date.

 

MFRSB-7 is effective for future acquisitions.

 

Atthe date of the financial statements, management is evaluating what effect theobservance of this accounting pronouncement will have on the Company’s resultsof operations and financial position.

 

**MFRS B-8,Consolidated or Combined Financial Statements**

 

ThisMFRS replaces MFRS B-8 *Consolidated FinancialStatements* and describes general rules for the preparation,presentation and disclosure of consolidated and combined financial statements.

 

Themain changes of this MFRS are as follows: (a) this rule defines “Specific-purposeEntity” (SPE), establishes the cases in which an entity has control over a SPE,and when a company should consolidate this type of entity; (b) addressesthat potential voting rights should be analyzed when evaluating the existenceof control over an entity; and (c) set new terms for “controlling interest”instead of “majority interest,” and “non-controlling interest” instead of “minorityinterest.”

 

Atthe date of the financial statements, management is evaluating what effect theobservance of this accounting pronouncement will have on the Company’s resultsof operations and financial position.

 

51

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**MFRS C-7,Investments in Associates and Other Permanent Investments**

 

MFRSC-7 describes the accounting treatment for investments in associates and otherpermanent investments, which were previously treated within MFRS B-8 *Consolidated Financial Statements*. This MFRS requires therecognition of a Specific-PurposeEntity, through equity method. Also, this MFRS establishes that potentialvoting rights should be considered when analyzing the existence of significantinfluence.

 

Inaddition, this rule defines a procedure and a limit for the recognition oflosses in an associate.

 

Atthe date of the financial statements, management is evaluating what effect theobservance of this accounting pronouncement will have on the Company’s resultsof operations and financial position.

 

**MFRS C-8,Intangible Assets**

 

Thisrule substitutes MFRS C-8 *Intangible Assets*.The new rule defines intangible assets as non-monetary items and broadensthe criteria 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.

 

Onthe other hand, this standard establishes that preoperative costs should beeliminated from the capitalized balance, affecting retained earnings, andwithout restating prior financial statements.

 

Thisamount should be presented as an accounting change in consolidated financialstatements.

 

Atthe date of the financial statements, management is evaluating what effect theobservance of this accounting pronouncement will have on the Company’s resultsof operations and financial position.

 

**MFRS D-8,Share-Based Payments**

 

MFRSD-8 establishes the recognition of share-based payments. When an entitypurchases goods or pay services with share-based payments, the entity isrequired to recognize those goods or services at fair value and thecorresponding increase in equity. According with MFRS D-8, if share-basedpayments cannot be settled with equity instruments, they have to be settledusing an indirect method considering MFRS D-8 parameters.

 

Atthe date of the financial statements, management is evaluating what effect theobservance of this accounting pronouncement will have on the Company’s resultsof operations and financial position.

 

**Interpretation 14 of MFRS(IMFRS), Construction, Sales and Services Agreements related to Real Estate**

 

In December 2008IMFRS 14 was issued by the CINIF to complement Bulletin’s D-7 regulation, *Construction Agreements and Manufacturing of Certain Capital Assets*.This Interpretation is applicable to the recognition of revenues, costs andexpenses for all entities that undertake the construction of capital assetsdirectly 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 shouldare recognized, when all of the following conditions are fulfilled:

 

52

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| a) | the entity has  transferred the control to the homebuyer, in other words, the significant  risks and benefits due to the property or the assets ownership;                                                                |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b) | the entity does  not keep for itself any continue participation on the actual management 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 can be estimated reliably;                                                                                                                                                                           |
| d) | it is probable  that the entity receives the economic benefits associated with the  transaction; and                                                                                                                      |
| e) | the costs and  expenses incurred or to be incurred related to the transaction can be  estimated reliably.                                                                                                                 |

 

This Interpretation willbe adopted as of January 1, 2010, with retrospective application to prioraccounting periods presented with its 2010 consolidated financial statements.At the date of the consolidated financial statements, management is evaluatingwhat effect this new accounting pronouncement will have on the Company’s resultsof operations and financial position. While differences in revenue recognitionmight still exist between MFRS and US GAAP upon the adoption of INIF 14, it isanticipated that the Company’s MFRS revenue recognition will more closelyapproximate its US GAAP revenue recognition at that time. The Company’s US GAAPrevenue recognition is disclosed further in Note 28 below.

 

**International Financial ReportingStandards (IFRS)**

 

On November 11, 2008the Mexican Securities Commission (Comisión Nacional Bancaria y de Valores)issued a press release in which it debriefed that this Commission will performthe necessary regulatory adaptations on which it will be established therequirements for the listed companies to prepare and reveal their financialinformation under IFRS beginning the year 2012. Likewise it was specified thatearly adoption for the years 2008, 2009, 2010 and 2011 is allowed.

 

At the date of the financialstatements, management is evaluating the effects of the adoption andimplementation of IFRS as well as the potential adoption date.

 

***U.S. GAAP***

 

**FAS160**

 

In December 2007,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 160, “Noncontrolling Interest in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (FAS 160). FAS 160requires noncontrolling interests held by parties other than the parent insubsidiaries to be clearly identified, labeled, and presented in theconsolidated statements of financial position within equity, but separate fromthe parent’s equity. FAS 160 is effective for fiscal years beginning after December 15,2008. At December 31, 2008, the Company had Ps. 246,343 of noncontrollinginterest under MFRS that has been treated as a difference between MFRS and USGAAP.

 

**FAS141 (R)**

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations” (FAS 141 (R)). FAS 141 (R) is arevision of FAS 141 and requires that costs incurred to effect the acquisition(i.e., acquisition-related cost) be recognized separately from the acquisition.In addition, in accordance with Statement of Financial Accounting Standards No. 141,“Business combinations” (FAS 141), restructuring costs that the acquirerexpected but was not obligated to incur, which included changes to benefitplans, were recognized as if they were a liability assumed at the acquisitiondate. FAS 141 (R) requires the acquirer to recognized those costsseparately from the business combination. FAS 141 (R) is effective for theCompany in 2009, and its impact will vary with each acquisition.

 

**FAS161**

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133” (FAS 161). FAS 161 requires enhanced disclosures aboutan entity’s derivatives and hedging activities to improve the transparency offinancial reporting. It is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008. FAS 161 isexpected to increase annual disclosures but will not have an impact on theCompany’s financial position and results of operations.

 

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**FAS 162**

** **

**In May 2008,the FASB issued Statement No. 162, *TheHierarchy of Generally Accepted Accounting Principles (FAS 162)*,which identifies the sources of accounting principles and the framework forselecting principles to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (GAAP) in the United States.  This statement is effective 60 days followingthe SEC’s approval of the Public Company Accounting Oversight Board amendmentsto AU Section 411, “The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles.” This statement is not expected toresult in a change in current practice.**

** **

**FSPFAS 142-3**

 

In April 2008, theFASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life ofIntangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 iseffective for financial statements issued for fiscal years beginning after December 15,2008. The Company is currently evaluating the impact that FSP FAS 142-3 willhave in its accounting for intangible assets.

 

**FSP157-3**

 

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 provides an example that clarifies and reiterates certain provisions ofthe existing fair value standard, including basing fair value on orderlytransactions and usage of management and broker inputs. FSP 157-3 is effectiveimmediately but is not expected to have a material impact on financial positionor results of operations of the Company.

 

**EITF 08-6**

 

In November 2008,the Emerging Issues Task Force (EITF) reached a consensus on EITF 08-6, “EquityMethod Investment Accounting Considerations”. EITF 08-6 provides guidance onthe application of the equity method. It states equity-method investmentsshould be recognized using a cost accumulation model. Also, it requires that equity method investments as a whole beassessed for other-than-temporary impairment in accordance with AccountingPrinciples Board Opinion No. 18. EITF 08-6 is effective on a prospectivebasis for transactions in an investee’sshares occurring or impairments recognized in fiscal years beginning on orafter December 15, 2008.  Currently, the Company’s equity method investments do not represent asignificant component of its operations.  Accordingly, it does not anticipate that the adoption of this EITF willhave a significant impact on its financial statements.

 

**EITF08-7**

 

In November 2008,the EITF reached a consensus on EITF 08-7 “Accounting for Defensive IntangibleAssets”. EITF 08-7 provides that intangible assets that an acquirer intends touse as defensive assets, intangible assets acquired in a business combinationor an asset acquisition that an entity does not intend to actively use but doesintend to prevent others from using, are a separate unit of account from theexisting intangible assets of the acquirer. It also states that a defensiveintangible asset should be amortized over the period that fair value of thedefensive intangible asset diminishes. EITF 08-7 is effective on a prospectivebasis for transactions occurring in fiscal years beginning on or after December 15,2008. This EITF will not have a material impact on the Company’s financial positionand results of operations.

 

**FSPFAS 132(R)-1**

 

In December 2008,the FASB issued FASB Staff Position FAS 132(R)-1, “Employers ́ Disclosures aboutPostretirement Benefit Plan Assets” (FSP FAS 132(R)-1). FSP FAS 132(R)-1 amendsFASB Statement No.132(R), “Employers ́ Disclosures about Pensions and OtherPostretirement Benefit” (FAS132(R)). This FASB Staff Position replaces therequirement to disclose the percentage of fair value of total plan assets witha requirement to disclose the fair value of each major asset category. It alsoamends FASB Statement 157, “Fair Value Measurements” (FAS 157), to clarify thatdefined benefits pension or other postretirement plan assets not subject to FAS157 ́s disclosure requirements. FSO FAS 132(R)-1 is effective for fiscal yearsending after December 2009. This FSP will increase the amount ofdisclosures for plan assets in the Company’s 2009 audited financial statements.

 

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**FAS 166**

 

FASB Statement No. 166“Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140”(“FAS 166”) provides for removal of the concept of a qualifying special-purposeentity from FAS 140 and removes the exception from applying FIN 46R*,* to qualifying special-purpose entities.   It also clarifies that one objective of FAS140 is to determine whether a transferor and all of the entities included inthe transferor’s financial statements being presented have surrendered controlover transferred financial assets. FAS 166 modifies the financial-componentsapproach used in FAS 140 and limits the circumstances in which a financialasset, or portion of a financial asset, should be derecognized when thetransferor has not transferred the entire original financial asset to an entitythat is not consolidated with the transferor in the financial statements beingpresented and/or when the transferor has continuing involvement with thetransferred financial asset. FAS 166 also defines the term *participating interest* to establishspecific conditions for reporting a transfer of a portion of a financial assetas a sale. FAS 166 requires that a transferor recognize and initially measureat fair value all assets obtained (including a transferor’s beneficialinterest) and liabilities incurred as a result of a transfer of financialassets accounted for as a sale. Enhanced disclosures are also required by FAS166. FAS 166 must be applied as of the beginning of each reporting entity’sfirst annual reporting period that begins after November 15, 2009. Thisstatement must be applied to transfers occurring on or after the effectivedate. The Company is currently evaluating the impact that the adoption of thisstandard will have on its consolidated financial statements.

 

**FAS 167**

 

The FASB’s objective in issuingFAS 167 “Amendments to FIN 46R” is to improve financial reporting byenterprises involved with variable interest entities. The Board undertook thisproject to address (1) the effects on certain provisions of FIN 46R, *Consolidation of Variable Interest Entities,*as a result of the elimination of the qualifying special-purpose entity conceptin FAS 166*,* and (2) constituent concerns about theapplication of certain key provisions of FIN 46R, including those in which theaccounting and disclosures under FIN 46R do not always provide timely anduseful information about an enterprise’s involvement in a variable interest.This Statement retains the scope of FIN 46R with the addition of entitiespreviously considered qualifying special-purpose entities, as the concept ofthese entities was eliminated in FAS 166. FAS 167 shall be effective as of thebeginning of each reporting entity’s first annual reporting period that beginsafter November 15, 2009. Earlier application is prohibited. The Company iscurrently evaluating the impact that the adoption of this standard will have onits consolidated financial statements.

 

**ITEM 6.      Directors, Senior Management and Employees.**

 

**DIRECTORSAND EXECUTIVE OFFICERS**

 

Our board of directorscurrently consists of nine members and is responsible for managing ourbusiness. Each director is elected for a term of one year or until a successorhas been appointed. Our board of directors meets quarterly. Pursuant to Mexicanlaw, at least 25% of the members of the board of directors must be independent,as such term is defined by the New Mexican Securities Market Law. As requiredby New York Stock Exchange regulations, a majority of the members of our boardof directors are independent.

 

As of the date of thisannual report, the members of our 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                |
| Matthew M. Zell                                     |       | 1966     |       | Director                |
| Z. Jamie Behar                                      |       | 1957     |       | Director                |
| Wilfrido Castillo  Sánchez-Mejorada            |       | 1941     |       | Director                |
| Edward Lowenthal                                    |       | 1944     |       | Director                |
| Rafael Matute Labrador                              |       | 1960     |       | Director                |

 

**Eustaquio Tomás de NicolásGutiérrez** isChairman of the board of directors. Before co-founding our predecessor in 1989,Mr. de Nicolás founded and managed DENIVE, a clothing manufacturingcompany. Mr. de Nicolás has been a Board Member of the 

 

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Mexican Stock Exchangesince 2005, and has served as regional Chairman and regional Vice Chairman ofthe Mexican Chamber of Industrial Housing Promoters and Development, orCANADEVI (Cámara Nacional de la Industria de Desarrollo y Promoción de Vivienda)and as a member of the regional advisory board of financial institutions suchas BBVA Bancomer and HSBC (formerly BITAL). Currently, Mr. de Nicolásoversees our main operations, focusing on land acquisition and developing newgeographical markets.

 

**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., asofol that became the third largest mortgage bank in Mexico. Mr. deNicolás also cofounded Homex and served as CEO from 1989 to 1997. Mr. deNicolás is a member of the regional advisory board of Nacional Financiera(NAFIN), a Mexican government-owned development bank. He has recently beenappointed member of the Board of Directors of Afore Coppel, a retirement fundadministrator. In addition, Mr. de Nicolás founded and was chairman of anon-profit organization for social assistance in the state of Sinaloa from 2002to 2005, and serves as national advisor of the Mexican Philanthropic Institute.Mr. de Nicolás received a B.S. in Finance and Administration fromUniversidad Panamericana, in Mexico City.

 

**Luis AlbertoHarvey MacKissack**, is co-founding partnerand senior managing director of Nexxus Capital, S.A.  He has approximately20 years of experience in investment banking and private equity.  Beforefounding Nexxus, Mr. Harvey held positions at Grupo Bursátil Mexicano,Fonlyser, Operadora de Bolsa, and Servicios Industriales Peñoles, S.A. deC.V.  His experience includes several private and public equitytransactions and initial public offerings of several major Mexican corporationson the Mexican Stock Exchange (BMV) and international capital markets.  Mr. Harveyis a member of the boards of directors of Nexxus Capital, S.A., Grupo SportsWorld, S.A. de C.V., Genomma Lab Internacional, S.A.B. de C.V., Harmon HallHolding, 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.

** **

**MathewM. Zell** ismanaging director of EGI. Previously, he served as president of PrometheusTechnologies, Inc., an information technology consulting firm. Mr. Zellis a member of the board of directors of Anixter Inc., a global distributor ofwire, cable and communications connectivity products.

 

**Z. Jamie Behar** is Managing Director, Real Estate &Alternative Investments, for Promark Global Investors, Inc. (Prormark,formerly General Motors Investment Management Corp.). She manages Promarkclients’ real estate investment portfolios, including private market and publicly-traded securities investments, aswell as their alternative investment portfolios, totaling $10.5 billion. Ms. Beharis a member of the board of directors of Sunstone Hotel Investors, Inc., apublicly listed hotel company operating in the United States,  the Pension Real Estate Association (PREA),and serves on the advisory boards of several domestic and international privatereal estate investment entities.

 

**Wilfrido CastilloSánchez-Mejorada**is CFO of Qualitas Cía. de Seguros, S.A.B de C.V., or Qualitas, a Mexicaninsurance company. Previously he served as CEO of Castillo Miranda, ContadoresPúblicos, a public accounting firm, and he has held senior positions in severalbrokerage firms. Mr. Castillo is a member of the board ofdirectors of Quálitas Compañía de Seguros, S.A.B. de C.V, Unión de Esfuerzopara 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 with Reis, Inc.,a real estate market information and analytics provider. He also founded andwas trustee and president of Wellsford Residential Property Trust, a publicly-ownedmulti-family real estate investment trust that was merged into EquityResidential Properties Trust. Mr. Lowenthal is a member of the board ofdirectors of several companies, including, Reis, Inc., Omega HealthcareInvestors, Inc., a healthcare real estate investment trust and AmericanCampus Communities, a publicly traded Real Estate Investment Trust whichfocuses solely on student housing in the United States. He also serves asnon-executive Chairman of Tiburon Lockers, Inc., a privately held owner-operatorof rental storage lockers for transportation, entertainment, sports and othervenues.

 

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**RafaelMatute Labrador**is Executive Vice-President and Chief Financial Officer of Wal-Mart de Mexico. Hehas been a member of the Board of Directors and the Executive Committee of theBoard of Directors for Wal-Mart de Mexico since 1998. In addition, Mr. Labradoris a member of the Board of Directors for Banco Wal-Mart de Mexico. He has alsobeen member of Consultative Boards for Nacional Financiera (NAFIN), Banorte yBanco Nacional de México (Banamex/Citibank). He has an MBA from the Institutode Estudios Superiores de la Empresa (IESE), in Barcelona, Spain. He hasattended upper management courses at IMD in Lausanne, Switzerland and at theUniversity of Chicago Booth School of Business (GSB).

 

**Secretary**

 

The secretary of theboard of directors is Jaime Cortés Rocha, who is not a member of the board ofdirectors.

 

**AuditCommittee**

 

Our Audit Committee consists of WilfridoCastillo Sánchez-Mejorada (Chairman), Edward Lowenthal, Matthew Zell and Z.Jamie Behar. Our Board of Directors has determined that Mr. Castillo hasthe attributes of an “audit committee financial expert” as defined by the SECand that 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 any accountingfirm engaged for the purpose of preparing or issuing an audit report orperforming other audit review or attest services and for the establishment ofprocedures for the receipt, retention, and treatment of complaints receivedwith respect to accounting, internal controls, or auditing matters and theconfidential, anonymous submission by employees with regard to the same.

 

**ExecutiveCommittee**

 

Our Executive Committee consists of EustaquioTomás de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Edward Lowenthal,Luis Alberto Harvey MacKissack and Rafael Matute Labrador. Among other dutiesand responsibilities, the committee acts on general planning and financialmatters not reserved exclusively for action by the board of directors,including appointing and removing our CEO, members of management, and any ofour employees; entering into credit agreements on our behalf; and convening shareholders’meetings.

 

**CorporateGovernance and Compensation Committee**

 

Our corporate governanceand compensation committee consists of Luis Alberto Harvey MacKissack, EdwardLowenthal and Matthew Zell. Among other duties and responsibilities, thecommittee identifies individuals qualified to become board members and makesrecommendations to the board of directors and shareholders regarding directorand executive nominees; issues opinions to the board of directors regardingrelated party transactions, develops and recommends to the board of directors aset of corporate governance principles applicable to us; oversees theevaluation of the board and management; and makes recommendations forcompensation policies applicable to our executives and officers. The committeealso reviews and approves corporate goals and objectives relating to CEOcompensation, evaluates the CEO’s performance in light of those goals andobjectives, determines and approves the CEO’s compensation level based on thisevaluation, and makes recommendations to the board with respect to compensationplans and incentive-compensation plans as well as employee stock option plans.

 

## **Risk Management Committee**

 

Our Risk Management Committee consists ofEustaquio Tomás de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, EdwardLowenthal, Luis Alberto Harvey, Rafael Matute Labrador MacKissack, and WilfridoCastillo Sánchez-Mejorada. The Committee reviews and approves the activitiesrelated to the contracting of hedging instruments of the Company. The Committeealso identifies, assesses and limits other business risk associated with thenormal activities of the Company. The Committee also identifies,evaluates and establishes limits to other business risks related to theCompany’s operations.

 

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**DisclosureCommittee**

 

Our disclosure committeeas approved by the Board of Directors is comprised of executives withinmanagement. This committee is chaired by the Investor Relations Officerand is comprised of the Chief Executive Officer, the Chief Financial Officer,the Manager of Financial Reporting, and the Administrative and AccountingOfficer and the General Counsel. Among other duties and responsibilities,the committee establishes the criteria to identify relevant information andreviews before publishing all documents that are to be presented to the generalpublic as well as to buy side and sell side analysts.  By doing this, thecommittee acts to ensure that the relevant information issued by the Company isaccurate in all financial, economic and operative aspects.

 

**EthicsCommittee**

 

Our ethics committee, asapproved by the Board of Directors is comprised of executives withinmanagement. This committee is comprised of the Chief Executive Officer,the Executive Director of Human Resources and Corporate Responsibility, theGeneral Counsel, the Training Director, the Director of Administrative Supportand an external legal counsel.  Among other functions, the committee actsto ensure that the Company complies with its code of ethics and determines thesanctions if certain actions are considered to be not in compliance therewith.The Committee also receives and processes complaints from the Company’spersonnel.

 

**SeniorManagement**

 

As of the date of thisannual report, our senior management 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                                            |
| Monica Lafaire Cruz                                 |       | 1964     |       | Vice President of Human  Resources and Social Responsibility                      |
| Rubén Izábal González                |       | 1968     |       | Vice  President—Construction                                                 |
| Alberto Menchaca  Valenzuela                        |       | 1969     |       | Vice President—Affordable  Entry-Level Division and Chief Operations Officer |
|                                                |       |     |       |                                                                              |
| Julián de Nicolás  Gutiérrez         |       | 1971     |       | Vice  President—Middle-Income Division                                       |
| Daniel Leal Díaz-Conti                         |       | 1952     |       | Vice President—Sales  and Marketing                                          |
| Alberto Urquiza Quiroz                              |       | 1962     |       | Vice  President—International Division                                       |

 

**EustaquioTomás de Nicolás Gutiérrez******isChairman of the board of directors. Before co-founding our predecessor in 1989,Mr. de Nicolás founded and managed DENIVE, a clothing manufacturingcompany. Mr. de Nicolás has been a Board Member of the Mexican StockExchange since 2005, and has served as regional Chairman and regional ViceChairman of the Mexican Chamber of Industrial Housing Promoters andDevelopment, or CANADEVI (Cámara Nacional de la Industria de Desarrollo yPromoción de Vivienda) and as a member of the regional advisory board offinancial institutions such as BBVA Bancomer and HSBC (formerly BITAL).Currently, Mr. de Nicolás oversees our main operations, focusing on landacquisition and developing new geographical markets.

 

**Gerardode Nicolás Gutiérrez**is the Company’s Chief Executive Officer. Mr. de Nicolás served asChief Strategic Officer and head of the Executive Committee from October 2006to June 5, 2007. Mr. de Nicolás also served as the CEO of the Companyfrom 1997 to September 2006. Prior to his appointment as CEO, Mr. deNicolás served as regional manager, systems manager, and construction managersupervisor. He holds an undergraduate degree in industrial engineering fromUniversidad Panamericana, in Mexico City and an MBA from Instituto Tecnológicoy de Estudios Superiores de Monterrey in Guadalajara.

 

**CarlosMoctezuma Velasco** is Homex ́s Chief FinancialOfficer. Mr. Moctezuma had served as Investor Relations Officer since 

 

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April, 2004. Mr. Moctezuma was appointed Director of StrategicPlanning for the Company in December of 2007. Prior to joining Homex, Mr. Moctezumaserved as Senior Manager of Finance and Investor Relations Officer in GrupoIusacell, S.A. de C.V., a publicly traded Mexican wireless telecommunicationscompany that 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. Moctezumais President and co-founder of the Mexican Investor Relations Association(AMERI), having held various positions there since 2002.

 

**RamónLafarga Bátiz**hasbeen the Administrative and Accounting Officer of Homex since June 2007.Prior to this position, Mr. Lafarga served as Administrative VicePresident from 1993 to 2006. His prior experience includes serving as CEO andpartner in Lafarga Bátiz, Contadores Públicos, a public accounting firm, andpartner and CEO of a private company specializing in computer equipment.

 

**MónicaLafaire Cruz** isthe Vice President of Human Development and Social Responsibility and Presidentof Homex Foundation. Mónica Lafaire has served as director of Homex’sregional offices and manager of the trust Homex — Nafin.  She was alsoresponsible for implementing the supply chain program with NAFIN. Besides herwork at Homex, she taught finance, philosophy and management at the UniversidadPanamericana.  Mónica Lafaire has adegree in business administration from La Salle University.

 

**RubénIzábal González**hasserved as Vice President—Construction since 1997. Prior to joining Homex, Mr. Izabalserved at different construction companies, including Gomez y GonzalesConstructores, Provisur S.A. de C.V., Promotoria de Vivienda del Pacifico, S.A.de C.V., and Constructor Giza, S.A. de C.V. Currently, Mr. Izabal overseesour construction operations, with a focus on the homebuilding process. Mr. Izabalearned an undergraduate degree in architecture from Instituto Tecnológico y deEstudios Superiores del Occidente in Guadalajara, Jalisco. Mr. Izabal alsoearned an associate degree in Business Management from Instituto Tecnológico deEstudios Superiores de Monterrey.

 

**AlbertoMenchaca Valenzuela**has served as Vice President—Affordable Entry-Level and Chief OperationsOfficer since January 2007. Prior to this appointment, Mr. Menchacaserved as Vice President—Operations from 2000 to 2006 and as finance managerfrom 1996 to 2000. His prior experience includes work at Banco Mexicano,InverMexico and Banca Confia. Currently, Mr. Menchaca oversees ouraffordable entry-level division with a focus on home deliveries and branchmanagement. Mr. Menchaca earned an undergraduate degree in agriculturalengineering from Universidad Autónoma Agraria Antonio Narro in Saltillo,Coahuila.

 

**Juliánde Nicolás Gutiérrez**has served as Vice President—Middle-Income Division since January 2007.Prior to becoming Vice President—Middle-Income Division, he served as RegionalDirector for the western zone from 2005 to 2007 and started the operations ofthe Company in the city of Guadalajara in 2002. Currently, Mr. de Nicolásoversees our middle-income division, with a focus on home deliveries and branchmanagement. Mr. de Nicolás holds an undergraduate degree in marketing fromInstituto Tecnológico y de Estudios Superiores de Monterrey in Monterrey, andan associate degree from Instituto Panamericano de Alta Dirección de Empresas(IPADE).

 

**DanielLeal Díaz-Conti**has served as Vice President—Sales and Marketing since January 2007. Mr. Lealjoined Homex from Hipotecaria Nacional, where he served as Deputy GeneralDirector of Sales and Marketing. Mr. Leal was also President of themortgage chapter of the Mexican Association of Banks until February 2007. Mr. Lealhas an undergraduate degree in economics from Universidad Veracruzana.

 

**Alberto Urquiza 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).

 

**Compensationof Directors and Senior Management**

 

Each member of the boardof directors is paid a fee of US$12,500 for each board meeting that he or sheattends, subject to an annual cap of US$50,000. In addition, members of theaudit committee are also paid an annual compensation fee of US$25,000 (thechairman of the audit committee’s annual compensation is US$35,000 and membersof the executive, corporate governance and compensation committees are paid anannual fee of US$5,000).

 

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For 2008, the aggregateamount of compensation net of taxes paid to all directors, alternate directorsand committee members was approximately US$420,808, which includes US$108,348of variable compensation for directors paid during the second quarter of 2008.

 

For 2008, the aggregateamount of compensation paid to all executive officers through the Long TermExecutives Stock Option Plan was approximately US$44,984.

 

We offer a bonus plan toour directors and senior management that is based on individual performance andour results of operations. This variable compensation can range from 30% to 50%of annual base compensation, depending on the employee’s level.

 

Since late 2007 we offera stock option plan as an incentive to key executives of the Company. Theshares for the stock option plan for executives (999,200 shares) wererepurchased by the Company, through a trust especially created for thispurpose. In 2007, 978,298 stock options were granted to the key executives atan exercise price of greater than the market value at the grant date ofPs.98.08. In 2008, 612,516 were granted to the executives.

 

The executives have theright to exercise one-third of their total options granted per year. The rightto exercise the option expires three years from the grant date or, in somecases, after 180 days from the departure of the executive from the Company.Given the condition of the equity markets in 2008, the Company’s ChiefExecutive Officer extended the Company’s option policy to allow executives toexercise their options one year later than previously permitted under thepolicy, if they had not exercised any options during the previous year.

 

The average remaininglife of the options is 2.5 and 2.1 years as of December 31, 2008 and 2007,respectively. The average fair value of all the stock options granted wasPs.6.02 and Ps. 18.42 pesos per stock option, as of December 31, 2008 and2007, respectively.

 

The total compensationcost related to non-vested stock option awards not yet recognized was Ps. 3,687and Ps. 18,019 at December 31, 2008 and 2007, respectively.

 

**EMPLOYEES**

 

As of December 31,2008, we had a total of approximately 17,280 employees; 17,251 of theseemployees were employed in Mexico and 29 were employed in India. Our totalemployees for 2007, 2006 and 2005 were 15,127, 11,948, and 7,337, respectively.Of our total employees as of December 31, 2008, approximately 30% werewhite-collar and 70% were blue-collar.

 

**ShareOwnership**

 

The following table setsforth the beneficial ownership of our capital stock by our directors and seniormanagement as of the date of this annual report:

 
| **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                                                                | %          |
| Carlos  Moctezuma Velasco                           |       | *                                                         |       | *                                                                   |       |
| Ramón  Lafarga Bátiz                      |       | *                                                         |       | *                                                                   |       |
| Mónica  Lafaire Cruz                           |       | *                                                         |       | *                                                                   |       |
| Daniel  Leal Díaz-Conti                        |       | *                                                         |       | *                                                                   |       |
| Rubén  Izabal González                    |       | *                                                         |       | *                                                                   |       |
| Alberto  Menchaca Valenzuela                        |       | *                                                         |       | *                                                                   |       |
| Alberto  Urquiza Quiroz                             |       | *                                                         |       | *                                                                   |       |
| Luis  Alberto Harvey MacKissack                     |       | *                                                         |       | *                                                                   |       |
| Matthew  M. Zell                                    |       | *                                                         |       | *                                                                   |       |
| Z.  Jamie Behar                                     |       | *                                                         |       | *                                                                   |       |
| Wilfrido  Castillo Sanchez-Mejorada                 |       | *                                                         |       | *                                                                   |       |
| Edward  Lowenthal                                   |       | *                                                         |       | *                                                                   |       |
| Rafael  Matute Labrador                             |       | *                                                         |       | *                                                                   |       |

 

60

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*              Beneficially owns less than one percent of theoutstanding shares of our capital stock.

 

**ITEM 7.      Major Shareholders and Related Party Transactions.**

 

**MAJORSHAREHOLDERS**

 

As of December 31,2008, there were 334,870,350 common shares issued and outstanding, with153,429,216 shares held in the United States in the form of American DepositaryShares by six record holders. The remaining shares were held through Mexicancustodians. Because certain of the shares are held by nominees, the number ofrecord holders may not be representative of the number of beneficial holders.

 

On January 24, 2006,the Company completed a successful non-dilutive secondary public offering ofapproximately 45.6 million shares of its common stock by a group of investorscontrolled by Mr. Carlos Romano, the former majority investor of Beta, whosold his position 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. JoséIgnacio de Nicolas Gutierrez, a member of the Homex board of directors, sold asignificant portion of his interest in Homex through the Mexican StockExchange, decreasing the percentage of shares owned by the de Nicolás familyand increasing the public float of the Company to 54.0% of the total equity ofHomex.

 

On July 26, 2007,Equity International Properties, LLC, a shareholder of the Company, soldapproximately 8.6 million common shares through the Mexican Stock Exchange.These shares represented 20% of its ownership in the Company. The public floatof the Company was increased to 56.61% of the total equity of Homex.

 

On November 8, 2007,the main shareholders of Homex, led by Mr. Eustaquio de NicolásGutierrez, chairman of the board of directors of Homex, acquired 6.7million common shares of Homex from EIP Investment HoldingsL.L.C., an indirect subsidiary of EIP, in a private transaction.

 

On February 5,2008, the de Nicolás family acquired 17,142,857 common shares of Homexfrom EIP in a private transaction. On April 25, 2008, pursuantto the investment policies of EIP’s investment fund, EIP sold the rest of itsapproximately 11 million common shares of Homex in a private transaction. As ofMarch 31, 2009, EIP had an ownership equivalent to 1.0% of the Company’scommon shares. See “Item 4.  Informationon the Company—Business Overview—Our Relationship with Equity InternationalProperties, Inc.”

 

The de Nicolás family nowholds 35% of Homex’s capital. The public float remains below 65%.

 

The table below setsforth information concerning the percentage of our capital stock owned by anyperson known to us to be the owner of 5% or more of any class of our votingsecurities, our directors and officers as a group and our other shareholders asof June 26, 2009. The Company’s major shareholders do not have differentor preferential voting rights with respect to the shares they own.

 
| ** **                            | ** ** | **As of June 26, 2009** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| **Identity of Shareholder** | ** ** | **Number of Shares**              | ** ** | **% of Share Capital** | ** ** |
| de  Nicolás family(1)(2)         |       | 117,777,176                                 |       | 35.00 | % |
| Total(3)                              |       | 335,869,550                                 |       | 100.00 | % |

 

----

| (1) | Following the  acquisition of Beta. |
|-----|-------------------------------------|

 

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| (2)    | 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    | Includes public  shareholders that in the aggregate hold 65% of our share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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**RELATEDPARTY TRANSACTIONS**

 

We have engaged, and inthe future may engage, in transactions with our shareholders and companiesaffiliated with our shareholders. We believe that the transactions in which wehave engaged with these parties have been made on terms that are no lessfavorable to us than those that could be obtained from unrelated third parties.We currently require that transactions with our shareholders and companiesaffiliated with our shareholders be approved by our board of directors afterconsidering the recommendation of our audit committee or our corporategovernance and compensation committee and, in certain cases, after anindependent fairness opinion, as required by the Mexican Securities Market Lawand other applicable laws.

 

The Company was party toan administrative service agreement with two entities (*Serviasesorías* and*Administradores de la Empresa en Equipo, S.C.*),whose principal owners are officers of the Company, for which PICSA paid a 5%fee based on total expenses. The amounts paid under this agreement totaledPs.55,389 and Ps.88,232 in 2007 and 2006, respectively.  No amounts were paid in 2008. As of April 1,2007, these companies entered into a liquidation process and the employees weretransferred to subsidiaries of the Company.

 

**Financingfrom Related Parties**

 

***Hipotecaria Créditoy Casa, S.A. de C.V.***

 

Eustaquio de NicolásGutiérrez, our Chairman, and José Ignacio de Nicolás Gutiérrez, brother ofEustaquio de Nicolás Gutiérrez, collectively owned a 29.4% ownership interestin Hipotecaria Crédito y Casa, S.A. de C.V, or Crédito y Casa, the principalbusiness of which is providing mortgage financing and bridge loan financing. Weestimate that in 2008, 2007 and 2006, 0.1% of the mortgages obtained by ourhomebuyers were provided by Hipotecaria Crédito y Casa, S.A. de C.V.

 

Eustaquio de NicolásGutiérrez and Jose Ignacio de Nicolás Gutiérrez are both members of the deNicolás family, which collectively owns 13.4% of our share capital. In thepast, Crédito y Casa has provided bridge loan financing to us and mortgagesunder SHF-sponsored programs to our customers. During 2006, 2007 and 2008,Crédito y Casa provided mortgages with respect to some of the homes sold by us.

 

On November 19,2007, Hipotecaria Crédito y Casa, S.A. de C.V. was purchased by an independentgroup of investors, and is no longer an affiliate.

 

**Financingto Related Parties**

 

No related partytransactions were reported in 2008 and 2007.

 

**LandPurchases from Related Parties**

 

No related partytransactions were reported in 2008 and 2007.

 

**ITEM 8.      Financial Information.**

 

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

 

**LEGALPROCEEDINGS**

 

As of the date of thisannual report, we are involved in certain legal proceedings incidental to thenormal operation of our business. We do not believe that liabilities resultingfrom these proceedings are likely to have a material adverse effect on ourfinancial condition, cash flow, or results of operations.

 

In July 2007,the Company entered into an agreement with Empreendimentos ImobiliariosLimitada (“E.O.M.”), pursuant to which the Company agreed to contribute 67% andE.O.M. agreed to contribute 33% of the projected 4.0 million Brazilian Realscapital stock of Homex Brasil Incorporacoes and Construcoes ImobiliariosLimitada (Homex Brasil). Following disagreements with E.O.M., the Companyexercised its right to terminate the 2007 agreement.

 

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InNovember of 2008, the Company reached a settlement with E.O.M. andterminated the 2007 agreement. Pursuant to the settlement, the Company agreedto purchase the Khafif family’s 33% interest in Homex Brasil for 8,352,941 Brazilian Reals,equivalent to approximately Ps. 48.5 million. As of December 31, 2008,Homex had paid 2.1 million Brazilian Reals (Ps.11.7 million). The remainingbalance will be paid in four equal payments in the months of April and October of2009 and 2010. The Company has treated the step acquisition of this minorityinterest as a transaction between entities under common control, as isappropriate under MFRS. Because E.O.M. had negligible identifiable tangible orintangible assets as of the date of the transaction, the Company has recognizedthe entire amount of this transaction as a settlement expense (other expense)in the statement of income for 2008 (See Note 21).

 

Pursuantto the settlement, the Company is able to operate in Brazil with a 100%-ownedsubsidiary.

 

**ITEM 9.      The Offer and Listing.**

 

Our common shares havebeen traded on the Mexican Stock Exchange (*BolsaMexicana de Valores, S.A. de C.V.*) since June 29, 2004.The ADSs, each representing six common shares, have been trading on the NewYork Stock Exchange since June 29, 2004. On December 31, 2008,there were 334,870,350 outstanding common shares (of which 153,429,216 wererepresented by 25,571,536 ADSs held by six holders of record in the UnitedStates).

 

The following table setsforth, for the periods indicated, the quarterly and monthly high and lowclosing sale prices of our common shares and ADSs as reported by the MexicanStock Exchange and the New York Stock Exchange, respectively.

 
| ** **          | ** ** | **Mexican Stock Exchange** | ** ** | **NYSE**                                                                                      | ** ** |
|---------------------|------------|--------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **High**                             | ** ** | **Low**                                                                                       | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **          | ** ** | **(Ps. per share)**        | ** ** | **(U.S. $ per ADS)********(one ADS=********six common shares)** | ** ** |
| **2005**            |       |                                 |       |                                                                                          |       |   |   |   |   |
| 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                                                                                         |       | 62.8 |   | 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**            |       |                                 |       |                                                                                          |       |   |   |   |   |
| January 2009   |       | 56.78                                |       | 42.94                                                                                         |       | 25.55 |   | 18.37 |   |
| February 2009  |       | 51.69                                |       | 31.82                                                                                         |       | 21.89 |   | 12.52 |   |
| March 2009     |       | 35.53                                |       | 26.06                                                                                         |       | 14.99 |   | 10.05 |   |
| April 2009     |       | 51.49                                |       | 33.58                                                                                         |       | 23.65 |   | 14.54 |   |
| May 2009       |       | 59.49                                |       | 43.17                                                                                         |       | 27.02 |   | 19.38 |   |
| June 26,  2009 |       | 65.83                                |       | 57.19                                                                                         |       | 29.21 |   | 25.67 |   |

 

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On June 26, 2009,the last reported sale price of the common shares on the Mexican Stock Exchangewas Ps.59.79 per common share and the last reported sale price of the ADSs onthe New York Stock Exchange was US$27.20 per ADS.

 

**MEXICANSTOCK EXCHANGE**

 

The Mexican StockExchange, located in Mexico City, is the only stock exchange in Mexico.Operating continuously since 1907, the Mexican Stock Exchange is organized as acorporation (*sociedad anónima bursátil decapital variable*). Securities are traded on the Mexican StockExchange each business day from 8:30 a.m. to 3:00 p.m., Mexico Citytime.

 

Since January 1999,all trading on the Mexican Stock Exchange has been effected electronically. TheMexican Stock Exchange may impose a number of measures to promote an orderlyand transparent trading price of securities, including the operation of asystem of automatic suspension of trading in shares of a particular issuer whenprice fluctuation exceeds certain limits. The Mexican Stock Exchange may alsosuspend trading in shares of a particular 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 StockExchange may reinstate trading in suspended shares when it deems that thematerial events have been adequately disclosed to public investors or when itdeems that the issuer has adequately explained the reasons for the changes inoffer and demand, volume traded, or prevailing share price. Under currentregulations, the Mexican Stock Exchange may consider the measures adopted byother stock exchanges in order to suspend and/or resume trading in an issuer’sshares in cases where the relevant securities are simultaneously traded on astock exchange outside Mexico.

 

Settlement on the MexicanStock Exchange is effected two business days after a share transaction. Deferredsettlement is not permitted without the approval of the CNBV, even wheremutually agreed. Most securities traded on the Mexican Stock Exchange are ondeposit with the Mexican Securities Depository, or INDEVAL (*S.D. Indeval, S.A. de C.V., Institución para elDepósito de Valores, S.A. de C.V.*), a privately owned securitiesdepositary that acts as a clearinghouse, depositary, and custodian, as well asa settlement, transfer, and registration agent for Mexican Stock Exchangetransactions, eliminating the need for physical transfer of securities.

 

Although the MexicanSecurities Market Law (*Ley del Mercado deValores*) provides for the existence of an over-the-counter market,no such market for securities in Mexico has developed.

 

***Market Regulation and Registration Standards***

 

In 1925, the MexicanBanking Commission (*Comisión NacionalBancaria*) was established to regulate banking activity and in 1946the Mexican Securities Commission (*ComisiónNacional Bancaria y de Valores*) was established to regulate stock marketactivity. In 1995, these two entities were merged to form the CNBV. The NewMexican Securities Market Law, which took effect in 1975, introduced importantstructural changes to the Mexican financial system, including the organizationof brokerage firms as corporations (*sociedadesanónimas*). The New Mexican Securities Market Law sets standards forauthorizing companies to operate as brokerage firms, which authorization isgranted at the discretion of the CNBV by resolution of its board of governors.In addition to setting standards for brokerage firms, the Mexican SecuritiesMarket Law authorizes the CNBV, among other things, to regulate the publicoffering and trading of securities and to impose sanctions for the illegal useof insider information and other violations of the New Mexican SecuritiesMarket Law. The CNBV regulates the Mexican securities market, the Mexican StockExchange, and brokerage firms through a board of governors composed of 13members.

 

Effective June 28,2006, the New Mexican Securities Market Law requires issuers to increase theprotections offered to minority shareholders and to bring corporate governancepractices in line with international standards. Such protections and corporategovernance practices have been incorporated to our bylaws. See “Item 3. KeyInformation—Risk Factors — Risk Factors Related to Mexico — Minorityshareholders have different rights against us, our directors, or ourcontrolling shareholders in Mexico.”

 

To offer securities tothe public in Mexico, an issuer must meet specific qualitative and quantitativerequirements. In addition, only securities that have been registered with theMexican Securities Registry pursuant to CNBV approval may be listed on 

 

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the Mexican StockExchange. The CNBV’s approval for registration does not imply any kind ofcertification or assurance related to the investment quality of the securities,the solvency of the issuer, or the accuracy or completeness of any informationdelivered to the CNBV.

 

In March 2003, theCNBV issued certain general regulations applicable to issuers and othersecurities market participants. The general regulations, which repealed severalpreviously enacted CNBV regulations *(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 theNew Mexican Securities Market Law by resolution of the CNBV published on September 22,2006, and were updated on September 19, 2008 and January 27, 2009.

 

The general regulationsstate that the Mexican Stock Exchange must adopt minimum requirements forissuers to list their securities in Mexico. These requirements relate tomatters such as operating history, financial and capital structure, anddistribution. The general regulations also state that the Mexican StockExchange must implement minimum requirements for issuers to maintain theirlisting in Mexico. These requirements relate to matters such as financialcondition, trading minimums, and capital structure, among others. The MexicanStock Exchange will review compliance with the foregoing requirements and otherrequirements on an annual, semi-annual and quarterly basis. The Mexican StockExchange must inform the CNBV of the results of its review and this informationmust, in turn, be disclosed to investors. If an issuer fails to comply with anyof the foregoing requirements, the Mexican Stock Exchange will request that theissuer propose a plan to cure the violation. If the issuer fails to propose aplan, or if the plan is not satisfactory to the Mexican Stock Exchange, or ifan issuer does not make substantial progress with respect to the correctivemeasures, trading of the relevant series of shares on the Mexican Stock Exchangewill be temporarily suspended. In addition, if an issuer fails to propose aplan or ceases to follow the plan once proposed, the CNBV may suspend or cancelthe registration of the shares.

 

Issuers of listedsecurities are required to file unaudited quarterly financial statements andaudited annual financial statements as well as various periodic reports withthe CNBV and the Mexican Stock Exchange. Mexican issuers must file thefollowing reports with the CNBV:

 

·       an annual report prepared in accordancewith CNBV regulations by no later than June 30 of each year (analogous toreports filed with the SEC by U.S. issuers on Form 10-K and by foreignprivate issuers on Form 20-F);

 

·       quarterly reports, within 20 days followingthe end of each of the first three quarters and 40 days following the endof the fourth quarter (analogous to reports filed with the SEC by U.S. issuerson Form 10-Q); and

 

·       current reports promptly upon theoccurrence of material events (analogous to reports filed with the SEC by U.S.issuers on Form 8-K and by foreign private issuers on Form 6-K).

 

Pursuant to the CNBV’sgeneral regulations, the internal rules of the Mexican Stock Exchange wereamended to implement an automated electronic information transfer system, orSEDI (*Sistema Electrónico de Envío yDifusión de Información*), for information required to be filed withthe Mexican Stock Exchange. Issuers of listed securities must prepare anddisclose their financial information via a Mexican Stock Exchange-approvedelectronic financial information system, or SIFIC (*Sistema de Información Financiera Computarizada*).Immediately upon its receipt, the Mexican Stock Exchange makes financialinformation prepared via SIFIC available to the public.

 

The CNBV’s generalregulations and the rules of the Mexican Stock Exchange require issuers oflisted securities to file information through SEDI that relates to any act,event, or circumstance that could influence an issuer’s share price. If listedsecurities experience unusual price volatility, the Mexican Stock Exchange mustimmediately request that the issuer inform the public as to the causes of thevolatility or, if the issuer is unaware of the causes, that the issuer make astatement to that effect. In addition, the Mexican Stock Exchange mustimmediately request that issuers disclose any information relating to relevantmaterial events, when it deems the information currently disclosed to beinsufficient, as well as instruct issuers to clarify the information whennecessary. The Mexican Stock Exchange may request issuers to confirm or denyany material events that have been disclosed to the public by third partieswhen it deems that the material event may affect or influence the securities beingtraded. The Mexican Stock Exchange must immediately inform the CNBV of any suchrequests. In addition, the CNBV may also make any of these requests directly toissuers. An issuer may defer the disclosure of material events under somecircumstances, as long as:

 

·       the issuer implements adequateconfidentiality measures;

 

·       the information is related to incompletetransactions;

 

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

 

·     no unusual price or volume fluctuationoccurs.

 

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

 

·     if the issuer does not disclose amaterial event; or

 

·     upon price or volume volatility orchanges in the offer or demand in respect of the relevant securities that arenot consistent with the historic performance of the securities and cannot beexplained solely through information made publicly available pursuant to theCNBV’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 New Mexican Securities Market Law:

 

·     members ofthe board of directors and principal officers of a listed issuer;

 

·     shareholderscontrolling 10% or more of a listed issuer’s outstanding share capital, and thedirectors and principal officers of such shareholders;

 

·     groups havingsignificant influence on a listed issuer; and

 

·     otherinsiders

 

must abstain from purchasing or selling securities of the issuer within90 days from the most recent public tender of shares of the issuer forsale or purchase, respectively. Shareholders of issuers listed on the MexicanStock Exchange must notify the Mexican Stock Exchange of any transactions madein or outside the Mexican Stock Exchange that result in a transfer of 10% ormore but less than 30% of an issuer’s share capital on the day following therespective transaction.

 

The New 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 New 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.

 

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***New Mexican Securities Market Law***

 

The Mexican legislature issued a New MexicanSecurities Market Law effective June 28, 2006. The amendments provide, among otherthings, that:

 

·     issuersmust have a board of directors with 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 approve related party transactions and material assettransactions;

 

·     issuersmust appoint and maintain an audit committee and a corporate governancecommittee; and

 

·     issuersmust provide additional protections for minority shareholders.

 

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

 

The New 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 or non-votingrights may not exceed 25% of the aggregate amount of publicly-held shares,unless approved by the CNBV.

 

**ITEM 10.       AdditionalInformation.**

 

**BYLAWS**

 

Set forth below is a brief summary of certainsignificant provisions of (1) our bylaws, as amended by our shareholders inaccordance with the New 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 New Mexican Securities Market Law. Wewere incorporated 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 in other mercantile or civilcompanies, either by taking part in their formation or acquiring shares orinterests in companies that are already in existence; (iii) receive from thirdparties and give to the companies of which it is a shareholder or partner or toany other third party, guidance or technical consulting services, includingservices in the fields of administration, accounting, merchandising orfinancing; (iv) obtain, acquire, utilize or dispose of any patent, brand orcommercial name, franchise or rights in industrial property in Mexico orabroad; (v) obtain any type of financing or loan, with or without a specificguarantee, and grant loans to mercantile or civil companies or other persons inwhich the company has an interest or with others with which it has a businessrelationship; (vi) grant any type of guarantee and endorsement in respect toobligations or credit instruments, for the benefit of mercantile or civilcompanies or other persons with which the company has an interest or with whichit maintains a business relationship; (vii) issue, subscribe, draw, accept andendorse all types of credit instruments, including obligations with or withouta guarantee; (viii) acquire, rent, administer, sell, mortgage, pledge, encumberor dispose of goods, in whatever form, being movable or immovable, as well asrights over the same; (ix) execute any kind of act and formalize any kind oflabor, civil, mercantile or administrative agreement or contract permitted byMexican legislation, with real and corporate personalities that are eitherpublic or private, obtaining from these, concessions, permits andauthorizations relating directly or indirectly to the company’s objectives asset forth in its bylaws, including, actively or passively contracting 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 New Mexican Securities Market Law;(xi) establish agencies or representatives and act as broker, agent,representative, mercantile mediator or distributor; and (xii) perform any actsnecessary 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 ouroutstanding share capital are entitled to appoint one member of the board ofdirectors.

 

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 New Mexican SecuritiesMarket Law, the board of directors must approve, among other things:

 

·     strategicdecisions for the Company and its subsidiaries;

 

·     anytransactions outside the ordinary course of business to be undertaken withrelated parties;

 

·     significantasset transfers or acquisitions;

 

·     creditpolicies;

 

·     grantingmaterial guarantees or collateral;

 

·     designationof the Chief Executive Officer (or Director General); and

 

·     any otherimportant 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:

 

·     approvingor modifying the report of the board of directors including the auditedyear-end financial statements, as well as the report of the Chief ExecutiveOfficer (or Director General);

 

·     allocatingprofits, if applicable;

 

·     appointingor ratifying the appointment of members of the board of directors and thesecretary, and determining their compensation;

 

·     appointingthe chairman of the audit committee and of the corporate governance committee;

 

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·     designatingthe maximum amount that may be allocated to share repurchases;

 

·     discussingthe audit committee’s and corporate governance committee’s annual reports tothe board of directors; and

 

·     approvingtransactions of the Company and subsidiaries representing 20% or more of theconsolidated assets of the Company.

 

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

 

·     extendingthe corporate duration of the Company;

 

·     dissolution;

 

·     increasesor reductions of our fixed share capital;

 

·     changes inthe Company’s corporate purpose or nationality;

 

·     transformationor merger;

 

·     issues ofpreferred shares;

 

·     shareredemptions;

 

·     delistingof our shares with the Mexican Securities Registry or with any stock exchange;

 

·     anyamendments to our bylaws; and

 

·     any othermatters for which applicable Mexican law or the bylaws specifically require anextraordinary 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 singleshareholder may call 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 following theadjournment 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 ispublished.

 

To be admitted to any shareholders’ meeting,shareholders must be registered in our share registry or provide evidence of 

 

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their status as shareholders as provided in our bylaws (includingthrough certificates provided by INDEVAL and INDEVAL participants).Shareholders may appoint one or more attorneys-in-fact to represent thempursuant to general or special powers of attorney or by a proxy.Attorneys-in-fact may not be directors of Homex.

 

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 New 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, theNew 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 New Mexican Securities Market Law andour bylaws, 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 theNew Mexican Securities Market Law, and carried out, reported, and disclosed inthe manner established by the CNBV.

 

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If we intend to repurchase more than 1% of ouroutstanding common shares at a single trading session, we must inform thepublic of this intention at least 10 minutes before submitting our bid. If weintend to repurchase 3% or more of our outstanding common shares during aperiod of 20 trading days, we must conduct a public tender offer for thosecommon shares.

 

We may not submit bids for repurchase during the firstand the last 30 minutes of each trading session and we must inform the MexicanStock Exchange of the results of any share repurchase no later than thefollowing business day.

 

The amount allocated to share repurchases isdetermined annually by our shareholders at a general ordinary shareholders’meeting and cannot exceed the aggregate amount of our net profits, includingretained profits.

 

**Delisting**

 

If we decide to cancel the registration of our shareswith the Mexican Securities Registry or if the CNBV orders such deregistration,we will be required to make a tender offer to purchase the shares held byminority shareholders prior to such cancellation. Shareholders deemed to have “control”will be secondarily responsible for making such tender offer. The price of theoffer to purchase will be the higher of:

 

·     the average trading price on the MexicanStock Exchange during the last 30 days on which the shares were quoted prior tothe date on which the tender offer is made; and

 

·     the book value of the shares as reflectedin our latest quarterly report filed with the CNBV and the Mexican StockExchange.

 

In order to make the repurchase, we must form a trustand contribute to it the amount required to secure payment of the purchaseprice offered pursuant to the tender offer to all of our shareholders that didnot sell their shares pursuant to the tender offer. The trust must be in forcefor a period of at least six months from the date of delisting.

 

No later than 10 business days following the commencementof an offering, our board of directors must issue an opinion on the offeringprice reflecting the opinion of our audit committee and disclosing anypotential conflicts of interest that any of the board members may have.  The board’s resolution may be accompanied bya fairness opinion issued by an expert selected by us.

 

**Ownership of Share Capital bySubsidiaries**

 

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

 

**Redemption**

 

Pursuant to the New Mexican Securities Market Law, shareholdersare entitled to the redemption of their variable common shares, pro rata, byresolution of the shareholders’ meeting.

 

**Liquidation**

 

Upon our dissolution, one or more liquidators must beappointed at an extraordinary shareholders’ meeting to wind-up our affairs. Allshares will be entitled to participate equally in any distribution uponliquidation.

 

**Appraisal Rights and Other MinorityProtections**

 

If shareholders approve a change in our corporatepurpose, nationality, or corporate form, any voting shareholder who votedagainst these matters is entitled to the redemption of its common shares atbook value pursuant to the last financial statements approved by ourshareholders at a shareholders’ meeting. These redemption rights must beexercised within 15 days after the shareholders’ meeting at which the matterwas approved.

 

Pursuant to the New Mexican Securities Market Law andthe Mexican General Business Corporations Law, our bylaws include a number ofminority shareholder protections. These minority protections include provisionsthat permit:

 

·     holders of at least 5% of our outstandingshare capital to bring an action for civil liabilities against our directorsand 

 

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members of oursenior management, provided that any recovery is for our benefit and not thebenefit of the plaintiffs;

 

·     holders of at least 10% of our shares whoare entitled to vote (including in a limited or restricted manner) to requestthat a shareholders’ meeting be called in certain limited situations;

 

·     holders of at least 10% of our shares whoare entitled to vote (including in a limited or restricted manner) at anyshareholders’ meeting to request that resolutions with respect to any matter onwhich they were not sufficiently informed to be postponed;

 

·     holders of at least 10% of ouroutstanding share capital to appoint one member of our board of directors; and

 

·     holders of at least 20% of ouroutstanding share capital to contest and suspend any shareholder resolution,subject to certain requirements under Mexican law.

 

In addition, pursuant to the New Mexican SecuritiesMarket Law, we are also subject to certain corporate governance requirements,including the requirement to maintain an audit committee and a corporategovernance committee and that at least 25% of our directors qualify asindependent.  The CNBV is empowered to verify their independence.

 

The protections afforded to minority shareholdersunder Mexican law are generally different from those in the United States andother jurisdictions, although we believe the New Mexican Securities Market Lawhas introduced higher corporate governance standards including directorfiduciary duties with a comprehensive description of duties of care and loyalty.Mexican civil procedure does not provide for class-action lawsuits.

 

Notwithstanding the foregoing, it is anticipated to bemore difficult for our minority shareholders to enforce rights against us orour directors or principal shareholders than it is for shareholders of a U.S.issuer.

 

**Information to Shareholders**

 

The Mexican General Business Corporations Lawestablishes that companies, acting through their board of directors, mustannually present a report to shareholders at a shareholders’ meeting thatincludes:

 

·     a report of the directors on theoperations of the company and its subsidiaries during the preceding year, aswell as on the policies followed by the directors and management;

 

·     an opinion on the Chief Executive Officer’sreport on the principal accounting and information policies and criteriafollowed in the preparation of the financial information;

 

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

 

·     a statement showing the results ofoperations of the company during the preceding year, as well as changes in thecompany’s financial condition and share capital during the preceding year; and

 

·     the notes which are required to completeor clarify the above-mentioned information.

 

In addition, the New Mexican Securities Market Lawrequires that information relating to matters to be discussed at shareholders’meetings be made available to shareholders from the date on which the noticefor the relevant meeting is published.

 

**Restrictions Affecting Non-MexicanShareholders**

 

Foreign investment in capital stock of Mexicancorporations is regulated by the 1993 Foreign Investment Law and by the 1998Foreign Investment Regulations to the extent they are not inconsistent with theForeign Investment Law. The Ministry of Economy and the National ForeignInvestment Commission*(Comisión NacionalReguladora de la Inversión Extranjera)* are responsible for theadministration of the Foreign Investment Law and the Foreign InvestmentRegulations.

 

Our bylaws do not restrict the participation ofnon-Mexican investors in our capital stock. However, approval of the 

 

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National Foreign Investment Commission must be obtained for foreigninvestors to acquire a direct or indirect participation in excess of 49% of thecapital stock of a Mexican company that has an aggregate asset value thatexceeds, at the time of filing the corresponding notice of acquisition, anamount determined annually by the National Foreign Investment Commission.

 

As required by Mexican law, our bylaws provide thatnon-Mexican shareholders agree to be considered Mexican citizens with respectto:

 

·     shares held by them;

 

·     property rights;

 

·     concessions;

 

·     participations or interests we own; and

 

·     rights and obligations derived from anyagreements we have with the Mexican government.

 

As required by Mexican law, our bylaws also providethat non-Mexican shareholders agree to refrain from invoking the protection oftheir governments in matters relating to their ownership of our shares.Therefore, a non-Mexican shareholder may not ask its government to introduce adiplomatic claim against the government of Mexico with respect to its rights asa shareholder. If the shareholder invokes such governmental protection, itsshares could be forfeited to the Mexican government. Notwithstanding theseprovisions, shareholders do not forfeit any rights they may have under U.S.securities laws.

 

**Summary of Differences betweenMexican and U.S. Corporate Law**

 

You should be aware that the Mexican General BusinessCorporations Law and the New Mexican Securities Market Law, which apply to us,differ in material respects from laws generally applicable to U.S. corporationsand their shareholders. In order to highlight these differences, set forthbelow is a summary of provisions applicable to us (including modificationsadopted pursuant to our bylaws) which differ in material respects fromprovisions of the corporate law of the State of Delaware.

 

*Dutiesof Directors*

 

Under the New Mexican Securities Market Law, directorsnow have fiduciary duties of care and loyalty specified therein. The duties ofdirectors of public companies are more extensive than the duties of directorsof private companies. Actions against directors may be initiated by holders ofat least 5% of our outstanding share capital, although any damages recoveredfrom directors are awarded solely to the company.

 

Under the New Mexican Securities Market Law, thebusiness and affairs of a corporation are managed by or under the direction ofits board of directors. In exercising their powers, directors are charged witha fiduciary duty of care to protect the interests of the corporation and afiduciary duty of loyalty to act in the best interests of its shareholders.

 

The duty of care requires that directors act in aninformed and deliberate manner, and inform themselves, prior to making a businessdecision, of all relevant material information reasonably available to them.The duty of care also requires that directors exercise care in overseeing andinvestigating the conduct of corporate employees. The duty of loyalty may besummarized as the duty to act in good faith, not out of self-interest, and in amanner which the director reasonably believes to be in the best interests ofthe shareholders.

 

Under the “business judgment rule,” courts generallydo not question the business judgment of directors and officers. A partychallenging the propriety of a decision of a board of directors bears theburden of rebutting the presumption afforded to directors by the businessjudgment rule. If the presumption is not rebutted, the business judgment rule attachesto protect the directors from liability for their decisions. Where, however,the presumption is rebutted, the directors bear the burden of demonstrating thefairness of the relevant transaction. However, when the board of directorstakes defensive actions in response to a threat to corporate control andapproves a transaction resulting in a sale of control of the corporation,Delaware courts subject directors’ conduct to enhanced scrutiny.

 

Under the New MexicanSecurities Market Law, directors are exempted from liability for theirdecisions when they act in 

 

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good faith and in compliance with all legal and bylaw requirements, andbased on information provided by management, having selected 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 New Mexican Securities Market Law requires thatour corporate governance committee issue an opinion with regard to transactionsand arrangements with related parties, including directors. These transactionsand arrangements must be approved by our board of directors, except forimmaterial transactions or transactions with affiliates in the normal course ofbusiness and at market prices. Mexican law provides that a member of the boardof directors can be liable for failing to disclose a conflict of interest andfor voting on a transaction in which he or she has a conflict of interest.

 

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

 

·     the material facts with respect to suchinterested director’s relationship or interests are disclosed or are known tothe board of directors, and the board of directors in good faith authorizes thetransaction by the affirmative vote of a majority of the disinteresteddirectors;

 

·     the material facts are disclosed or areknown to the shareholders entitled to vote on the transaction, and thetransaction is specifically approved in good faith by vote of the majority ofshares entitled to vote thereon; or

 

·     the transaction is fair to thecorporation 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 to paying dividends a companymust reserve at least 5% of its profits every year until it establishes a legalreserve equal to 20% of its capital share. Dividends may only be paid fromretained earnings and only if losses for prior fiscal years have been paid.Dividends may also be subject to additional restrictions contained in thecompany’s bylaws. The payment of dividends must be approved at an annualgeneral shareholders’ meeting. We do not currently expect to pay dividends.

 

Under Delaware law, subject to any restrictionscontained in the company’s certificate of incorporation, a company may paydividends out of surplus or, if there is no surplus, out of net profits for thefiscal year in which the dividend is declared and for the preceding fiscalyear. Delaware law also provides that dividends may not be paid out of netprofits at any time when capital is less than the capital represented by theoutstanding stock of all classes having a preference upon the distribution ofassets.

 

*Mergers,Consolidations, and Similar Arrangements*

 

A Mexican company may merge with another company onlyif a majority of the shares representing its outstanding share capital approvesthe merger at a duly convened extraordinary shareholders’ meeting. Dissentingshareholders are not entitled to appraisal rights. Creditors have 90 days to opposea merger judicially, provided they have a legal interest to oppose the merger.

 

Under Delaware law, with certain exceptions, a merger,consolidation, or sale of all or substantially all the assets of a corporationmust be approved by the board of directors and a majority of the outstandingshares entitled to vote thereon. Under Delaware law, a shareholder of acorporation participating in certain major corporate transactions may, undercertain circumstances, be entitled to appraisal rights pursuant to which theshareholder may receive payment in the amount of the fair market value of theshares held by the shareholder (as determined by a court) in lieu of theconsideration the shareholder would otherwise receive in the transaction.Delaware law also provides that a parent corporation, by resolution of itsboard of directors and without any shareholder vote, may merge with anysubsidiary of which it owns at least 90% of each class of capital share. Uponany such merger, dissenting shareholders of the subsidiary would have appraisalrights.

 

*Anti-TakeoverProvisions*

 

Our bylaws do not include anti-takeover provisions.The New Mexican Securities Market Law permits public companies to includeanti-takeover provisions in their bylaws that restrict the ability of thirdparties to acquire control of the company; provided, however, that:

 

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·     adoption of such provisions is notopposed by holders of 5% or more of our share capital;

 

·     no shareholder is excluded from thebenefits that may derive from such provisions;

 

·     takeovers cannot be absolutely banned andany required approval from the company’s board of directors must be subject toestablished criteria and a deadline not to exceed three months; and

 

·     takeover procedures conform to compulsorytender offering rules.

 

Under Delaware law, corporations can implementshareholder rights plans and other measures, including staggered terms fordirectors and super-majority voting requirements, to prevent takeover attempts.Delaware law also prohibits a publicly-held Delaware corporation from engagingin a business combination with an interested shareholder for a period of threeyears after the date of the transaction in which the shareholder became aninterested shareholder unless:

 

·     prior to the date of the transaction inwhich the shareholder became an interested shareholder, the board of directorsof the corporation approves either the business combination or the transactionthat resulted in the shareholder becoming an interested shareholder;

 

·     upon consummation of the transaction thatresulted in the shareholder becoming an interested shareholder, the interestedshareholder owns at least 85% of the voting stock of the corporation, excludingshares held by directors, officers, and employee stock plans; or

 

·     at or after the dateof the transaction in which the shareholder became an interested shareholder,the business combination is approved by the board of directors and authorizedat a shareholders’ meeting by at least 662 /3 % of the voting stock which is not ownedby the interested shareholder.

 

*Transactionswith Significant Shareholders*

 

Under Mexican law, a company’s board of directors mustapprove any potential transaction to be undertaken with any shareholders of thecompany or other companies affiliated with shareholders of the company. Theboard of directors must take the recommendation of the corporate governancecommittee into consideration in granting its approval and may also require anindependent fairness opinion. In addition, pursuant to Mexican law, anyshareholder who votes on a transaction in which the shareholder has a conflictof interest may be liable for damages if the transaction would not have beenapproved without the shareholder’s vote.

 

As a Mexican company, we may enter into businesstransactions with our significant shareholders, including asset sales, in whichthe significant shareholder receives a greater financial benefit than othershareholders with prior approval from our board of directors. Prior approvalfrom our shareholders is not required for this kind of transaction.

 

No similar provision relating to transactions withsignificant shareholders exists under Delaware law.

 

*Shareholders’Suits*

 

As mentioned above, holders of at least 5% of ouroutstanding share capital may bring derivative actions for civil liabilitiesagainst our directors, members of the audit committee, and the corporategovernance committee. However, the grounds for shareholder derivative actionsunder Mexican law are limited, which effectively bars most of these suits inMexico. In addition, subject to certain requirements, holders of at least 20%of a company’s outstanding share capital may contest and suspend anyshareholder resolution that violates Mexican law or our bylaws. Class-actionlawsuits are not permitted under Mexican law.

 

Class-actions and derivative actions are generallyavailable to shareholders under Delaware law for, among other things, breach offiduciary duty, corporate waste and actions not taken in accordance withapplicable law. In these kinds of actions, the court generally has discretionto permit the winning party to recover attorneys’ fees incurred in connectionwith the action.

 

*Indemnificationof Directors and Officers*

 

Under Mexican law, a company may indemnify directorsor members of any committee of the board of directors, for actions 

 

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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.

 

Under Delaware law, a corporation may indemnify adirector or officer of the corporation against expenses (including attorneys’fees), judgments, fines and amounts paid in settlement actually and reasonablyincurred in defense of an action, suit or proceeding by reason of a director’sor officer’s position if:

 

·      the director or officer acted in goodfaith and in a manner the director or officer reasonably believed to be in ornot opposed to the best interests of the corporation; and

 

·      with respect to any criminal action orproceeding, the director or officer had no reasonable cause to believe his orher conduct was unlawful.

 

*Inspectionof Corporate Records*

 

Under Mexican law, at the time that a notice ofshareholders’ meeting is published, shareholders are entitled to allinformation related to the matters to be discussed at the meeting.

 

Delaware law permits any shareholder to inspect orobtain copies of a corporation’s shareholder list and its other books andrecords for any purpose reasonably related to a person’s interest as ashareholder.

 

*ShareholderProposals*

 

Under Mexican law and our bylaws, holders of at least10% of our outstanding share capital are entitled to appoint one member of ourboard of directors.

 

Delaware law does not include a provision restrictingthe manner in which nominations for directors may be made by shareholders orthe manner in which business may be brought before a meeting.

 

*Callingof Special Shareholders’ Meetings*

 

Under Mexican law and our bylaws, a shareholders’meeting may be called by the board of directors, the chairman of the board ofdirectors or of the audit committee or the corporate governance committee. Anyshareholder or group of shareholders with voting rights representing at least10% of our share capital may request in writing that the board of directors calla 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 the written request, the shareholder or group ofshareholders may request that a competent court call the meeting. A singleshareholder may call 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.

 

Delaware law permits the board of directors or anyperson who is authorized under a corporation’s certificate of incorporation orbylaws to call a special meeting of shareholders.

 

*CumulativeVoting*

 

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

 

Under Delaware law, cumulative voting for the electionof directors is permitted only if expressly authorized in the certificate ofincorporation.

 

*Approvalof Corporate Matters by Written Consent*

 

Mexican law permits shareholders to take action byunanimous written consent of the holders of all shares entitled to vote. Theseresolutions have the same legal effect as those adopted in a general or specialshareholders’ meeting. The board of directors may also approve matters byunanimous written consent.

 

Delaware law permits shareholders to take action bywritten consent of holders of outstanding shares having more than the minimumnumber of votes necessary to take the action at a shareholders’ meeting atwhich all voting shares were present and voted.

 

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*Amendmentof Certificate of Incorporation*

 

Under Mexican law, it is not possible to amend acompany’s certificate of incorporation (*actaconstitutiva*). However, the provisions that govern a Mexican companyare contained in its bylaws, which may be amended as described below.

 

Under Delaware law, amending a company’s certificateof incorporation, which is equivalent to a memorandum of association, must bemade by a resolution of the board of directors setting forth the amendment,declaring its advisability, and either calling a special meeting of theshareholders entitled to vote or directing that the amendment proposed beconsidered at the next annual meeting of the shareholders. Delaware law requiresthat, unless a different percentage is provided for in the certificate ofincorporation, a majority of the outstanding shares entitled to vote thereon isrequired to approve the amendment of the certificate of incorporation at theshareholders’ meeting. If the amendment would alter the number of authorizedshares or otherwise adversely affect the rights or preference of any class of acompany’s stock, Delaware law provides that the holders of the outstandingshares of such affected class should be entitled to vote as a class upon theproposed amendment, regardless of whether such holders are entitled to vote bythe certificate of incorporation. However, the number of authorized shares ofany class may be increased or decreased, to the extent not falling below thenumber of shares then outstanding, by the affirmative vote of the holders of amajority of the stock entitled to vote, if so provided in the company’scertificate of incorporation or any amendment that created such class or wasadopted prior to the issuance of such class or that was authorized by theaffirmative vote of the holders of a majority of such class of stock.

 

*Amendmentof Bylaws*

 

Under Mexican law, amending a company’s bylawsrequires shareholder approval at an extraordinary shareholders’ meeting.Mexican law requires that at least 75% of the shares representing a company’soutstanding share capital be present at the meeting upon the first call (unlessthe bylaws require a higher threshold) and that the resolutions be approved byshares representing one-half of the company’s outstanding capital share.

 

Under Delaware law, holders of a majority of thevoting rights of a corporation and, if so provided in the certificate ofincorporation, the directors of the corporation, have the power to adopt, amendand repeal the bylaws of a corporation.

 

*StaggeredBoard of Directors*

 

Mexican law does not permit companies to have astaggered board of directors.

 

Delaware law permits corporations to have a staggeredboard of directors.

 

**MATERIALCONTRACTS**

 

For further discussion of our material contracts, see “Item7. Major Shareholders and Related Party Transactions.”

 

**EXCHANGECONTROLS**

 

Mexican law does not restrict our ability to remitdividends and interest payments, if any, to non-Mexican holders of oursecurities. Payments of dividends to equity holders, to the extent made,generally will not be subject to Mexican withholding tax. Mexico has had a freemarket for foreign exchange since 1991, and the government has allowed the pesoto float freely against the U.S. dollar since December 1994.

 

**TAXATION**

 

The following summarycontains a description of:

 

·      the material anticipated Mexican federalincome tax consequences of the purchase, ownership and disposition of the ADSsor common shares by non-resident holders, or holders that

 

·      are not residents of Mexico for taxpurposes; and

 

·      will not hold the ADSs or common sharesor a beneficial interest therein in connection with the conduct of a trade orbusiness through a permanent establishment, for tax purposes, in Mexico; and

 

·      the material anticipated U.S. federalincome tax consequences of the purchase, ownership, and disposition of the ADSsor common shares by non-resident holders that are U.S. holders, or holders that

 

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·      are citizens or residents of the UnitedStates;

 

·      are corporations organized under thelaws of the United States or any state thereof or the District of Columbia; or

 

·      that otherwise will be subject to U.S.federal income tax on a net income basis in respect of the ADSs or commonshares.

 

For purposes of Mexicantaxation:

 

·      individuals are residents of Mexico ifthey have established their principal place of residence in Mexico or, if theyhave established their principal place of residence outside Mexico, if theircore of vital interests (*centro de interesesvitales*) is located in Mexico. An individual’s core of vitalinterests will be deemed to be located in Mexico if, among other things,

 

·      at least 50% of the individual’saggregate annual income derives from Mexican sources, or

 

·      the individual’s principal center ofprofessional activities is located in Mexico;

 

·      individuals are residents of Mexico ifthey are state employees, regardless of the location of the individual’s coreof vital interests; and

 

·      legal entities are residents of Mexicoif they maintain their principal place of business or their place of effectivemanagement in Mexico.

 

If non-residents of Mexico are deemed to have apermanent establishment in Mexico for tax purposes, all income attributable tothe permanent establishment will be subject to Mexican taxes, in accordancewith applicable Mexican tax law.

 

In general, for U.S. federal income tax purposes,holders of ADSs will be treated as the beneficial owners of the common sharesrepresented by those ADSs.

 

The following summary does not purport to be acomprehensive description of all of the tax considerations that may be relevantto a decision to purchase the ADSs or common shares. In particular, the summaryof U.S. federal income tax consequences only addresses U.S. holders that willhold the ADSs or common shares as capital assets and does not address the taxtreatment of U.S. holders that own or are treated as owning 10% or more of ouroutstanding voting shares. Further, this summary does not discuss all aspectsof U.S. federal income taxation that may be relevant to a particular investoror applicable to certain categories of U.S. holders such as banks, dealers,traders who elect to mark-to-market, tax-exempt entities, insurance companies,regulated investment companies, real estate investment trusts, dealers insecurities or currencies, expatriates, persons who hold the ADSs as part of ahedge, straddle, synthetic security, conversion or integrated transaction, U.S.holders who have a functional currency other than the U.S. dollar, or U.S.holders liable for the alternative minimum tax.  Potential U.S. holders should realize that thetax consequences for  persons describedin the 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 taxconsiderations below assumes that we are not a passive foreign investmentcompany, or PFIC. Based on our audited financial statements and relevant marketand shareholder data, we believe that we were not treated as a PFIC for U.S.federal income tax purposes with respect to our 2008 taxable year.  Furthermore, based on our audited financialstatements and our current expectations regarding the value and nature of ourassets, the sources and nature of our income and relevant market andshareholder data, we do not anticipate being a PFIC for our 2009 taxable year.  However, this determination is made annuallyand it is possible that our status could change.

 

This summary is based upon the federal income tax lawsof the U.S. and Mexico as in effect on the date of this annual report and theprovisions of the income tax treaty between the U.S. and Mexico and theprotocol thereto (the “Tax Treaty”), all of which are subject to change,possibly with retroactive effect. However, this summary does not address allaspects of the federal income tax laws of the U.S. and Mexico. Prospectiveinvestors in the ADSs or common shares should consult their own tax advisors asto the U.S., Mexican, or other tax consequences of the purchase, ownership, anddisposition of the ADSs or common shares, including, in particular, the effectof any foreign, state or local tax laws and their entitlement to the benefits,if any, afforded by the Tax Treaty.

 

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**Taxation of Dividends**

 

*MexicanTax Considerations*

 

Under the provisions of the Mexican Income Tax Law (*Ley del Impuesto Sobre la Renta*),dividends paid to non-resident holders with respect to the common shares or theADSs will not be subject to Mexican withholding tax.

 

Dividends paid from distributable earnings that havenot been subject to corporate income tax are subject to a corporate-leveldividend tax at a rate of 38.89% (gross-up of 28%) . The corporate-leveldividend tax on the distribution of earnings is not final and may be creditedagainst income tax payable during the fiscal year in which the dividend tax waspaid and for the following two years. Dividends paid from distributableearnings, after corporate income tax has been paid with respect to theseearnings, are not subject to this corporate-level dividend tax.

 

*U.S.Federal Income Tax Considerations*

 

The gross amount of any dividend distributions paidwith respect to the common shares represented by the ADSs, to the extent paidout of our current or accumulated earnings and profits, as determined for U.S.federal income tax purposes, generally will be includible in the gross incomeof a U.S. holder as ordinary income on the date on which the distributions arereceived by the depositary and will not be eligible for the dividends receiveddeduction allowed to certain corporations under the U.S. Internal Revenue Codeof 1986, as amended (the “Code”). To the extent that a distribution exceeds ourcurrent and accumulated earnings and profits, it will be treated as anon-taxable return of basis to the extent thereof, and thereafter as capitalgain from the sale of ADSs or common shares.

 

Distributions, which will be made in pesos, will beincludible in the income of a U.S. holder in a U.S. dollar amount calculated byreference to the exchange rate in effect on the date they are received by thedepositary, whether or not they are converted into U.S. dollars. U.S. holdersshould consult their own tax advisors regarding the treatment of foreigncurrency gain or loss, if any, on any pesos received that are converted intoU.S. dollars on a date subsequent to receipt. Dividend income generally willconstitute foreign source “passive income” or, in the case of certain U.S.holders for taxable years beginning before January 1, 2007, “financial servicesincome,” and for taxable years beginning after December 31, 2006, “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 Mexican taxes are withheld fromdividend distributions, any such withheld taxes would be treated as part of thegross amount of the dividend includible in income for a U.S. holder for U.S.federal income tax purposes (to the extent of current or accumulated earningsand profits). U.S. holders may be entitled to credit such taxes against theirU.S. federal income tax liability or, for those U.S. holders who so elect, todeduct such Mexican taxes in computing taxable income.  The calculation of foreign tax credits and, inthe case of U.S. holders that elect to deduct foreign taxes, the availabilityof deductions, are subject to generally applicable limitations under U.S.federal income tax regulations and involve the application of rules that dependon U.S. holders’ particular circumstances.  U.S. holders should consult their own taxadvisors regarding the potential availability of foreign tax credits and deductions.

 

Distributions of additional common shares to holdersof ADSs with respect to their ADSs that are made as part of a pro ratadistribution to all our shareholders generally will not be subject to U.S.federal income tax.

 

Currently the maximum rate of tax imposed on certaindividends received by U.S. shareholders that are individuals is 15%, providedthat certain holding period requirements are met. This reduced rate applies todividends received between January 1, 2003 and December 31, 2010 from “qualifiedforeign corporations.” We believe we are a “qualified foreign corporation” withrespect to our ADSs because our ADSs are listed on the New York Stock Exchange.Therefore, we believe that dividends paid on our ADSs will constitute “qualifieddividend income” and therefore qualify for the reduced rate. It is possible,however, that we will not continue to be considered a “qualified foreigncorporation” and that our dividends will not continue to be eligible for thisrate. Notwithstanding the previous rule, the term “qualified dividend income”will not include, among other dividends, any (i) dividends on any share ofstock or ADS which is held by a taxpayer for 60 days or less during the 120-dayperiod beginning on the date which is 60 days before the date on which suchshare or shares backing the ADS become ex-dividend with respect to suchdividends (as measured under section 246(c) of the Code); or (ii) dividends tothe extent that the taxpayer is under an obligation (whether pursuant to ashort sale or otherwise) to make related payments with respect to positions insubstantially similar or related property. U.S. holders should consult theirown advisors regarding the applicability of the 15% dividend rate in theirparticular circumstances.

 

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**Taxation of Dispositions of Shares orADSs**

 

*MexicanTax Considerations*

 

Gain on the sale or other disposition of ADSs by anon-resident holder will generally not be subject to Mexican tax. Deposits andwithdrawals of common shares in exchange for ADSs will not give rise to Mexicantax or transfer duties.

 

Gain on the sale of the common shares by anon-resident holder will not be subject to any Mexican tax if the transactionis carried out through the Mexican Stock Exchange or other stock exchange orsecurities markets approved by the Mexican Ministry of Finance and PublicCredit. The exemption is not available when a person or a group of peoplecontrol a company or own 10% or more of the capital stock of a company and sell10% or more of the company’s stock in a period of 24 months in one or moretransactions of such shares.

 

Gain on sales or other dispositions of the commonshares made in other circumstances generally would be subject to Mexican tax ata rate of 25% based on the total amount of the transaction or, subject tocertain requirements applicable to the seller, at a rate of 28% on gainsrealized from the disposition, regardless of the nationality or residence ofthe transferor, provided that the transferor is not a resident of a countrywith a preferential tax regime.

 

Under the Tax Treaty, a holder that is eligible toclaim the benefits of the Tax Treaty will be exempt from Mexican tax on gainsrealized on a sale or other disposition of the common shares, in a transactionthat is not carried out through the Mexican Stock Exchange or such otherapproved securities markets, so long as the holder did not own, directly orindirectly, 25% or more of our share capital (including ADSs) during thetwelve-month period preceding the sale or other disposition.

 

*U.S.Federal Income Tax Considerations*

 

Upon the sale or other disposition of the ADSs orcommon shares, a U.S. holder generally will recognize gain or loss in an amountequal to the difference between the amount realized on the sale or otherdisposition and such U.S. holder’s tax basis in the ADSs or common shares. Gainor loss recognized by a U.S. holder on such sale or other disposition generallywill be long-term capital gain or loss if, at the time of the sale or otherdisposition, the ADSs or common shares have been held for more than one year.Currently, the top individual tax rate on adjusted net capital gains for salesand exchanges of capital assets on or after May 6, 2003 and before January 1,2011 is 15%. The deduction of a capital loss is subject to limitations for U.S.federal income tax purposes. Gain or loss generally will be treated as U.S.source gain or loss and a U.S. holder may be unable to credit any Mexican taxesimposed on these gains unless it has certain other income from foreign sources.Deposits and withdrawals of common shares by U.S. holders in exchange for ADSswill not result in the realization of gain or loss for U.S. federal income taxpurposes.

 

**Other Mexican Taxes**

 

There are no Mexican inheritance, gift, succession orvalue-added taxes applicable to the purchase, ownership or disposition of theADSs or common shares by non-resident holders. However, gratuitous transfers ofthe ADSs or common shares may result in a Mexican federal tax obligation forthe recipient in certain circumstances.

 

There are no Mexican stamp, issue, registration orsimilar taxes or duties payable by non-resident holders of the ADSs or commonshares.

 

**U.S. Backup Withholding Tax andInformation Reporting Requirements**

 

A U.S. holder may, under certain circumstances, besubject to “backup withholding” with respect to some payments to the U.S.holder, such as dividends or the proceeds of a sale or other disposition of theADSs, unless the holder:

 

·      is a corporation or comes within certainexempt 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 under these rules will becreditable against the U.S. holder’s federal income tax liability.

 

**DOCUMENTSON DISPLAY**

 

We are subject to the information requirements of theExchange Act and, in accordance therewith, we are required to file 

 

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reports and other information with the SEC. These materials, includingthis Form 20-F and the exhibits thereto, may be inspected and copied at the SEC’sPublic Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.

 

**ITEM 11.       Quantitative andQualitative Disclosures about Market Risk.**

 

**Interest Rate Risk**

 

In connection with our business activities, we haveissued and hold financial instruments that currently expose us to market risksrelated to changes in interest rates. Interest rate risk exists principallywith respect to our indebtedness that bears interest at floating rates. At December31, 2008, we had outstanding indebtedness of Ps.7,811.4 million, the majorityof which bore interest at fixed interest rates. The interest rate on ourvariable rate debt is determined primarily by reference to the 28-day MexicanInterbank Rate, or TIIE *(Tasa de InterésInterbancaria de Equilibrio).* TIIE increases would, consequently,increase our interest payments.

 

The following table sets forth principal cash flows byscheduled maturity, average interest rates, and estimated fair market value ofour debt obligation as of December 31, 2008. Fair value is estimated usingdiscounted cash flow analyses, based on the Company’s current incrementalborrowing rates for similar types of borrowing arrangements.

 
| ** **               | ** ** | **Expected  Maturity Dates as of December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | **2009**                                        | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012** | ** ** | **2013** | ** ** | **After********2014** | ** ** | **Total** | ** ** | **Fair Value  Dec. 31, ‘08** | ** ** |
| ** **               | ** ** | **(Millions  of Dollars Equivalent)**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Long-term  debt**      |       |                                            |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Fixed rate *             |       | —                                          |       | —     |       | —     |       | — |   | — |   | 250 |   | 250 |   | 250 |   |
| Average interest  rate** |       | 7.5                                             | %          | 7.5        | %          | 7.5        | %          | 7.5 | % | 7.5 | % | 7.5 | % |   |   |   |   |
| Variable rate  (Ps.)     |       | 103                                             |       | 40         |       | 7          |       | 7 |   | 153 |   | 0 |   | 311 |   | 311 |   |
| Average interest  rate   |       | 10.9                                            | %          | 10.4       | %          | 10.2       | %          | 10.2 | % | 10.2 | % | 0 | % |   |   |   |   |

 

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*  Until July 5, 2008 ouroutstanding US$250 million Senior Guaranteed Notes included the principal-onlyswap effect, whereby at maturity date we were to pay pesos at a contractual fixedexchange rate of Ps.10.83 per dollar and receive U.S. dollars equivalent to thenotional amount of US$250 million. This principal-only swap was cancelled onthe aforementioned date.

 

** Until July 5, 2008 included a six-month weighted fixed rate of 2.92%of our principal-only swap. This principal-only swap was cancelled on theaforementioned date.

 

A hypothetical, instantaneous, and unfavorable changeof 100 basis points in the average interest rate applicable to floating-rateliabilities held at December 31, 2008 would have increased our interest expensein 2008 by approximately Ps.42.8 million, over a twelve-month period.

 

Together with the issuance of the US$250 millionlong-term U.S. dollar-denominated Senior Guaranteed Notes due 2015, Homexentered into a principal-only swap in an attempt to hedge and cover theeconomic and cash flow principal U.S. dollar exposure bearing a six-monthweighted fixed rate of 2.92% exposed to U.S. dollar currency fluctuations. Theunderlying notes bear interest at a rate of 7.5% payable semi-annually and areexposed to U.S. dollar currency fluctuations. The Company accounted for thisswap at fair value in its consolidated financial statements. Because theagreement did not meet the requirements for hedge accounting, periodicmark-to-market measurement was made through the income statement. Thisprincipal-only swap was cancelled on July 5, 2008.

 

We manage our exposure to changes in interest rates byefficiently timing construction and delivery of our homes and payments to oursuppliers, thereby allowing us to reduce our borrowing needs for workingcapital. Our capital expenditures are financed either through our own resourcesor leveraging their return through operating leases.

 

**ForeignCurrency Risk**

 

Because substantially all of our revenues are and willcontinue to be denominated in pesos, if the value of the peso decreases againstthe U.S. dollar, our cost of financing will increase. Severe depreciation ofthe peso may also result in disruption of the international foreign exchangemarkets. This may limit our ability to transfer or convert pesos into U.S.dollars and other currencies for the purpose of making timely payments ofinterest and principal on our securities and any U.S. dollar-denominated debtthat we may incur in the future.

 

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The exchange rates in effect at December 31, 2008,2007 and 2006 were Ps. 13.7738, Ps.10.9185 and Ps.10.8385, respectively, perU.S. dollar.

 

**ITEM 12.       Description ofSecurities other than Equity Securities.**

 

Not applicable.

 

**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.       Controls andProcedures.**

 

(a)           *Disclosure controls and procedures.*

 

Under the supervision of our Chief Executive Officer,Chief Financial Officer and other management, we carried out an evaluation ofthe effectiveness of the design and operation of our disclosure controls andprocedures as of December 31, 2008. 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 in the reports that we file or submitunder the Exchange Act are recorded, processed, summarized and reported withinthe time periods specified in the applicable rules and forms. Further,management concluded that our disclosure controls and procedures are effectiveto provide reasonable assurance that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as necessary to allow timely decisions regarding required disclosure.

 

(b)           *Management’s annual report on internal controls overfinancial reporting.*

 

Our management is responsible for establishing andmaintaining adequate internal controls over financial reporting, as such termis defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Actof 1934, as amended. Under the supervision of our management, including ourBoard of 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 over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial 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. Ourinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of ourassets; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withMexican FRS, and that our receipts and expenditures are being made only inaccordance with authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of our assets that could have a materialeffect on our financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.  Based on our evaluation under the frameworkin Internal Control—Integrated Framework, our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2008.

 

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 26, 2009.

 

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(c)           *Attestation Report of the registered publicaccounting 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.’s internal controlover financial reporting as of December 31, 2008, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). DesarrolladoraHomex, S.A.B. de C.V.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on the effectiveness of the Company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, Desarolladora Homex, S.A.B. de C.V. maintained, in allmaterial respects, effective internal control over financial reporting as of December31, 2008, based on the COSO criteria.

 

Mancera, S.C.

A Member Practice of

Ernst & Young Global

 

 

C.P.C. Carlos Alberto Rochín Casanova

 

Culiacán, México

June 26, 2009

 

(d)           *Changes in internal control over financial reporting.*

 

In our prior year Form 20-F, we reported amaterial weakness in internal control over financial reporting related to ourUS GAAP conversion process as of December 31, 2007. We remediated thismaterial weakness during 2008. There has been no other change in our internalcontrol over financial reporting during 2008 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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**ITEM16.       (Reserved)**

 

**ITEM16A.       Financial Expert**

 

Our audit committeeconsists of Wilfrido Castillo Sánchez-Mejorada (Chairman), Z. Jamie Behar,Edward Lowenthal and Matthew Zell. Our board of directors has determined that Mr. Castillohas the attributes of an “audit committee financial expert” as defined by theSEC and that each member of the audit committee satisfies the financialliteracy requirements of the New York Stock Exchange. Our board of directorshas also determined that Mr. Castillo is independent, as that term isdefined in the listing rules of the New York Stock Exchange.

 

**ITEM16B.       Code of Ethics**

 

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.

 

**ITEM16C.       Principal Accountant Fees and Services**

 

**Auditand Non-Audit Fees**

 

For the fiscal yearsended December 31, 2008 and 2007, our auditors continued to be Mancera,S.C., a member 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 ended December 31,2008 and 2007, respectively:

 
| ** **          | ** ** | **Years ended December 31,**             | ** ** |
|---------------------|------------|---------------------------------------------------------|------------|
| ** **          | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **          | ** ** | **(in thousands of Mexican pesos)** | ** ** |
| Audit  fees         |       | Ps.                                                     | 17,296     |   | Ps. | 20,071 |   |
| Audit-related  fees |       | —                                                  |       | 1,325 |   |
| Tax  fees           |       | 2,247                                                   |       | 1,609 |   |
| Total  fees         |       | Ps.                                                     | 19,543     |   | Ps. | 23,005 |   |

 

*Auditfees*. Audit feesin the 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.  Amounts presented for 2008 include Ps. 1,659 corresponding toadditional fees from the audit of 2007, which were agreed and billed after wefiled the 20-F for the year ended December 31, 2007.

 

*Audit-relatedfees.* Audit-related fees in the above table are fees billed by Mancera, S.C. for thereview of pro forma financial information related to contemplated businessactivities. This section also includes fees related to financial due diligencefees paid to other Ernst & Young affiliated firms for internationalexpansion activities.

 

*Taxfees*.  Taxfees in the above table include the aggregate fees billed by Mancera, S.C. forthe review of reports on our transfer pricing study, and fees paid to Mancera,S.C. and other Ernst & Young affiliated firms for international taxservices.

 

**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.

 

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**ITEM16D.       Exemptions from the Listing Standardsfor Audit Committees.**

 

Not applicable.

 

**ITEM16E.       Purchases of Equity Securities by theIssuer and Affiliated Purchasers.**

 

The followingtable sets out certain information concerning purchases of our shares by us andaffiliated purchasers in 2008:

 

**Issuer Purchases of Equity Securities**

**(for the fiscal year ended December 31, 2008)**

 
| **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   |       | 17,142,857                                             | (1)        | $                                               | 8.75       |                                                                                                           |       |                                                                                                                                   |       |   |   |
| March      |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| April      |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| May        |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| June       |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| July       |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| August     |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| September  |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| October    |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| November   |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| December   |       | —                                                 |       | —                                          |       |                                                                                                           |       |                                                                                                                                   |       |
| Total      |       | 17,142,857                                             |       | $                                               | 8.75       |                                                                                                           |       |                                                                                                                                   |       |   |
|            |            |                                                        |            |                                                 |            |                                                                                                                |            |                                                                                                                                        |            |  |  |

 

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| (1) | On February 7, 2008, the de Nicolás family  Trust acquired 17,142,857 Shares from EIP Investment Holdings LLC Comm V.A.  for US$150,000,000. See “Item 7. Major Shareholders and Related Party  Transactions—Major Shareholders.” |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM16F.       Change of Certifying Accountant**

** **

Not applicable.

 

**ITEM 16G.      Corporate Governance**

 

As a foreign privateissuer with 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 Mexicancorporation with shares listed on the*BolsaMexicana de Valores*, or Mexican Stock Exchange. Our corporategovernance practices are governed by our bylaws, the New Mexican SecuritiesMarket Law, and the general dispositions issued by the CNBV and the MexicanStock Exchange. Although compliance is not mandatory, we also substantiallycomply with the Mexican Code of Best Corporate Practices (*Código de Mejores Prácticas Corporativas*),as amended in 2006.

 

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The table below setsforth a description 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.                                                                                                                                                                                                    |
|                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                                                                                                                                      |
| 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**

 

**ITEM17.       Financial Statements.**

 

Not applicable.

 

**ITEM18.       Financial Statements.**

 

See pages F-1through F-6, incorporated herein by reference.

 

87

----

 

**ITEM19.       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. ***                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 8                    |       | List of Principal  Subsidiaries.***                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 12(a)(1)             |       | CEO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 29,  2009.                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 12(a)(2)             |       | CFO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 29,  2009.                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 13                   |       | Officer Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated June 29,  2009.                                                                                                                                                                                      |

 

----

|  * | 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.                    |

 

88

----

 

**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 29,  2009 |                                             |

 

89

----

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders

Desarrolladora Homex, S.A.B. de C.V.

 

We have audited the accompanying consolidatedbalance sheets of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries as of December 31,2008 and 2007, and the related consolidated statements of income and changes instockholders’ equity for each of the three years ended December 31, 2008,the related consolidated statement of cash flows for the year ended December 31,2008, and the related consolidated statements of changes in financial positionfor each of the two years ended December 31, 2007. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour 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 statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries at December 31,2008 and 2007, and the consolidated results of their operations and cash flowsfor the year ended December 31, 2008, and the consolidated results oftheir operations and changes in their financial position for each of the twoyears ended December 31, 2007, in conformity with Mexican FinancialReporting Standards, which differ in certain respects from accounting principlesgenerally accepted in the United States of America (see Notes 28 and 29 to theconsolidated financial statements).

 

F-1

----

 

As disclosed in Note 3 to the accompanyingconsolidated financial statements, during 2008, the Company adopted MexicanFinancial Reporting Standard (“MFRS”) B-2 *Statement of Cash Flows*,MFRS B-10 *Effects of Inflation, MFRS D-3 Employee Benefits,*andcertain other*MFRS.*As is also disclosed inNote 3 to the accompanying consolidated financial statements, during 2007, theCompany adopted the provisions of MFRS D-6 *Capitalization of thecomprehensive financing cost. *Theapplication of all of these standards 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 financialreporting as of December 31, 2008, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated June 262009, 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. Carlos Alberto Rochín Casanova |

 

Culiacan, MexicoJune 26, 2009

 

F-2

----

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

**Consolidatedbalance sheets**

(Figures inthousands of Mexican pesos (Ps.))

 
| ** **                                                    | ** ** | **2008**        | ** **    | ** **                  | ** ** | ** **     | ** ** |
|---------------------------------------------------------------|------------|-----------------|---------------|-----------------------------|------------|----------------|------------|
| ** **                                                    | ** ** | **Convenience** | ** **    | ** **                  | ** ** | ** **     | ** ** |
| ** **                                                    | ** ** | **Translation** | ** **    | **As of December 31,** | ** ** |
| ** **                                                    | ** ** | **(Note 2a)**   | ** **    | **2008**                    | ** ** | **2007**       | ** ** |
| **As****sets**                                                |       |            |          |                        |       |           |       |
| Current assets:                                               |       |            |          |                        |       |           |       |
| Cash and cash  equivalents (Note 4)                           | ** ** | **$**           | **82,776**    | ** **                  | **Ps.**    | **1,140,140**  |       | Ps. | 2,206,834 |   |
| Restricted cash  (Note 4)                                     | ** ** | **9,296**       | ** **    | **128,045**                 |       | 156,090        |       |
| Trade accounts  receivable, net (Note 5)                      | ** ** | **860,005**     | ** **    | **11,845,530**              |       | 7,549,258      |       |
| Inventories  (Note 6)                                         | ** ** | **370,764**     | ** **    | **5,106,832**               |       | 4,392,039      |       |
| Prepaid expenses  and other current assets, net (Note 7)      | ** ** | **31,018**      | ** **    | **427,238**                 |       | 490,354        |       |
| Total current assets                                          | ** ** | **1,353,859**   | ** **    | **18,647,785**              |       | 14,794,575     |       |
|                                                          | ** ** | ** **      | ** **    | ** **                  |       |           |       |
| Land held for  future development (Note 6)                    | ** ** | **671,889**     | ** **    | **9,254,469**               |       | 7,091,074      |       |
| Property and  equipment, net (Note 8)                         | ** ** | **101,855**     | ** **    | **1,402,928**               |       | 1,155,729      |       |
| Goodwill (Note  3j)                                           | ** ** | **53,134**      | ** **    | **731,861**                 |       | 731,861        |       |
| Other assets,  net (Note 9)                                   | ** ** | **34,005**      | ** **    | **468,369**                 |       | 416,017        |       |
| Total assets                                                  | ** ** | **$**           | **2,214,742** | ** **                  | **Ps.**    | **30,505,412** |       | Ps. | 24,189,256 |   |
|                                                          |       |            |          |                        |       |           |       |
| **Liabilities  and stockholders’ equity**                | ** ** | ** **      | ** **    | ** **                  | ** ** | ** **     | ** ** |
| Current  liabilities:                                         |       |            |          |                        |       |           |       |
| Current debt and  current portion of long-term debt (Note 10) | ** ** | **$**           | **102,906**   | ** **                  | **Ps.**    | **1,417,404**  |       | Ps. | 260,758 |   |
| Current portion  of leases (Note 12)                          | ** ** | **6,480**       | ** **    | **89,255**                  |       | 68,187         |       |
| Trade accounts  payable (Note 14)                             | ** ** | **290,831**     | ** **    | **4,005,853**               |       | 3,456,269      |       |
| Land suppliers  (Note 15)                                     | ** ** | **168,874**     | ** **    | **2,326,036**               |       | 2,754,906      |       |
| Advances from  customers                                      | ** ** | **26,569**      | ** **    | **365,962**                 |       | 279,823        |       |
| Taxes other than  income taxes                                | ** ** | **25,978**      | ** **    | **357,821**                 |       | 79,494         |       |
| Income taxes                                                  | ** ** | **9,376**       | ** **    | **129,141**                 |       | 32,992         |       |
| Employee  statutory profit-sharing                            | ** ** | **5,115**       | ** **    | **70,445**                  |       | 35,163         |       |
| Total current  liabilities                                    | ** ** | **636,129**     | ** **    | **8,761,917**               |       | 6,967,592      |       |
|                                                          | ** ** | ** **      | ** **    | ** **                  |       |           |       |
| Long-term debt  (Note 10)                                     | ** ** | **434,892**     | ** **    | **5,990,119**               |       | 3,098,786      |       |
| Long-term leases  (Note 12)                                   | ** ** | **22,844**      | ** **    | **314,639**                 |       | 288,857        |       |
| Financial  instruments (Note 11)                              | ** ** | **—**      | ** **    | **—**                  |       | 79,098         |       |
| Other long-term  liabilities (Note 25)                        | ** ** | **1,336**       | ** **    | **18,403**                  |       | —         |       |
| Long-term land  suppliers (Note 15)                           | ** ** | **29,435**      | ** **    | **405,426**                 |       | 992,801        |       |
| Employee  benefits obligations (Note 13)                      | ** ** | **6,182**       | ** **    | **85,150**                  |       | 79,097         |       |
| Deferred income  taxes (Note 23)                              | ** ** | **247,753**     | ** **    | **3,412,501**               |       | 2,841,895      |       |
| Total  liabilities                                            | ** ** | **1,378,571**   | ** **    | **18,988,155**              |       | 14,348,126     |       |
|                                                          | ** ** | ** **      | ** **    | ** **                  |       |           |       |
| Stockholders’  equity (Note 16):                         | ** ** | ** **      | ** **    | ** **                  |       |           |       |
| Common stock                                                  | ** ** | **38,334**      | ** **    | **528,011**                 |       | 528,011        |       |
| Additional  paid-in capital                                   | ** ** | **238,149**     | ** **    | **3,280,223**               |       | 3,280,223      |       |
| Shares repurchased for employee stock option plan,  at cost   | ** ** | **(7,212**      | **)**         | **(99,342**                 | **)**      | (99,342        | )          |
| Retained  earnings                                            | ** ** | **545,145**     | ** **    | **7,508,715**               |       | 5,581,198      |       |
| Other  stockholders’ equity accounts                     | ** ** | **3,870**       | ** **    | **53,307**                  |       | 342,828        |       |
| Majority  stockholders’ equity                           | ** ** | **818,286**     | ** **    | **11,270,914**              |       | 9,632,918      |       |
| Minority  interest in consolidated subsidiaries               | ** ** | **17,885**      | ** **    | **246,343**                 |       | 208,212        |       |
| Total  stockholders’ equity                              | ** ** | **836,171**     | ** **    | **11,517,257**              |       | 9,841,130      |       |
| Total  liabilities and stockholders’ equity              | ** ** | **$**           | **2,214,742** | ** **                  | **Ps.**    | **30,505,412** |       | Ps. | 24,189,256 |   |

 

See accompanying notes tothese consolidated financial statements.

 

F-3

----

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

 

**Consolidatedstatements of income**

 

(Figures inthousands of Mexican pesos (Ps.) except earnings per share)

 
| ** **                                                     | ** ** | **2008**        | ** **    | ** **                                 | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------|---------------|--------------------------------------------|------------|----------------|------------|------------|------------|
| ** **                                                     | ** ** | **Convenience** | ** **    | ** **                                 | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **translation** | ** **    | **For the years ended  December 31,** | ** ** |
| ** **                                                     | ** ** | **(Note 2a)**   | ** **    | **2008**                                   | ** ** | **2007**       | ** ** | **2006**   | ** ** |
|                                                           | ** ** |            | ** **    |                                       | ** ** |           | ** ** |       | ** ** |
| Revenues  (Note 3b)                                            | ** ** | **$**           | **1,368,576** | ** **                                 | **Ps.**    | **18,850,496** |       | Ps.        | 16,222,524 |   | Ps. | 13,439,519 |   |
| Cost  of sales (Note 3b)                                       | ** ** | **978,180**     | ** **    | **13,473,257**                             |       | 11,041,456     |       | 9,191,005  |       |
| Gross  profit                                                  | ** ** | **390,396**     | ** **    | **5,377,239**                              |       | 5,181,068      |       | 4,248,514  |       |
| Operating  expenses (Note 20)                                  | ** ** | **172,621**     | ** **    | **2,377,646**                              |       | 1,798,429      |       | 1,359,147  |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Income  from operations                                        | ** ** | **217,775**     | ** **    | **2,999,593**                              |       | 3,382,639      |       | 2,889,367  |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Other  (expenses) income, net (Note 21)                        | ** ** | **(7,980**      | **)**         | **(109,926**                               | **)**      | 209,223        |       | 11,004     |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Net  comprehensive financing cost (Note 6):                    | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Interest  expense (Note 22)                                    | ** ** | **17,209**      | ** **    | **237,033**                                |       | 344,928        |       | 674,579    |       |
| Interest  income                                               | ** ** | **(11,424**     | **)**         | **(157,351**                               | **)**      | (140,202       | )          | (108,792   | )          |
| Exchange  loss                                                 | ** ** | **11,968**      | ** **    | **164,841**                                |       | 26,782         |       | 46,501     |       |
| Valuation  effects of derivative instruments (Note 11)         | ** ** | **22,794**      | ** **    | **313,962**                                |       | (147,977       | )          | 101,895    |       |
| Monetary  position loss (Note 3a)                              | ** ** | **—**      | ** **    | **—**                                 |       | 195,373        |       | 76,786     |       |
|                                                           | ** ** | **40,547**      | ** **    | **558,485**                                |       | 278,904        |       | 790,969    |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Income  before income tax                                      | ** ** | **169,248**     | ** **    | **2,331,182**                              |       | 3,312,958      |       | 2,109,402  |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Income  tax (Note 23)                                          | ** ** | **51,705**      | ** **    | **712,175**                                |       | 951,280        |       | 669,843    |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Consolidated  net income                                       | ** ** | **$**           | **117,543**   | ** **                                 | **Ps.**    | **1,619,007**  |       | Ps.        | 2,361,678  |   | Ps. | 1,439,559 |   |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Net  income of majority stockholders                           | ** ** | **$**           | **114,774**   | ** **                                 | **Ps.**    | **1,580,876**  |       | Ps.        | 2,233,066  |   | Ps. | 1,391,281 |   |
| Net  income of minority stockholders                           | ** ** | **2,769**       | ** **    | **38,131**                                 |       | 128,612        |       | 48,278     |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Consolidated  net income                                       | ** ** | **$**           | **117,543**   | ** **                                 | **Ps.**    | **1,619,007**  |       | Ps.        | 2,361,678  |   | Ps. | 1,439,559 |   |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Weighted  average shares outstanding (in thousands)            | ** ** | **334,870**     | ** **    | **334,870**                                |       | 335,688        |       | 335,869    |       |
|                                                           | ** ** | ** **      | ** **    | ** **                                 |       |           |       |       |       |
| Basic and  diluted earnings per share of majority stockholders | ** ** | **$**           | **0.34**      | ** **                                 | **Ps.**    | **4.72**       |       | Ps.        | 6.65       |   | Ps. | 4.14 |   |

 

See accompanying notes tothese consolidated financial statements.

 

F-4

----

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

 

**Consolidatedstatements of changes in stockholders’ equity**

 

For the yearsended December 31, 2008, 2007 and 2006

 

(Figures inthousands of Mexican pesos (Ps.))

 
| ** **                                                                                   | ** ** | **Common  stock** | ** **  | **Additional  paid-in  capital** | ** ** | **Shares  repurchased   for employee   stock option   plan** | ** ** | **Retained  earnings** | ** **  | **Other  stockholders’  equity  accounts** | ** ** | **Total Majority  stockholders’   equity** | ** ** | **Minority  interest in  consolidated  subsidiaries** | ** ** | **Total  stockholders’  equity  (Note 16)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------|-------------|----------------------------------|------------|--------------------------------------------------------------|------------|------------------------|-------------|-------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                                                         | ** ** | ** **        | ** **  | ** **                       | ** ** | ** **                                                   | ** ** | ** **             | ** **  | ** **                                      | ** ** | ** **                                      | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** |
| Balances  as of January 1, 2006                                                         |       | Ps.               | 528,011     |                             | Ps.        | 3,280,223                                                    |       |                   |        | Ps.                                             | 1,956,851  |                                            | Ps.        | 337,779                                                    |       | Ps.                                                   | 6,102,864  |   | Ps. | 40,455 |   | Ps. | 6,143,319 |   |
| Comprehensive  income                                                                        |       |              |        |                             |       |                                                         |       | 1,391,281              |        | 9,626                                           |       | 1,400,907                                       |       | 48,278                                                     |       | 1,449,185                                             |       |
| Balances  as of December 31, 2006                                                       |       | 528,011           |        | 3,280,223                        |       |                                                         |       | 3,348,132              |        | 347,405                                         |       | 7,503,771                                       |       | 88,733                                                     |       | 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 and13)                             | ** ** | ** **        | ** **  | ** **                       | ** ** | ** **                                                   | ** ** | ** **             | ** **  | **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**                                                   | ** ** | **Ps.**           | **528,011** | ** **                       | **Ps.**    | **3,280,223**                                                | ** ** | **Ps.**                | **(99,342** | **)**                                           | **Ps.**    | **7,508,715**                                   | ** ** | **Ps.**                                                    | **53,307** | ** **                                            | **Ps.**    | **11,270,914** | ** ** | **Ps.** | **246,343** | ** ** | **Ps.** | **11,517,257** | ** ** |

 

See accompanying notes tothese consolidated financial statements.

 

F-5

----

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

 

**Consolidatedstatement of cash flows**

 

(In thousands ofMexican pesos (Ps.))

 
| ** **                                                                       | ** ** | **2008**                   | ** **  | ** **                                     | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|-------------|------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Convenience**            | ** **  | ** **                                     | ** ** |
| ** **                                                                       | ** ** | **translation  (Note 2a)** | ** **  | **For the year ended  December 31, 2008** | ** ** |
| **Cash flows generated by (used in)  operating activities**                      | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| Income before income tax                                                         | ** ** | **$**                      | **169,248** | ** **                                     | **Ps.**    | **2,331,182** | ** ** |
| Items related to investing  activities:                                          | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| Depreciation and  amortization                                                   | ** ** | **30,857**                 | ** **  | **425,021**                                    | ** ** |
| Gain on sale of property  and equipment                                          | ** ** | **(637**                   | **)**       | **(8,771**                                     | **)**      |
| Interest income                                                                  | ** ** | **(11,424**                | **)**       | **(157,351**                                   | **)**      |
| Items related to financing  activities:                                          | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| Interest expense                                                                 | ** ** | **48,191**                 | ** **  | **663,765**                                    | ** ** |
| Valuation effects of  derivative instruments                                     | ** ** | **22,794**                 | ** **  | **313,962**                                    | ** ** |
| Deferred profit-sharing                                                          | ** ** | **222**                    | ** **  | **3,061**                                      | ** ** |
| Exchange loss                                                                    | ** ** | **51,946**                 | ** **  | **715,500**                                    | ** ** |
| ** **                                                                       | ** ** | **311,197**                | ** **  | **4,286,369**                                  | ** ** |
| ** **                                                                       | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| Increase in trade accounts  receivable                                           | ** ** | **(311,916**               | **)**       | **(4,296,272**                                 | **)**      |
| Increase in inventories  and land held for future developments                   | ** ** | **(208,961**               | **)**       | **(2,878,188**                                 | **)**      |
| Decrease in prepaid  expenses and other assets                                   | ** ** | **6,724**                  | ** **  | **92,611**                                     | ** ** |
| Interest income collected                                                        | ** ** | **11,424**                 | ** **  | **157,351**                                    | ** ** |
| Increase in trade accounts  payable                                              | ** ** | **31,151**                 | ** **  | **429,063**                                    | ** ** |
| Decrease in accounts  payable to land suppliers                                  | ** ** | **(73,781**                | **)**       | **(1,016,245**                                 | **)**      |
| Increase in other  liabilities                                                   | ** ** | **30,358**                 | ** **  | **418,151**                                    | ** ** |
| Increase in employee  benefits obligations                                       | ** ** | **2,922**                  | ** **  | **40,242**                                     | ** ** |
| Payments of derivative  instruments                                              | ** ** | **(24,751**                | **)**       | **(340,912**                                   | **)**      |
| Income tax paid                                                                  | ** ** | **(8,969**                 | **)**       | **(123,531**                                   | **)**      |
| Net cash flows from  operating activities                                        | ** ** | **(234,602**               | **)**       | **(3,231,361**                                 | **)**      |
|                                                                             | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| **Cash flows generated by (used in)  investing activities**                      | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| Increase in the investment  in associate                                         | ** ** | **(2,013**                 | **)**       | **(27,727**                                    | **)**      |
| Acquisition of property  and equipment                                           | ** ** | **(40,927**                | **)**       | **(563,723**                                   | **)**      |
| Proceeds from sale of  property and equipment                                    | ** ** | **7,167**                  | ** **  | **98,720**                                     | ** ** |
| Net cash flows from  investing activities                                        | ** ** | **(35,773**                | **)**       | **(492,730**                                   | **)**      |
|                                                                             | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| **Cash flows generated by (used in)  financing activities**                      | ** ** | ** **                 | ** **  | ** **                                     | ** ** |
| Proceeds from new  borrowings                                                    | ** ** | **663,962**                | ** **  | **9,145,280**                                  | ** ** |
| Payments of notes payable                                                        | ** ** | **(425,522**               | **)**       | **(5,861,061**                                 | **)**      |
| Interest paid                                                                    | ** ** | **(48,339**                | **)**       | **(665,807**                                   | **)**      |
| Net cash flows from  financing activities                                        | ** ** | **190,101**                | ** **  | **2,618,412**                                  | ** ** |
| Net decrease of cash and  cash equivalents                                       | ** ** | **(80,274**                | **)**       | **(1,105,679**                                 | **)**      |
| Translation adjustment                                                           | ** ** | **794**                    | ** **  | **10,940**                                     | ** ** |
| Cash, cash equivalents and  restricted cash at the beginning of the year **(1)** | ** ** | **171,552**                | ** **  | **2,362,924**                                  | ** ** |
| Cash, cash equivalents and  restricted cash at the end of the year **(1)**       | ** ** | **$**                      | **92,072**  | ** **                                     | **Ps.**    | **1,268,185** | ** ** |

 

----

**(1)**     This balance is composed by Ps. 1,140,140 of cash andcash equivalents and Ps. 128,045 of restricted cash as of December 31,2008 (Ps. 2,206,834 and Ps. 156,090 as of December 31, 2007,respectively).

 

See accompanying notes to these consolidated financialstatements.

 

F-6

----

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

 

**Consolidatedstatements of changes in financial position**

 

(In thousands ofMexican pesos (Ps.))

 
| ** **                                             | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| **Operating activities**                               |       |                                       |       |   |   |
| Consolidated  net income                               |       | Ps.                                        | 2,361,678  |   | Ps. | 1,439,559 |   |
| Add  items that did not require the uses of resources: |       |                                       |       |   |   |
| Depreciation                                           |       | 196,307                                    |       | 130,829 |   |
| Amortization  of intangibles                           |       | 105,410                                    |       | 114,529 |   |
| Labor  obligations                                     |       | 18,416                                     |       | 19,347 |   |
| Deferred  income taxes, net of inflation               |       | 818,407                                    |       | 526,539 |   |
|                                                   |       | 3,500,218                                  |       | 2,230,803 |   |
| Changes  in operating assets and liabilities:          |       |                                       |       |   |   |
| (Increase)  decrease in:                               |       |                                       |       |   |   |
| Trade  accounts receivable                             |       | (2,008,172                                 | )          | 151,277 |   |
| Inventories  and land held for future development      |       | (2,090,087                                 | )          | (3,503,491 | ) |
| Other  assets                                          |       | (124,375                                   | )          | 227,385 |   |
| Increase  (decrease) in:                               |       |                                       |       |   |   |
| Trade  accounts payable                                |       | 1,321,131                                  |       | 559,288 |   |
| Land  suppliers                                        |       | 245,812                                    |       | 1,623,150 |   |
| Taxes  payable                                         |       | (154,829                                   | )          | (81,775 | ) |
| Other  liabilities                                     |       | (29,529                                    | )          | 100,450 |   |
| Net  resources generated by operating activities       |       | 660,169                                    |       | 1,307,087 |   |
|                                                   |       |                                       |       |   |   |
| **Financing activities**                               |       |                                       |       |   |   |
| Proceeds  from new borrowings                          |       | 2,647,276                                  |       | 1,650,970 |   |
| Payments  of notes payable                             |       | (2,408,739                                 | )          | (1,746,935 | ) |
| Changes  in fair value of financial instrument         |       | (147,976                                   | )          | 99,401 |   |
| Debt  issuance costs                                   |       | —                                     |       | (12,994 | ) |
| Share  repurchase for employee stock option plan       |       | (99,342                                    | )          | — |   |
| Dividends  paid by subsidiary company                  |       | (9,133                                     | )          | — |   |
| Net resources  used in financing activities            |       | (17,914                                    | )          | (9,558 | ) |
| **Investing  activities**                              |       |                                       |       |   |   |
| Restricted  cash                                       |       | (118,493                                   | )          | (37,597 | ) |
| Investment  in associates                              |       | (17,869                                    | )          | — |   |
| Acquisition  of property and equipment, net            |       | (680,748                                   | )          | (302,392 | ) |
| Net  resources used in investing activities            |       | (817,110                                   | )          | (339,989 | ) |
|                                                   |       |                                       |       |   |   |
| Cash  and cash equivalents:                            |       |                                       |       |   |   |
| Net  (decrease) increase                               |       | (174,855                                   | )          | 957,540 |   |
| Balance  at beginning of year                          |       | 2,381,689                                  |       | 1,424,149 |   |
| Balance  at end of year                                |       | Ps.                                        | 2,206,834  |   | Ps. | 2,381,689 |   |

 

See accompanying notes tothese consolidated financial statements.

 

F-7

----

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**ANDSUBSIDIARIES**

 

**Notes toconsolidated financial statements**

 

For the yearsended December 31, 2008 and 2007

 

(Figures as of December 31,2008 in thousands of Mexican pesos (Ps.),

 except as otherwise indicated)

**1. Nature of business**

 

Desarrolladora Homex,S.A.B. de C.V. and its subsidiaries (the “Company”) is comprised of a group ofcompanies engaged mainly in the promotion, design, development, constructionand sale of affordable entry level and middle income residential housing. Allsales are made in Mexico.

 

To carry out its activities, the Companyengages in land acquisition, obtaining permits and licenses, designing,constructing, marketing and selling homes, obtaining individual financing forits customers and developing communities to satisfy housing needs in Mexico.

 

The Company participatesin housing supply offers from the main housing funds in Mexico, such as theNational Workers’ Housing Fund, or Instituto Nacional del Fondo de Ahorro parala Vivienda de los Trabajadores (“INFONAVIT”), the Social Security and ServicesInstitute Public-Segment Workers’ Housing Fund, or Fondo de la Vivienda delInstituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (“FOVISSSTE”)and the governmental mortgage providers such as the Federal Mortgage Society,or Sociedad Hipotecaria Federal (“SHF”). Additionally, the Company participatesin the market, where mortgage financing is provided by commercial banks andcash transactions.

 

For the years ended December 31,2008, 2007 and 2006, revenues obtained through INFONAVIT mortgage financingaccounted for 76%, 75% and 75% respectively, of the Company’s total revenues,with other sources accounting for 24%, 25% and 25%, respectively.

 

Homex’soperations include 112 developments in 32 cities located in 20 Mexican states,which states represent 74.4% of Mexico’s population, according to the MexicanInstitute of Statistics, Geography and Computer Sciences, or INEGI (InstitutoNacional de Estadistica, Geografia e Informatica). In 2008, 35% of Homex’srevenues originated in the Mexico City Metropolitan Area, the largest city inMexico, and 8% in Guadalajara, the second largest city. The remaining revenueswere originated throughout 30 cities.

 

The Company’s operationsare on a seasonal basis: normally, the highest volume of sales takes place inthe second half of the year. Construction times of real-estate developmentsvary depending on the type of housing: entry-level, middle-income orupper-income; accordingly, construction revenues are recognized in differentfiscal years, and the revenues from work completed and generation of accountsreceivable fluctuate depending on the date of the beginning of the project andthat of its completion.

 

On April 22, 2008,the Financial Director (CFO), Carlos Moctezuma Velasco and the ControllingDirector, Ramón Lafarga Bátiz, authorized the issuance of the Company’sconsolidated Mexican Financial Reporting Standards (Mexican FRS) financialstatements and notes as of December 31, 2008 and 2007 and for each of thethree years in the period ended December 31, 2008. Those consolidatedfinancial statements have been approved by the Audit Committee and the Board ofDirectors on April 26, 2009, and by the Company’s stockholders at itsmeeting held on April 29, 2009.

 

The accompanyingconsolidated financial statements which consist of those Mexican FRSconsolidated financial statements and notes, as supplemented by theaccompanying US GAAP disclosures presented in Notes 28 and 29, wereauthorized for issuance herein by Gerardo de Nicolás (CEO), the CFO and theControlling Director on June 26, 2009.

 

F-8

----

** **

**2. Basisof preparation**

 

**a) Convenience translation**

 

The financial statements are stated in Mexicanpesos, the currency of the country in which the Company is incorporated andoperates. The statements’ translations ofMexican pesos into US dollar amounts are included solely for the convenience ofreaders in the United States of America and have been made at the rate ofPs.13.7738 per one US dollar. Such translations should not be construed asrepresentations that the Mexican peso amounts have been, could have been, orcould in the future be, converted into US dollars at this or any other exchangerate.

** **

**b) Consolidation of financial statements**

 

The consolidatedfinancial statements include those of Desarrolladora Homex, S.AB. de C.V. andits subsidiaries, whose shareholding percentage in their capital stock is shownbelow:

 
| ** **                                                                  | ** ** | **Ownership percentage** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|------------|
| **Company**                                                                 | ** ** | **2008**                 | ** ** | **2007**   | ** ** | **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. (4)                                   | ** ** | **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**                  | **%**      | —     |   | Promotion, design, construction and sale of upper-income  tourism housing |
| Homex Central Marcaria, S.A. de C.V. (5)                                    | ** ** | **100**                  | **%**      | —     |   | Administration of industrial and intellectual  property |

 

F-9

----

 

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. owns 100% of the outstandingstock of Comercializadora Cántaros, S.A. de C.V. and Super Abastos Centrales yComerciales, S.A. de C.V. and 50% of the outstanding stock of PromotoraResidencial Huehuetoca, S.A. de C.V. (Huehuetoca), which are engaged in thepromotion, design, construction and sale of entry-level housing. Huehuetoca isfully consolidated in accordance Bulletin B-8 *Consolidatedand Combined Financial Statements and Valuation of Permanent Investments*(MFRSB-8), since the Company has control over this subsidiary.

 

(2)                   Hogares del Noroeste, S. A. de C.V. is a 50% owned and controlledsubsidiary of Desarrolladora Homex, S.A.B. de C.V., which is engaged in thepromotion, design, construction and sale of entry-level and middle-incomehousing. This entity is fully consolidated in accordance with MFRS B-8, sincethe Company has control over this subsidiary.

 

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

 

(a)                   Effective March 2008, Homex Global owns 100% of the outstandingstock of Homex India Private Limited, a subsidiary located in India and thatperforms the construction and development of entry-level and middle-incomehousing in India. This company had no significant operations during 2008.

 

(b)                   Effective September 2007, Homex Global owns 15% of the outstandingstock of Orascom Housing Communities “S.A.E.”, an associated company located inCairo, Egypt that performs the construction and development of entry-level andmiddle-income housing in Egypt.

 

(c)                    Effective February 2008, Homex Global owns 100% of the outstandingstock of Desarrolladora de Sudamérica, S.A. de C.V., a Mexican company that hadno operations during 2008.

 

(d)                  Effective November 2008, Homex Global owns 100% of the outstandingcommon stock of Homex Brasil Incorporacoes a Construcoes Limitada (HomexBrasil), through its subsidiaries Éxito Construcoes e Participacoes Limitadaand HMX Empreendimentos Imobiliarios Limitada. Homex Brasil intends to performconstruction and development of entry-level and middle-income housing in SaoPaulo, Brazil. However, it had no significant operations during 2008.

 

(4)               Thesecompanies were incorporated in 2007; however, they had no significantoperations during 2007 and 2008.

 

(5)               Thesecompanies were incorporated in 2008; however, they had no significantoperations during 2008.

 

F-10

----

** **

**3. Summary of significant accounting policies**

 

The accompanyingconsolidated financial statements were prepared in conformity with MexicanFinancial Reporting Standards (MFRS).

 

**a) New accounting policies**

 

The most relevant standards that came into force in 2008 are describedbelow:

 

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

 

In November 2007, MFRS B-2 was issued by the Consejo Mexicano parala Investigación y Desarrollo de Normas de la Información Financiera, A.C.(Mexican Financial Information Standards Research Development Board or “CINIF”)to replace 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 are not eliminated.

 

MFRS B-2 establishes that in the statement of cash flows, the entitymust first present cash flows derived from operating activities, then frominvesting activities, the sum of these activities and finally cash flowsderived from financing activities. The statement of changes in financialposition first shows the entity’s operating activities, then financingactivities and finally its investing activities. Under this new standard, thestatement of cash flows may be determined by applying the direct or indirectmethod.

 

The transitory rules ofMFRS B-2 establish that the application of this standard is prospective.Therefore, the financial statements for years ended prior to 2008 include astatement of changes in financial position, as previously established by Mexicanaccounting Bulletin B-12.

 

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

 

InJuly 2007, the CINIF issued MFRS B-10, *Effectsof Inflation*. MFRS B-10 defines the two economic environments inMexico that will determine whether or not entities must recognize the effects ofinflation on financial information: i) inflationary, when inflation is equal toor higher than 26%; accumulated in the preceding three fiscal years (an 8%annual average); and ii) non-inflationary, when accumulated inflation for thepreceding three fiscal years is less than the aforementioned accumulated 26%.Based on these definitions, the effects of inflation on financial informationmust be recognized only when entities operate in an inflationary environment.

 

F-11

----

 

Thisstandard also establishes the accounting rules applicable whenever theeconomy changes from any type of environment to another. When the economychanges from an inflationary environment to a non-inflationary one, the entitymust maintain in its financial statements the effects of inflation recognizedthrough the immediate prior year, since the amounts of prior periods are takenas the base amounts of the financial statements for the period of change andsubsequent periods. Whenever the economy changes from a non-inflationaryenvironment to an inflationary one, the effects of inflation on the financialinformation are recognized retrospectively, meaning that all information forprior periods must be adjusted to recognize the accumulated effects ofinflation of the periods in which the economic environment was considerednon-inflationary.

 

Thisstandard also abolishes the use of the specific-indexation method for thevaluation of imported fixed assets and the replacement-cost method for the valuationof inventories, thus eliminating the result from holding non-monetary assets.

 

TheInterpretation 9 of MFRS establishes that comparative financial statements foryears prior to 2008 must be expressed in Mexican pesos with purchasing power atDecember 31, 2007, which was the last date on which the effects ofinflation were recognized.

 

Therealized result from holding non-monetary assets must be reclassified toretained earnings, while the unrealized portion must be maintained as suchwithin stockholders’ equity, and reclassified to results of operations when theasset giving rise to it is realized. Whenever it is deemed impractical toseparate the realized from the unrealized result from holding non-monetaryassets, the full amount of this item may be reclassified to the retainedearnings.

 

Theeffect of the adoption of this standard on the Company’s 2008 financialstatements is the Company’s ceasing to recognize the effects of inflation onits financial information; therefore no monetary result was determined. Theaccumulated monetary position as of December 31, 2007 that was Ps. 346,641was reclassified to the retained earnings.

 

**MFRS B-15, Foreign Currency Translation**

 

MFRS B-15 incorporatesthe concepts of recording currency, functional currency and reporting currency,and establishes the methodology to translate financial information of a foreignentity, based on those terms. Additionally, this rule is aligned with NIFB-10, which defines translation procedures of financial information fromsubsidiaries that operate in inflationary and non-inflationary environments.Prior to the application of this rule, translation of financial informationfrom foreign subsidiaries was according to inflationary environmentsmethodology.

 

The Company’s foreignoperations are insignificant at this time and thus the impact of the adoptionof this MFRS on the Company’s consolidated financial statements was alsoinsignificant.

 

**MFRS D-3, Employee Benefits**

 

MFRSD-3, *Employee Benefits* replacesthe previous MFRS accounting Bulletin D-3, *LaborObligations*. The most significant changes contained in MFRS D-3 areas follows:

 

i)              shorter periodsfor the amortization of unamortized items such as transition obligations, withthe option to credit or charge actuarial gains or losses directly to results ofoperations, as they accrue. As further disclosed in Note 13, during 2008 theCompany prospectively changed the amortization periods for its transitionliability from those of 10-22 year periods in prior years, to a four year periodstarting in 2008, resulting in Ps. 5,559 in additional labor costs beingrecognized in its 2008 statement of income as compared to prior periods;

 

F-12

----

 

ii)           elimination ofthe recognition of an additional liability and resulting recognition of anintangible asset and comprehensive income item. As further disclosed in Note13, upon the adoption of MFRS D-3 the Company reversed its intangible asset ofPs. 30,092 and additional liability of Ps. 34,189 resulting in a credit toshareholders equity of Ps. 4,097 in 2008;

 

iii) accounting treatment of current-year and deferred employeeprofit-sharing, requiring that deferred employee profit-sharing be recognizedusing the asset and liability method established under MFRS D-4. The Companyrecorded a deferred profit sharing asset of Ps. 29,667 upon adoption of MFRSD-3. That asset has been adjusted to a value of Ps. 26,606 as of December 31,2008; and

 

iv)       current-year anddeferred employee profit-sharing expense is to be presented as an ordinaryexpense in the income statement rather than as part of taxes on profits.

 

Theimpact of the adoption of MFRS D-3 is as indicated above.

 

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

 

TheCINIF also issued Mexican FRS D-4, *Taxes onProfits* which replacesMexican accounting Bulletin D-4 *Accountingfor Income Taxes, asset Tax and Employee Profit-sharing*. Themost significant changes attributable to MFRS D-4 are as follows:

 

i)                the concept ofpermanent differences is eliminated. The asset and liability method requiresthe recognition of deferred taxes on all differences in balance sheet accountsfor financial and tax reporting purposes, regardless of whether they arepermanent or temporary;

 

ii)             because currentand deferred employee profit-sharing is now considered as an ordinary expenseunder MFRS D-3, it is excluded from this standard;

 

iii)          asset taxes arerequired to be recognized as a tax credit and, consequently, as a deferredincome tax asset only in those cases in which there is certainty as to itsfuture realization; and

 

iv)         the cumulativeeffect of adopting Mexican accounting Bulletin D-4 is to be reclassified toretained earnings, unless it is identified with comprehensive items instockholders’ equity not yet taken to income.

 

Theapplication of this standard is prospective in nature. Therefore thecomparative financial statements from prior years were not modified. Theadoption of this MFRS did not have any effect on the Company’s consolidatedfinancial statements.

 

The most relevant standards that came into force in 2007 are describedbelow:

 

**MFRS B-3,**Statement of Income**

 

MFRSB-3 establishes the guidelines for classifying income, costs and expenses aseither ordinary or non-ordinary and modifies certain MFRS. The primary sectionsof the statement of income have been redefined to embody the concepts of “ordinaryitems” and the classification of income. Also, the caption Initial accumulatedeffect of accounting changes has been eliminated from such statement, asestablished in MFRS B-1, *Accounting Changesand Error Corrections*.

 

MFRSB-3 also allows entities to present costs and expenses in the statement ofoperations, based on their function or nature or a combination of both. MFRSB-3 does not require the presentation of operating income in the statement ofoperations, but still allows for it when operating income is deemed to be animportant indicator for evaluating a 

 

F-13

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particularentity’s performance. When an entity does decide to include the operatingincome caption, MFRS B-3 requires the disclosure of the items comprising suchcaption and a justification for its inclusion in the statement of income.

 

The Company decided to include the caption “Incomefrom Operations” in the consolidated statement of income since managementconsiders that these are significant indicators, conforming to the dispositionincluded in the recently issued Financial Reporting Standard Orientation No. 1,*Presentation or disclosure of the operating incomeor loss,* which establishes the general rules for thepresentation of the statement of income.

 

**MFRSB-13, Subsequent Events**

 

MFRSB-13 modifies the former rules relative to subsequent events byestablishing that certain events, such as the restructuring of assets andliabilities and the relinquishing of creditors of their collection rights inthe case of debt default, shall be disclosed in the notes to the financialstatements and recognized in the period in which they took place. Accordingly,the financial statements may no longer be adjusted to reflect these types ofsubsequent events.

 

The application of MFRSB-13 had no effect on the Company’s financial position or results ofoperations.

 

**MFRS C-13,Related Parties**

 

ThisMFRS broadens the concept of related parties to include immediate familymembers of key management personnel or directors, as well as funds derived fromlabor obligation plans. MFRS C-13 also requires the following disclosures: i)the relationship between the controlling company and its subsidiaries,irrespective of whether transactions were carried out between them in theperiod; ii) the name of the direct controlling company and, when different fromsuch, the name of the principal controlling company of the economic entity towhich the entity belongs; and iii) compensation granted to the entity’s keymanagement personnel or directors (in the case of public companies). Thisstandard allows entities to disclose, only when there are enough elements tosustain such an assertion, that the transactions carried out with relatedparties are on terms similar to market conditions.

 

The application of MFRS C-13 had no effect on theCompany’s financial position or results of operations.

 

**MFRS D-6,Capitalization of the Comprehensive Financing Cost**

 

MFRSD-6 establishes that entities must capitalize comprehensive financing cost(CFC), which had been optional, under Mexican accounting Bulletin C-6, *Property, Plant and Equipment*.

 

CapitalizedCFC is defined as the amount attributable to qualifying assets that could havebeen avoided if its acquisition had not taken place, which in the case ofMexican peso denominated financing, includes its interest and the net monetaryposition, and in the case of foreign currency denominated financing, it alsoincludes any exchange gain or losses. Qualifying assets are defined as thoseassets acquired by an entity requiring a prolonged period of time to carryoutthe activities to get them ready for their intended use, that are to be sold orleased that require a prolonged period to be acquired or readied for its saleor lease including inventories that require a period of time to take possessionor to get them in conditions for their sale. The capitalization of thecomprehensive result of financing starts and continues while investments forits acquisition are being made, the activities required for conditioning theasset for sale or use are underway and interest is being accrued.

 

MFRSD-6 establishes that the amount of capitalized CFC will be determined based onthe loans that were specifically used to acquire the qualifying assets, or ifsuch identification cannot be made, by applying the weighted averagecapitalization rate for financing to the weighted average number of investmentsin qualifying assets made during the acquisition period. Financing with imputedinterest cost may be capitalized against the cost of acquired assets, since thefinancing is recognized at its present value.

 

F-14

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Theapplication of MFRS D-6 for the years ended December 31, 2008 and 2007represented a decrease in CFC of Ps. 1,250,080 and Ps. 179,304, respectively,although Ps. 976,707 in 2008 and Ps. 119,286 in 2007 was ultimately charged tocost of sales as the underlying projects were sold. This standard is appliedprospectively, so 2008 and 2007 are not comparable to 2006.

 

**Interpretation8 of MFRS, Effects of the Flat-Rate Business Tax****(IETU)**

 

InDecember 2007, the CINIF issued the Interpretation 8 of MFRS, which iseffective for the reporting periods beginning on or after October 1, 2007.Such standard was created as a result of the need to clarify whether the newflat rate business tax (IETU) should be treated as a tax on profits and toestablish the guidelines for its accounting treatment.

 

MFRSinterpretation 8 establishes that the IETU is a tax on income; therefore itseffects should be recognized in conformity with the provisions of Mexicanaccounting Bulletin D-4, *Accounting forIncome Tax, Asset Tax and Employee Profit Sharing*, and as of January 1,2008, in conformity with MFRS D-4, *Taxes**on Profits*. Based on theconclusions of this Interpretation, an entity must first prepare financialprojections to determine whether its future taxable base would result in a IETUpayable or regular income tax payable. Based on the results of theseprojections, taxpayers will be able to identify the expected behavior of IETUand regular income tax.

 

Entitiesthat have determined that they will essentially pay IETU in future years mustrecognize the effects of deferred IETU in their financial statements datedbetween October 1 and December 31, 2007. This deferred tax mustcorrespond to the temporary differences and IETU credits existing in 2007 forwhich payment or recovery of IETU is expected as of or after 2008. Therefore,those entities that have determined that they will essentially pay IETU in thefuture must also eliminate the deferred income tax asset or liabilityrecognized at such date. These adjustments give rise to an expense or incomethat must be recognized in the 2007 statement of income as part of the captionTaxes on Income or in stockholders’ equity when it relates to othercomprehensive income (loss) items.

 

Thedeferred tax rate is the rate enacted and established in the tax provisions atthe date of the financial statements, which is expected to be in force at thetime the deferred IETU assets and liabilities will be realized (16.5% in 2008,17% in 2009 and 17.5% in 2010 and subsequent years).

 

DeferredIETU for the period must be recognized as a deferred tax expense or income inthe statement of income of the period as part of the tax on profits caption, orin stockholders’ equity for those amounts associated with comprehensive incomeitems, and as a non-current asset or long-term liability in the balance sheet.In the notes to the financial statements, the Company must disclose an analysisof the taxes on income presented in the statement of income, showing theamounts of current and deferred IETU expense. The entity must also mention thedeferred IETU related to other comprehensive items.

 

Basedon the IETU Law, an entity must determine the amount of asset tax generatedthrough 2007 that it will be able to recover as of 2008. This amount must berecognized in the 2007 financial statements as a tax account receivable and anyamount of asset tax considered unrecoverable must be recognized as an expensein the 2007 statement of income as part of the Taxes on income caption.Starting 2008, the balance of recoverable taxes must be reviewed on each financialstatement closing date and written down when there is evidence that someamounts may not be recoverable.

 

The effects of adopting this new accounting standard are described inNote 23.

 

F-15

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**b)****Revenue and cost recognition**

 

Revenues from the Company’sactivities as a developer are recorded pursuant to the percentage-of-completionmethod, measured by the percentage of actual costs incurred to total estimatedcosts for each development and each project. Under this method, the estimatedrevenue for each development and project is multiplied by such percentage todetermine the amount of revenue to be recognized. Management periodicallyevaluates the fairness of estimates used to determine the percentage of completion.If, as a result 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 followingconditions have been met:

 

·                                the homebuyer has submitted all required documents inorder to obtain the financing from the mortgage lender;

·                                the Company established that the homebuyer will obtainthe required financing from the mortgage lender;

·                                the homebuyer has signed a purchase application forthe processing and granting of a loan to buy a property to be used as housing;and

·                                the homebuyer has made a down payment, where downpayments are required.

 

Thecost of sales represents the cost incurred in the development of housingrevenues by the Company during the year. These costs include land, directmaterials, labor and all the indirect costs related to the development of theproject such as indirect labor, equipment, repairs, depreciation and thecapitalization of the comprehensive financing costs.

 

Refer to Note 26 for adiscussion of IMFRS 14 which will change the Company’s accounting for revenueand cost recognition beginning in 2010.

 

**c)****Recognition of the effects of inflation**

 

Effective January 1,2008 the Company adopted MFRS B-10, *Effects of Inflation*.Based on this Standard, the Company did not recognize the effects of inflationin the financial information for the year ended December 31, 2008. However,for prior period’s information of 2007 and 2006 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 over 2006, 2007 and 2008 is less than 26% andtherefore, in conformity with MFRS B-10, Mexico’s current economic environmentis considered non-inflationary and so the Company’s financial information for2008 was prepared without recognizing the effects of inflation. Interpretation9 of MFRS establishes that comparative financial statements for years prior to2008 must be expressed in Mexican pesos with purchasing power at December 31,2007, which was the last date on which the effects of inflation were recognized.Therefore amounts as of December 31, 2008 do not include inflationeffects, and the comparative figures as of December 31, 2007 and 2006, arestated in thousands of pesos as of December 31, 2007.

 

The consolidated statement of income, statement of changes instockholders’ equity and statement of changes in financial position for theyears ended December 31, 2006, which are presented for comparativepurposes, were restated to Mexican pesos of 2007 purchasing power. The factorused to restate the prior year balances was 1.037590, which is based on National Consumer Price Index or NCPI.

 

**d) Use ofestimates**

 

In conformity with MFRS,the preparation of financial statements requires the use of estimates andassumptions in certain areas.  Actualresults could differ from these estimates.

 

F-16

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**e) Cashand cash equivalents**

 

Cash and cash equivalentsconsist basically of bank deposits and highly liquid investments withmaturities of less than 90 days. These investments are stated at cost plusaccrued interest, which is similar to their market value.

 

**f)Allowance for doubtful accounts**

 

The Company’s policy isto provide for doubtful accounts based on balances of uncollected accountsreceivable, applying several percentages based on their aging status.

 

**g)Inventories and costs of sales**

 

Construction-in-process,construction materials and land for development and future development arerecorded at acquisition cost and until December 31, 2007 were restatedusing the NCPI. Cost of sales for the years ended December 31, 2007 and2006 was also restated by applying such index. The balance of this account issimilar to its market value.

 

Land for futuredevelopments refers to land reserves to be developed by the Company.

 

Effective January 1, 2007 MFRS D-6 becamemandatory and established the determination of the amount from thecomprehensive financing cost (CFC) that shall be capitalized. The land underdevelopment inventories and construction-in-process include the capitalizedCFC. The Company capitalizes the CFC that results from the application of theweighted average rate of the debt to the weighted average of theconstruction-in-process investment and the land under development during theacquisition period. In regards to debt in foreign currency, the capitalized CFCincludes 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 are initially recordedat acquisition cost and until December 31, 2007 were restated using theNCPI (see Note 3c). Depreciation is calculated using the straight-line methodbased on the remaining 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. See Note 3k for the accountingpolicy regarding impairment of long-lived assets.

 

F-17

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**i) Leases**

 

The Company classifiesagreements to lease property and equipment as operating or capital, inconformity with the guidelines of Bulletin D-5, *Leases*.

 

Lease arrangements arerecognized as capital leases if they meet at least one of the followingconditions:

 

a)              Under the agreement, the ownership of the leased assetis transferred to the lessee upon termination of the lease.

b)             The agreement includes an option to purchase the assetat a reduced price.

c)              The term of the lease is basically the same as theremaining useful life of the leased asset.

d)             The present value of minimum lease payments isbasically the same as the market value of the leased asset, net of any benefitor scrap value.

 

When the lessor retainsthe risks or benefits inherent to the ownership of the leased asset, theagreements are classified as operating leases and rent is charged to results ofoperations.

 

**j) Goodwill**

 

Goodwill represents thedifference between the purchase price and the fair value of the net assetsacquired at the date of purchase in accordance with the purchase method ofaccounting.

 

Goodwill is recordedinitially at acquisition cost and until December 31, 2007 was restatedusing adjustment factors derived from the NCPI.

 

Goodwill is not amortized; however, it is subject to annual impairmenttests, and is adjusted for any impairment losses. Goodwill is allocated to theaffordable entry-level segment.

 

Goodwill as of December 31, 2008 and 2007 was Ps. 731,861.

 

**k)Impairment of long-lived assets in use**

 

The Company reviews thecarrying amounts of long-lived assets in use annually or earlier when animpairment indicator suggests that such amounts might not be recoverable,considering the greater of the present value of future net cash flows using anappropriate discount rate, or the net sales price upon disposal. Impairment isrecorded when the carrying amounts exceed the greater of the amounts mentionedabove. The impairment indicators considered for these purposes are, amongothers, the operating losses or negative cash flows in the period if they arecombined with a history or projection of losses; depreciation and amortizationcharged to results, which in percentage terms in relation to revenues aresubstantially higher than that of previous years; obsolescence; reduction inthe demand for the products manufactured; competition; and other legal andeconomic factors.

 

**l) Other assets**

 

Expenses related to theplacement of the various borrowings disclosed in Note 10 are recorded at costand until December 31, 2007 were restated by applying NCPI factors. Theseamounts will be amortized under the straight-line method over the respectiveloan terms. The value assigned to the BETA trademark was restated until December 31,2007 by applying NCPI factors, and is amortized under the straight-line methodover five years for the trademark, which is the estimated useful life.

 

F-18

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**m)****Employeeretirement obligations**

 

The Company grantsseniority premiums and termination pay, covering all its employees. The relatedcalculations are based on the provisions of the Mexican Federal Labor Law(FLL).  Under FLL, workers are entitledto certain benefits at the time of their separation from the Company undercertain circumstances.  Senioritypremiums and termination payments are recognized periodically using theprojected unit-credit method and financial assumptions (2007 and 2006 net ofinflation).

 

As disclosed in Note 13,effective January 1 2008 the Company adopted MFRS D-3. As a result of thisadoption, the transition liability of labor obligations is now being amortizedover a four-year period. Prior to 2008, this liability was amortized on astraight-line basis over the labor life of our covered employees.

 

**n) Derivative financial instruments**

 

Derivative financialinstruments are used for hedging purposes. At December 31, 2008 and2007, all derivative instruments were recognized in the balance sheet at fairvalue, initially represented by the amount of consideration agreed (both assetsand liabilities). Transaction costs and cash flow received or delivered toadjust these instruments to fair value at the beginning of the transaction, notrelated to premiums on options, are amortized during the respective term. Thechanges in the fair value of derivative financial instruments that do notqualify as hedging instruments are recognized in income in valuation effects ofderivative instruments caption.

 

**o)Liabilities, provisions, contingent assets and liabilities and commitments**

 

Liability provisions are recognized whenever (i) theCompany has current obligations (legal or assumed) derived from past events, (ii) theliability will probably give rise to a future cash disbursement for itssettlement and (iii) the liability can be reasonably estimated.

 

Contingent liabilities are recognized when theywill probably likely give rise to a future cash disbursement for theirsettlement. Contingent assets, if any, are only subject to disclosure, unlessthey can be definitely realized. Also, commitments are only recognized whenthey generate a loss.

 

**p)Deferred taxes**

 

The Company recognizes deferred taxes using the asset and liabilitymethod.  Under this method, deferredtaxes are recognized on all temporary differences between the book and taxvalues of assets and liabilities, using the enacted income tax or IETU rate atthe time the financial statements are issued, which is the enacted rate thatwill be in effect at the time the temporary differences giving rise to deferredtax assets and liabilities are expected to be recovered or settled.

 

Deferred tax assets areevaluated periodically in order to determine their recoverability.

 

**q)Deferred employee statutory profit sharing**

 

Beginning January 1,2008 the Company uses MFRS D-3, *Employee Benefits*that considers the accounting treatment for Employee Statutory Profit-Sharing.This Standard establishes the Companies to use the asset and liability methodto compute and recognize the deferred liability or asset for profit-sharing, ina similar 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.

 

F-19

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Until December 31,2007 deferred employee profit sharing was recognized only on temporarydifferences determined in the reconciliation of current year net income and theincome base determined for employee profit-sharing purposes, only when there isno indication that the resulting liability or asset will not be realized in thefuture.

 

Current-year and deferredemployee profit-sharing expense is to be presented as an ordinary expense inthe income statement rather than as part of taxes on profits.

 

During the year ended December 31,2008, the deferred profit-sharing amounts 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 the Company’sprojections were more likely than not to be recovered.

 

**r)Foreign currency balances and transactions**

 

As mentioned in Note 3abeginning January 1, 2008 the Company adopted MFRS B-15 *Foreign Currency Translation*, Standard that replacesBulletin B-15 *Transactions in ForeignCurrency and Translation of Financial Statements of Foreign Operations*. This Standard is applicable for therecognition of transactions and amounts in foreign currency.

 

Foreign currencytransactions are recorded at the applicable exchange rate in effect at thetransaction date. Monetary assets and liabilities denominated in foreigncurrency are translated into Mexican pesos at the applicable exchange rate ineffect at the balance sheet date. Exchange fluctuations are recorded as acomponent of net comprehensive financing cost (income) in the consolidatedstatements of income.

 

See Note 17 for theCompany’s consolidated foreign currency position at the end of each year andthe exchange rates used to translate foreign currency denominated balances.

 

**s) Stockoption plan**

 

In November 2007,the Company implemented a plan through which certain of its executives andcompany officials receive remuneration in the form of share-based paymenttransactions, whereby these individuals render services as consideration forequity instruments. Given the settlement feature contained within the plans,the awards are treated as “Liability Awards” and compensation cost is measuredby reference to the fair value of the awards at each balance sheet date. Thefair value is determined using an appropriate pricing model (see Note 16e).

 

**t)Earnings per share**

 

Earnings per share arecalculated by dividing net income of majority interest by the weighted averagenumber of shares outstanding during the year. The Company does not have anydilutive securities beyond the stock options disclosed in Note 16e the effectsof which were immaterial in all periods. Accordingly basic and diluted earningsper share were the same.

 

**u)Comprehensive income**

 

Comprehensive income isrepresented by net income, the effects of labor obligations (until December 31,2007) and the effect of the translation of the financial statements of thesubsidiaries and foreign associated company.

 

F-20

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**v)Statement of income presentation**

 

The costs and expensesreflected in the statement of income are presented according to their function,since this classification allows an adequate analysis of gross profits andoperating margins. The Company’s operating income is presented because it is animportant indicator of its overall performance and results, and includesordinary expenses, operating costs and expenses. Other ordinary income istherefore excluded. This presentation conforms with that used for purposes ofthe financial statements for the years ended December 31, 2007 and 2006.

 

**w)Reclassifications**

 

Certain amounts in the2007 and 2006 consolidated financial statements have been reclassified in orderto conform with 2008 presentations.

 

**x)Segment reporting**

 

Segment reporting ispresented in accordance with the information prepared for the internal decisiontaking process. The information is presented according to the type of housingon sale by the Company.

 

**4. Cash and cash equivalents**

 
| ** **             | ** ** | **2008**    | ** **    | **2007**  | ** ** |
|------------------------|------------|-------------|---------------|-----------|------------|
| Cash                   | ** ** | **Ps.**     | **225,669**   |      | Ps.        | 118,410 |   |
| Temporary  investments | ** ** | **914,471** |          | 2,088,424 |       |
|                   | ** ** | **Ps.**     | **1,140,140** |      | Ps.        | 2,206,834 |   |

 

Cash and cash equivalentsconsist basically of bank deposits and highly liquid investments. The Companyhas restricted cash as of December 31, 2008 and 2007 for Ps. 128,045 andPs. 156,090, of which Ps. 128,045 and Ps. 102,000 are related to restrictedamounts (see Note 14), respectively. Ps. 54,090 in 2007 relates to acontemplated business combination.

 

**5. Trade accounts receivable**

 
| ** **                                     | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|------------------------------------------------|------------|----------------|----------------|------------|------------|
| As  promoter:                                  | ** ** | ** **     | ** **     | ** ** | ** ** |
| Total  incurred construction costs             | ** ** | **Ps.**        | **7,487,205**  |       | Ps.        | 4,370,277 |   |
| Estimated  gross profit on costs incurred      | ** ** | **3,082,839**  |           | 2,075,560  |       |
| Unbilled  revenues on developments in progress | ** ** | **10,570,044** |           | 6,445,837  |       |
| Due  from customers (1)(2)                     | ** ** | **1,343,786**  |           | 1,135,473  |       |
| Services  and other                            | ** ** | **61,382**     |           | 60,692     |       |
|                                           | ** ** | **11,975,212** |           | 7,642,002  |       |
| Allowance  for doubtful accounts               | ** ** | **(48,184**    | **)**          | (89,318    | )          |
|                                           | ** ** | **11,927,028** |           | 7,552,684  |       |
| Trade  accounts receivable, long-term (3)      | ** ** | **(81,498**    | **)**          | (3,426     | )          |
|                                           | ** ** | **Ps.**        | **11,845,530** |       | Ps.        | 7,549,258 |   |

 

Unbilled revenues on developments in progress**represent revenues recognized on costsincurred, in accordance with the percentage-of-completion method, which havenot yet been billed.

 

F-21

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The Company does not believe that it has asignificant concentration of credit risk. While some of its receivables arefrom homebuyers, the majority are from entities in the home finance business,whose characteristics differ from other receivables.

 

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(1)          These amounts include balancesdue from INFONAVIT, FOVISSSTE, SOFOLES *(Sociedades Financieras deObjeto Limitado)*, commercial banks and homebuyers. With the exception of commercial banks and homebuyers, all suchcategories exceed 10% of accounts receivable balances as of December 31,2008 and 2007.

 

(2)          TheCompany participates in a program referred to as “Programa de EntregaAnticipada de Vivienda INFONAVIT” (formerly “Programa de Liquidez Electronica”).This program provides for factoring of INFONAVIT receivables withoutrecourse, thereby providing for more timely collection.

 

(3)          The long-term trade accountreceivable is due to an agreement with the Housing Institute of the FederalDistrict, or Instituto de Vivienda del Distrito Federal (“INVI”), on which itwas agreed that the Company will receive monthly payments, including interestat a rate of TIIE plus 4%, during a five-year period due to the sale of housesin Mexico City.

 

The carrying value of accounts receivable approximates its market valuegiven its short term nature.

 

**6. Inventories**

 
| ** **                         | ** ** | **2008**       | ** **    | **2007**   | ** ** |
|------------------------------------|------------|----------------|---------------|------------|------------|
| Land:                              | ** ** | ** **     | ** **    | ** ** | ** ** |
| Titled  land                       | ** ** | **Ps.**        | **6,780,335** |       | Ps.        | 4,535,849 |   |
| Contracted  land                   | ** ** | **4,939,990**  |          | 4,782,862  |       |
| Advances  to land suppliers        | ** ** | **143,666**    |          | 104,007    |       |
|                               | ** ** | **11,863,991** |          | 9,422,718  |       |
| Land  held for future developments | ** ** | **(9,254,469** | **)**         | (7,091,074 | )          |
| Total  land                        | ** ** | **2,609,522**  |          | 2,331,644  |       |
|                               | ** ** | ** **     |          |       |       |
| Other  inventories:                | ** ** |           |          |       |       |
| Construction-in-process            | ** ** | **1,542,577**  |          | 1,128,591  |       |
| Construction  materials            | ** ** | **638,488**    |          | 629,869    |       |
| Advances  to suppliers             | ** ** | **316,245**    |          | 301,935    |       |
| Total  other inventories           | ** ** | **2,497,310**  |          | 2,060,395  |       |
| Total  inventories                 | ** ** | **Ps.**        | **5,106,832** |       | Ps.        | 4,392,039 |   |

 

The Company’s policy is to locate and acquireland each year, classifying land currently being developed and land planned tobe developed within the next year as part of current assets, and classifyingall remaining land as non-current assets.

 

Due to the application of MFRS D-6 during 2008and 2007, the net comprehensive financing cost related to qualified assets forthe same periods was Ps. 1,250,080 and Ps. 179,304, of which Ps. 976,707 andPs. 119,286 related to inventories sold and subsequently was applied to cost ofsales of the same periods, respectively. The average period for theamortization of the capitalized comprehensive financing cost is 6 months. Theannual capitalization rates are 24.3% and 7.6%, respectively.

 

The Company utilizes certain land trustagreements in order to obtain its supply of land for construction purposes. As December 31,2008 and 2007 the Company has recognized Ps. 4,438 and Ps. 41,199, related tothis inventory, which are part of the “contracted” land inventory.

 

F-22

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During the years ended December 31, 2008and 2007, the net comprehensive financing cost capitalized in inventories wasas follows:

 
| ** **                                                            | ** ** | **2008**       | ** **    | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------------|---------------|----------|------------|
| Total  accrued net comprehensive financing cost before capitalization | ** ** | **Ps.**        | **1,808,565** |     | Ps.        | 458,208 |   |
| Comprehensive  financing cost capitalized in inventories              | ** ** | **(1,250,080** | **)**         | (179,304 | )          |
| Comprehensive  financing cost after capitalization                    | ** ** | **Ps.**        | **558,485**   |     | Ps.        | 278,904 |   |

 

**7. Prepaid expenses and other current assets**

 
| ** **                         | ** ** | **2008**    | ** **  | **2007** | ** ** |
|------------------------------------|------------|-------------|-------------|----------|------------|
| Sales  commissions paid in advance | ** ** | **Ps.**     | **103,665** |     | Ps.        | 99,137 |   |
| Sundry  debtors                    | ** ** | **101,198** |        | 58,030   |       |
| Refundable  taxes                  | ** ** | **215,747** |        | 322,265  |       |
| Insurance  and bond contracts      | ** ** | **2,401**   |        | 6,052    |       |
| Prepaid  interest                  | ** ** | **4,227**   |        | 4,870    |       |
|                               | ** ** | **Ps.**     | **427,238** |     | Ps.        | 490,354 |   |

 

The carrying-value offinancial instruments contained within prepaid expenses and other currentassets approximate their market value given their short term nature.

 

**8.Property and equipment**

 
| ** **                      | ** ** | **2008**      | ** **    | **2007**  | ** ** |
|---------------------------------|------------|---------------|---------------|-----------|------------|
| Buildings                       | ** ** | **Ps.**       | **253,412**   |      | Ps.        | 251,570 |   |
| Machinery  and equipment        | ** ** | **1,399,166** |          | 967,009   |       |
| Transportation  equipment       | ** ** | **103,799**   |          | 89,313    |       |
| Air  transportation equipment   | ** ** | **75,203**    |          | 75,203    |       |
| Office  furniture and equipment | ** ** | **106,760**   |          | 63,672    |       |
| Computers                       | ** ** | **128,066**   |          | 76,482    |       |
| Communication  equipment        | ** ** | **38,360**    |          | 21,460    |       |
|                            | ** ** | **2,104,766** |          | 1,544,709 |       |
| Accumulated  depreciation       | ** ** | **(733,729**  | **)**         | (420,871  | )          |
|                            | ** ** | **1,371,037** |          | 1,123,838 |       |
| Land                            | ** ** | **31,891**    |          | 31,891    |       |
|                            | ** ** | **Ps.**       | **1,402,928** |      | Ps.        | 1,155,729 |   |

 

The amount of assetsacquired via capitalized leases during the years ended December 31, 2008and 2007, was Ps. 97,131 and Ps. 350,854, respectively. At December 31, 2006,the assets acquired by capital leases were not material.

 

Depreciation expense forthe years ended December 31, 2008, 2007 and 2006 was Ps. 323,727, Ps.196,307 and Ps. 130,829, respectively.

 

F-23

----

 

**9. Other assets**

** **
| ** **                                                        | ** ** | **2008**   | ** **  | **2007** | ** ** |
|-------------------------------------------------------------------|------------|------------|-------------|----------|------------|
| Net  value of the “BETA” trademark (1)                  | ** ** | **Ps.**    | **136,581** |     | Ps.        | 227,635 |   |
| Trade  accounts receivable, long-term (see Note 5)                | ** ** | **81,498** |        | 3,426    |       |
| Financial  instruments (see Note 11)                              | ** ** | **65,975** |        | —   |       |
| Debt  issuance costs, net                                         | ** ** | **79,468** |        | 69,979   |       |
| Investment  (2)                                                   | ** ** | **59,226** |        | 19,083   |       |
| Deferred  profit-sharing (Note 3q)                                | ** ** | **26,606** |        | —   |       |
| Other                                                             | ** ** | **19,015** |        | 65,802   |       |
| Intangible  assets from employee retirement obligations (Note 3a) | ** ** | **—** |        | 30,092   |       |
|                                                              | ** ** | **Ps.**    | **468,369** |     | Ps.        | 416,017 |   |

 

Amortization expense for the years ended December 31,2008, 2007 and 2006 was Ps. 101,294, Ps. 105,410 and Ps. 114,529, respectively.The expected amortization of the “BETA” trademark and debt issuance costs forthe years 2009 to 2015 is as follows:

 
| **Year**             | ** ** | **Amortization** | ** **  |
|----------------------|------------|------------------|-------------|
| 2009                 | ** ** | **Ps.**          | **109,747** | ** ** |
| 2010                 | ** ** | **56,959**       | ** **  |
| 2011                 | ** ** | **11,432**       | ** **  |
| 2012                 | ** ** | **11,432**       | ** **  |
| 2013  and thereafter | ** ** | **26,479**       | ** **  |
|                 | ** ** | **Ps.**          | **216,049** | ** ** |

 

----

(1)  The “BETA” Trademarkis allocated to the affordable entry-level segment.

 

(2)        The Company has an investment in the 15% of theEgyptian company Orascom Housing Communities “S.A.E.”. The Company accountsthis investment using equity method.

 

F-24

----

 

**10. Debt**

 

a) As of December 31,2008, the outstanding balances of short-term indebtedness with financialinstitutions consist of the following:

 
| ** **                                                                                                                                                                                                                                  | ** ** | **2008**    | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------|
| HSBC México,  S.A.                                                                                                                                                                                                                     | ** ** | ** **  | ** **    |
| A revolving line of  credit granted by HSBC Mexico, S.A. on December 26, 2008 for Ps. 50,000.  The borrowing matured on January 23, 2009 and bears interest at the  Mexican interbank equilibrium interest rate (TIIE) plus 4.1%. | ** ** | **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. The borrowing matured on January 8, 2009, and bears 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 for Ps.  600,000. The borrowing matured on January 19, 2009, and bears 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 for Ps.  300,000. The borrowing matured on January 29, 2009, and bears interest  at TIIE plus 3.25%.                                      | ** ** | **300,000** | ** **    |
| Banco Santander México, S.A.                                                                                                                                                                                                           | ** ** | ** **  | ** **    |
| A revolving credit line  granted by Banco Santander Mexico S.A. on November 12, 2008 for Ps.  100,000. The borrowing matures on May 7, 2009, and bears interest at  TIIE plus 1%.                                                 | ** ** | **100,000** | ** **    |
| Interest payable                                                                                                                                                                                                                            | ** ** | **3,448**   | ** **    |
| Total                                                                                                                                                                                                                                       | ** ** | **Ps.**     | **1,143,732** | ** ** |
|                                                                                                                                                                                                                                             |            |             |               |  |  |

 

There was no short-termindebtedness balance as of December 31, 2007.

 

F-25

----

 

b) As of December 31,2008 and 2007, the outstanding balances of long-term debt with financialinstitutions consist of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **2008**      | ** **    | **2007**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|-----------|------------|
| Bond  issuance (“Senior Guaranteed Notes”) 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.**       | **3,443,450** |      | Ps.        | 2,729,625 |   |
| 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 bears interest at TIIE  plus 1%.                                                                                                                                              | ** ** | **360,334**   |          | 540,500   |       |
| GE Capital, S.A.                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **    |          |      |       |
| A line of 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%.                                                                                                                                                                                                        | ** ** | **11,136**    |          | 13,872    |       |
| 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** |          | —    |       |
| 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 is  guaranteed by five of the Company’s land lots. | ** ** | **299,795**   |          | —    |       |
| Interest  payable, primarily Senior Guaranteed Notes                                                                                                                                                                                                                                                                                                                                                  | ** ** | **71,076**    |          | 75,547    |       |
| Total long-term  debt                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **6,263,791** |          | 3,359,544 |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **(273,672**  | **)**         | (260,758  | )          |
| Long-term debt  balances                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Ps.**       | **5,990,119** |      | Ps.        | 3,098,786 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |            |               |               |           |            |  |  |  |  |

 

F-26

----

 

**Covenants**

 

Loan covenants require the Company and itsguarantors subsidiaries to meet certain obligations. These covenants coverchanges in ownership control, restrictions on incurring additional debt thatdoes not meet certain requirements established in the loan contracts,restrictions on the sale of assets and the sale of capital stock insubsidiaries, unless they meet certain requirements, and restricted paymentswhere dividends cannot be paid or capital reimbursed to stockholders’ equityunless they are made between the guarantor subsidiaries.

 

Most significant financial covenants, containedwithin loan agreements, require the Company to maintain:

 

·                  A ratio of total debt to totalstockholders’ equity of more than 1.0 to 1.0;

 

·                  A ratio of the earnings before interest,taxes, depreciation and amortization (“EBITDA”) to the current portion of  long-term debt (including the interestpayable) of at least 3.0 to 1.0;

 

·                  Total of stockholders’ equity of at leastPs. 8,000,000;

 

·                  A ratio of interest coverage (EBITDA/netfinancing expense) of at least 2.50 to 1.0;

 

·                  A ratio of leverage (liabilities withcost/EBITDA) of less than 2.50 to 1.0; and

 

·                  Operational restrictions on the workingcapital.

 

There are also restrictions applicable toadditional debt based on EBITDA levels. In the event the Company does notcomply with any of the above provisions, it will be limited in its ability topay dividends to its stockholders.

 

As of December 31, 2008 and 2007, theCompany was in compliance with the financial covenants contained within itsdebt agreements.

 

**Seniorguaranteed notes exchange offer**

 

In January 2006, the Company completed anExchange Offer related to all of its Senior Guaranteed Notes. The new noteshave been registered pursuant to the Securities Act of 1933 as amended.Otherwise, the terms of the “Old” Senior Guaranteed Notes and the New “Senior”Guaranteed Notes are identical. During 2006, the Company incurred Ps. 12,994 inincremental direct costs associated with the Exchange Offer. These amounts areincluded with other debt issuance costs (see Note 9) and will be amortized overthe remaining life of the Senior Guaranteed Notes.

 

**Debt maturities**

 

As of December 31,2008, long-term debt matures as follows:

 
| **Year** | ** ** | **Amount**    | ** **    |
|----------|------------|---------------|---------------|
| 2010     | ** ** | **Ps.**       | **468,669**   | ** ** |
| 2013     | ** ** | **2,078,000** | ** **    |
| 2015     | ** ** | **3,443,450** | ** **    |
|     | ** ** | **Ps.**       | **5,990,119** | ** ** |
|          |            |               |               |  |  |

 

The value of the TIIE published in the Federal Official Gazette as of December 31,2008 and 2007 was 8.6886% and 7.9250%, respectively. The exchange rate used toconvert debt denominated in US Dollars was 13.7738 Mexican pesos and 10.9185Mexican pesos, respectively.

 

F-27

----

 

**11.  Financial instruments**

 

FinancialInstruments Related to the Senior Guaranteed Notes

 

Asdisclosed in Note 10, the Company’s Senior Guaranteed Notes are US dollardenominated. In order to convert the principal of the US dollar bonds toMexican pesos, in September 2005 the Company entered into two “Principal-OnlySwaps” with a notional value of US$250 million, which entitled the Company toreceive this amount in 2015 in return for a payment in Mexican pesos at a fixedexchange rate of 10.83 Mexican pesos per US Dollar. As part of this agreement,the Company paid interest of 2.92% a year on the total notional amount in USdollars, in semiannual payments.

 

ThePrincipal-Only Swap transaction did not meet hedge accounting requirements, andthus all changes in the fair value of the underlying derivative were recordedin the Company’s current earnings as a component of comprehensive financingcost within the valuation effects on derivative instruments account. As of December31, 2007 and 2006, the fair value of this derivative was Ps. 79,098 (US$7.2million) and Ps. 227,075 (US$20.2 million) which represented the estimatedpresent value of future cash flows to be paid out by the Company.

 

OnJuly 5, 2008 the Company cancelled its Principal-Only Swap by paying Ps.54,434 (US$ 5.3 million).   No gain orloss was recorded upon cancelation of the Principal-Only Swap agreement as itwas already recorded at fair value.

 

OnJuly 6, 2008 the Company entered into new derivative instruments in orderto cover the possible changes in the exchange rate of future interest paymentsof the Senior Guaranteed Notes for US$250 million (“Interest-Only Swap”). Thisnew transaction also does not meet hedge accounting requirements, and thuschanges in the fair value of the underlying derivative have been and will berecorded in the Company’s current earnings as a component of comprehensivefinancing cost within the exchange (gain) losses account. As of December 31,2008 the fair value of this derivative was a favorable asset position of Ps.65,975 (US$4.8 million) (see Note 9).

 

Thenet accumulated effect in the statement of income of the Principal-Only Swapand the Interest-Only Swap for the years ended December 31, 2008 was Ps.(90,639).

 

OtherFinancial Instruments

 

Duringthe normal course of operations the Company maintains net liability positionsin foreign currency (US dollars) which are originated by its operations’ shortand long-term liabilities. During 2008, the Company entered into hedgingderivative financial instruments that were expected to mitigate the riskassociated with the exchange loss in the acquisition of foreign currencies.However, due to the recent volatility in the exchange rate between the MexicanPeso and US dollar, the Company decided to cancel and or otherwise restructureall its hedging derivative financial instruments. At December 31, 2008,the Company only has the Interest-Only Swap described above. The Company had animpact in its statement of income of approximately Ps. 404,601.

 

Thenet valuation effects of financial instruments for the years ended December 31,2008, 2007 and 2006, were Ps. 313,962, Ps. (147,977) and Ps. 101,895,respectively.

 

F-28

----

 

**12. Leases**

 

**a) Capital leases**

 

As of December 31,2008 there are contracts of capital leases of machinery and equipment for a 5year period. The capital leases as of December 31, 2008 and 2007 areshown as follows:

 
| ** **                                                                                                                                    | ** ** | **2008**   | ** **  | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|----------|------------|
|                                                                                                                                          | ** ** | ** ** |        |     |       |
| 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.**    | **288,857** |     | Ps.        | 350,331 |   |
|                                                                                                                                          | ** ** | ** ** | ** **  |     |       |   |   |
| Financial  leases provided by Bancomer, S.A. in September 2008, with maturity in  October 2013 and interest rate at TIIE plus 0.8%. | ** ** | ** ** | **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%.  | ** ** | ** ** | **56,525**  |     |       | — |   |
| Other                                                                                                                                         | ** ** | ** ** | **2,315**   |     |       | 3,222 |   |
| Interest  payable                                                                                                                             | ** ** | ** ** | **2,472**   |     |       | 3,491 |   |
| Total  capital leases                                                                                                                         | ** ** | ** ** | **403,894** |     |       | 357,044 |   |
| Current  portion of long-term capitalized leases                                                                                              | ** ** | ** ** | **(89,255** | **)**    |       | (68,187 | ) |
| Total  long-term capital leases                                                                                                               | ** ** | **Ps.**    | **314,639** |     | Ps.        | 288,857 |   |

 

Minimum compulsorypayments relating to these contracts as of December 31, 2008, excludinginterest payable monthly, are as follows:

 

| **Year** | ** ** | **Total**  | ** **  |
|----------|------------|------------|-------------|
| 2009     | ** ** | **Ps.**    | **89,255**  | ** ** |
| 2010     | ** ** | ** ** | **93,171**  | ** ** |
| 2011     | ** ** | ** ** | **101,962** | ** ** |
| 2012     | ** ** | ** ** | **92,579**  | ** ** |
| 2013     | ** ** | ** ** | **26,927**  | ** ** |
| Total    | ** ** | **Ps.**    | **403,894** | ** ** |

 

**Covenants**

 

The most significant financial covenants of theleases require the Company and its subsidiaries to maintain:

 

·                 A liquidity ratioof current assets to short-term liabilities no less than 1.50 to 1.0;

 

·                 A financing ratioof total liabilities to stockholders’ equity no greater than 1.70 to 1.0;

 

·                 A relation ofoperational income to net comprehensive financing cost at a minimum level of2.0;

 

As of December 31, 2008 and 2007, theCompany was in compliance with these financial covenants.

 

F-29

----

 

**b) Operating leases**

 

As of December 31,2008 the Company had entered into agreements for the operating lease ofmachinery and equipment for a period of 5 to 6 years. The minimum compulsorypayments relating to these agreements are as follows:

 

| **Year** | ** ** | ** ** | **2008**    | ** ** |
|----------|------------|------------|-------------|------------|
| 2009     | ** ** | **Ps.**    | **53,874**  | ** ** |
| 2010     | ** ** | ** ** | **53,605**  | ** ** |
| 2011     | ** ** | ** ** | **49,110**  | ** ** |
| 2012     | ** ** | ** ** | **34,783**  | ** ** |
| 2013     | ** ** | ** ** | **19,359**  | ** ** |
| 2014     | ** ** | ** ** | **283**     | ** ** |
| Total    | ** ** | **Ps.**    | **211,014** | ** ** |

 

Operating leases expensedfor the years ended December 31, 2008, 2007 and 2006 amounted to Ps.52,833 Ps. 33,694 and Ps. 16,254, respectively.

 

**13. Employee benefits obligations**

 

The Company has a planfor covering seniority premiums which consists of a lump sum payment of 12 days’wages for each year worked, calculated using the most recent salary, not toexceed twice the legal minimum wage established by law. Since 2005, the Companyhas recognized a liability for personal severance pay. The related liabilityand annual cost of such benefits are calculated by an independent actuary onthe basis of formulas defined in the plans using the projected unit creditmethod.

 

Asmentioned in Note 3, the Company applied the provisions of new MFRS D-3, *Employee Benefits* which replaces the previous MFRS accounting Bulletin D-3, *Labor Obligations*. The most significanteffects of its application are as follows:

 

i)                 Additional laborcost of Ps. 5,559 being recognized in its 2008 statement of income as comparedto prior periods.

 

ii)             Elimination ofthe recognition of an additional liability and resulting recognition of anintangible asset and comprehensive income item. Upon the adoption of MFRS D-3the Company reversed its intangible asset of Ps. 30,092 and additionalliability of Ps. 34,189 resulting in a credit to shareholders equity of Ps.4,097 in 2008.

 

As of December 31,2008 and 2007 and for the years ended 2008, 2007 and 2006, the present valuesof these obligations and the rates used for the calculations are as follows:

 
| ** **                                              | ** ** | **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                                       | ** ** | ** **                                    | **78,392**  | ** ** | ** ** | **(367** | **)** | ** ** | **78,025** | ** ** |
| Net  period cost                                        | ** ** | **Ps.**                                       | **114,265** | ** ** | **Ps.** | **2,135** | ** ** | **Ps.** | **116,400** | ** ** |

 

F-30

----

 
| ** **                       | ** ** | **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 |   |

 
| ** **                       | ** ** | **For the year ended December 31, 2006** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **Severance pay**                             | ** ** | **Seniority premium** | ** ** | **Total** | ** ** |
| Integration  of Net Period Cost: |       |                                          |       |   |   |   |   |
| Labor  cost                      |       | Ps.                                           | 7,953      |   | Ps. | 895 |   | Ps. | 8,848 |   |
| Financial  cost                  |       |                                          | 2,769      |   |   | 93 |   |   | 2,862 |   |
| Transition  liability            |       |                                          | 2,929      |   |   | 36 |   |   | 2,965 |   |
| Actuarial  losses                |       |                                          | 1,385      |   |   | 17 |   |   | 1,402 |   |
| Inflation  adjustment            |       |                                          | 548        |   |   | 13 |   |   | 561 |   |
| Net  period cost                 |       | Ps.                                           | 15,584     |   | Ps. | 1,054 |   | Ps. | 16,638 |   |

 
| ** **                              | ** ** | **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** | ** ** |
| Accumulated  benefit obligations        | ** ** | **Ps.**                                   | **82,184**  | ** ** | **Ps.** | **2,966** | ** ** | **Ps.** | **85,150** | ** ** |

 
| ** **                       | ** ** | **Balances as of December 31, 2007** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **Severance pay**                         | ** ** | **Seniority premium** | ** ** | **Total** | ** ** |
| Vested  benefit obligations      |       | Ps.                                       | 111,052    |   | Ps. | 5,125 |   | Ps. | 116,177 |   |
| Transition  liability            |       |                                      | (18,216    | ) |   | (697 | ) |   | (18,913 | ) |
| Non-recognized  actuarial losses |       |                                      | (17,160    | ) |   | (755 | ) |   | (17,915 | ) |
| Prior  service cost              |       |                                      | (33,385    | ) |   | (1,056 | ) |   | (34,441 | ) |
|                             |       | Ps                                        | 42,291     |   | Ps. | 2,617 |   | Ps. | 44,908 |   |
| Additional  liability            |       |                                      | 33,890     |   |   | 299 |   |   | 34,189 |   |
| Accumulated  benefit obligations |       | Ps.                                       | 76,181     |   | Ps. | 2,916 |   | Ps. | 79,097 |   |

 

During2007, the Company amended its plan resulting in the admission of additionalemployee participants who have received credit for prior service costs in theamount of Ps. 34,441 as of December 31, 2007.

 

F-31

----

 

Thechanges in the balance of labor obligations are as follows:

 
| ** **                                              | ** ** | **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** | ** ** |

 

Thefollowing is an analysis at December 31 of the Company’s liabilities thatmake up its labor obligations related to seniority premiums and employeetermination payments for reasons other than corporate restructuring:

 
| ** ** | ** ** | **Seniority premium** | ** ** | **Severance pay**  | ** ** |
|------------|------------|-----------------------|------------|--------------------|------------|
| ** ** | ** ** | **Projected**         | ** ** | ** **         | ** ** | **Pending** | ** ** | **Projected** | ** ** | **Pending** | ** ** |
| ** ** | ** ** | **benefit**           | ** ** | ** **         | ** ** | **amortized** | ** ** | **benefit** | ** ** | **amortized** | ** ** |
| **Year**   | ** ** | **obligations**       | ** ** | **Plan situation** | ** ** | **items** | ** ** | **obligations** | ** ** | **items** | ** ** |
| **2008**   | ** ** | **Ps.**               | **4,122**  | ** **         | **Ps.**    | **4,122** | ** ** | **Ps.** | **1,156** | ** ** | **Ps.** | **112,617** | ** ** | **Ps.** | **30,443** | ** ** |
| 2007       |       | 5,125                 |       | 5,125              |       | 1,452 |   | 111,052 |   | 35,376 |   |
| 2006       |       | 2,685                 |       | 2,685              |       | 1,305 |   | 55,469 |   | 39,967 |   |
| 2005       |       | 1,870                 |       | 1,870              |       | 1,253 |   | 46,639 |   | 38,689 |   |
|            |            |                       |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

Beginningin 2008, the transition liability is being amortized over a four-year period.

 

The rates used in theactuarial analysis are as follow:

** **
| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discounts  of labor obligations |       | 8.50     | %          | 5.25     | %          | 5.50     | %          |
| Salary  increases               |       | 4.50     | %          | 1.25     | %          | 1.50     | %          |
| Inflation  rates                |       | 3.50     | %          | 4.00     | %          | 3.75     | %          |

 

F-32

----

 

**14. Trade accounts payable**

** **
| ** **                | ** ** | **2008**   | ** **    | **2007** | ** ** |
|---------------------------|------------|------------|---------------|----------|------------|
| Suppliers                 | ** ** | **Ps.**    | **2,680,141** |     | Ps.        | 2,711,927 |   |
| Revolving  credit lines * | ** ** | ** ** | **996,534**   |     |       | 557,369 |   |
| Other  creditors          | ** ** | ** ** | **329,178**   |     |       | 186,973 |   |
| Total accounts  payable   | ** ** | **Ps.**    | **4,005,853** |     | Ps.        | 3,456,269 |   |

 

----

* The Company establisheda trust that allows its 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. 128,045 and Ps. 102,000, respectively (investmentaccount), as of December 31, 2008 and 2007. Under this program, theAAA-Homex trust can use of the Nafinsa line of credit to finance a portion ofthe accounts receivable of the Company’s suppliers. As mentioned in Note 2, theAAA Homex trust is a consolidated subsidiary of the Company. As of December 31,2008 and 2007, this factoring program encompassed approximately 3,895 and 2,873suppliers, respectively, where the financing resources are covered by thesuppliers themselves.

 

**15. Land suppliers**

** **
| ** ** | ** ** | **2008** | ** **    | **2007** | ** ** |
|------------|------------|----------|---------------|----------|------------|
| Short-term | ** ** | **Ps.**  | **2,326,036** |     | Ps.        | 2,754,906 |   |
| Long-term  | ** ** | **Ps.**  | **405,426**   |     | Ps.        | 992,801 |   |

 

Land suppliers represent the outstanding balance payable to oursuppliers of land currently in use or estimated to be developed. Long-term landsuppliers represent payables with maturities of over twelve months.

 

**16. Stockholders’ equity**

 

a) Common stock issued atpar value (historical Pesos) as of December 31, 2008 and 2007 is asfollows:

 
| ** **      | ** ** | **Number of Shares** | ** ** | **Amount**  | ** ** |
|-----------------|------------|--------------------------------|------------|-------------|------------|
| ** **      | ** ** | **2008**                       | ** ** | **2007**    | ** ** | **2008** | ** ** | **2007** | ** ** |
| 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 of December 31,2008 and 2007 amounted Ps. 105,602 and is included as part of the retainedearnings.

 

c) The balances of the stockholders’ equity taxaccount as of December 31, 2008 and 2007 are:

 
| ** **                   | ** ** | **2008** | ** **    | **2007** | ** ** |
|------------------------------|------------|----------|---------------|----------|------------|
| Contributed  capital account | ** ** | **Ps.**  | **3,965,554** |     | Ps.        | 3,670,265 |   |
|                              |            |          |               |          |            |  |  |

 

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, 2008 the Company’s CUFINbalance is Ps. 359,235.

 

F-33

----

 

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) The stock option plan consists of 999,200 approvedstock options of the Company, the shares for which are held in a trustespecially created for this purpose. A total of 978,298 stock options wereinitially granted to the key executives. During 2007 these grants were made atan exercise price of 98.08 Mexican pesos, which was in excess of the sharesunderlying fair value at the grant date. During 2008, a total of 29,929 optionswere exercised, and 335,853 options were cancelled (forfeited) upon theseparation of the related employees. Compensation related to the optionsexcercised in 2008 was paid in cash, resulting in no effect on the number ofshares held in treasury.

 

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, the Company’s Chief Executive Officer authorized themodification of the terms of the awards. Specifically, the duration of the program was extended whereby theexercise of awards if not made in the previously specified period could beexercised one year following.

 

The following information is an analysis of stockoption activity during the year:

 
| ** **                                                        | ** ** | **Number  of stock  options** | ** ** | **Weighted  average  price of year (in  pesos)** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|
| Stocks repurchased for  future grant as of November 20, 2007 |       | 999,200                       |       | Ps.                                              | 98.08      |   |
| Granted                                                           |       | (978,298                      | )          |                                             | 98.08      |   |
| Exercised                                                         |       | —                        |       |                                             | —     |   |
| Forfeited                                                         |       | —                        |       |                                             | —     |   |
| Stock options pending  to be granted at December 31, 2007    |       | 20,902                        |       |                                             | 98.08      |   |
| Granted                                                           |       | —                        |       |                                             | —     |   |
| Exercised                                                         |       | 29,929                        |       |                                             | 118.78     |   |
| Forfeited                                                         |       | 335,853                       |       |                                             | —     |   |
| Stock options pending  to be granted at December 31, 2008    |       | 386,684                       |       | Ps.                                              | 98.08      |   |

 

The average fair value of all the stock optionsgranted was 6.02 Mexican pesos and 18.42 Mexican pesos per stock option, as of December 31,2008 and 2007, respectively.

 

Key assumptions used to calculate fair value for theyears ended December 31, 2008 and 2007 are as follows:

 
| ** **                         | ** ** | **2008**                 | ** ** | **2007**             | ** ** |
|------------------------------------|------------|--------------------------|------------|----------------------|------------|
| Expected dividend yield            | ** ** | **0**                    | **%**      | 0                    | %          |
| Expected stock price  volatility   | ** ** | **72.21**                | **%**      | 21.5                 | %          |
| Risk-free interest rate            | ** ** | **7.72**                 | **%**      | 8.1                  | %          |
| Expected life of  options in years | ** ** | **2.5 years**            |       | 2.1 years            |       |
| Model used                         | ** ** | **Black Scholes Merton** |       | Black Scholes Merton |       |

 

Total compensation cost related to non-vested stockoption awards not yet recognized was Ps. 3,687 and Ps. 18,019 at December 31,2008 and 2007, respectively.

 

F-34

----

 

f) On September 26,2007, Promotora Residencial Huehuetoca, S.A. de C.V. (Huehuetoca) declareddividends to its stockholders which included the Company and minority shareholders.Dividends paid to minority shareholders were Ps. 9,133 and have been reflectedas a reduction of minority stockholders’ equity in the accompanyingconsolidated financial statements.

 

g) On March 10,2008, the Board of Directors authorized the Company to repurchase up to $250million in treasury stock through market transaction. However there was norepurchase of treasury stock during 2008 or 2009 to date.

 

**17. Foreign currency balances and transactions**

 

a) As of December 31, 2008 and 2007, the foreigncurrency monetary position is as follows:

 
| ** **                        | ** ** | **2008**      | ** **     | **2007** | ** ** |
|-----------------------------------|------------|---------------|----------------|----------|------------|
| **Thousands of US dollars:**      |       |          |           |     |       |
| Monetary  assets                  | ** ** | **US$ ** | **6,024**      |     | US$   | 5,038 |   |
| Monetary  liabilities             | ** ** | ** **    | **(300,466**   | **)**    |       | (372,284 | ) |
| Monetary  liability position, net | ** ** | **US$ ** | **(294,442**   | **)**    | US$   | (367,246 | ) |
| Equivalent in  Mexican pesos      | ** ** | **Ps.**       | **(4,055,586** | **)**    | Ps.        | (4,009,775 | ) |

 

b) Non-monetaryassets of foreign origin as of December 31, 2008 and 2007 are as follows:

 
| ** **                   | ** ** | ** **     | ** ** | **Foreign currency** | ** ** | **Equivalent** | ** **  | **Foreign currency** | ** ** | **Equivalent** | ** ** |
|------------------------------|------------|----------------|------------|----------------------|------------|----------------|-------------|----------------------|------------|----------------|------------|
| ** **                   | ** ** | ** **     | ** ** | **Balance (in**      | ** ** | **in Mexican** | ** **  | **balance (in**      | ** ** | **in Mexican** | ** ** |
| ** **                   | ** ** | ** **     | ** ** | **thousands)**       | ** ** | **Pesos**      | ** **  | **thousands)**       | ** ** | **Pesos**      | ** ** |
| ** **                   | ** ** | **Currency**   | ** ** | **2008**             | ** ** | **2008**       | ** **  | **2007**             | ** ** | **2007**       | ** ** |
| Air transportation equipment |       | US Dollar      | ** ** | **US$ **        | **6,888**  | ** **     | **Ps.**     | **75,203**           |       | US$       | 6,888      |   | Ps. | 75,203 |   |
| Investment in Egypt          |       | Egyptian Pound | ** ** | **EGP**              | **23,463** | ** **     | ** **  | **59,226**           |       | EGP            | 8,688      |   |   | 17,298 |   |
|                         |       |           | ** ** | ** **           | ** ** | **Ps.**        | **134,429** |                 |       |           | Ps.        | 92,501 |   |

 

c) 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, 2008** | ** ** | **December 31, 2007** | ** ** | **June 26, 2009** | ** ** |
| US  dollar      | ** ** | **13.7738**                |       | 10.9185 |   | 13.3380 |   |
| Egyptian  pound | ** ** | **2.5242**                 |       | 1.9911 |   | 2.3920 |   |

 

**18. Transactions and balances with related 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 agreement totaledPs. 55,389 and Ps. 88,232 in 2007 and 2006, respectively. No amounts were paidin 2008. As of April 1, 2007, these companies entered in a liquidationprocess and the employees were transferred to subsidiaries of the Company.

 

F-35

----

 

b) An analysis ofbalances due from/to related parties at December 31, 2008 and 2007 is asfollows:

 
| ** **                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Due  from:                                         |       |     |       |     |       |
| Administradores de la empresa en equipo, S.C.  (1) | ** ** | **Ps.**  | **—** |     | Ps.        | 3,211 |   |
|                                               |       |     |       |     |       |   |   |
| Due  to:                                           |       |     |       |     |       |   |   |
| Serviasesorías,  S.C. (2)                     | ** ** | **Ps.**  | **—** |     | Ps.        | 104 |   |

 

----

(1)              This balance is a component of theCompany’s accounts receivable due from customers

(2)              This balance is a component of thesupplier account

 

c)  HipotecariaCrédito y Casa, S.A. de C.V.

 

Eustaquio de Nicolás Gutiérrez, Chairman, andJosé Ignacio de Nicolás Gutiérrez, brother of Eustaquio de Nicolás Gutiérrezcollectively owned a 29.4% ownership interest in Hipotecaria Crédito y Casa,S.A. de C.V, or Crédito y Casa, the principal business of which is providingmortgage financing and bridge loan financing. We estimate that in 2008, 2007and 2006, 0.1% of the mortgages obtained by our homebuyers were provided byHipotecaria Crédito y Casa, S.A. de C.V.

 

Eustaquio de Nicolás Gutiérrez and José Ignaciode Nicolás Gutiérrez are both members of the de Nicolás family, whichcollectively owns 35.0% of the Company’s share capital. In the past, Crédito yCasa has provided bridge loans and mortgages under SHF-sponsored programs toCompany’s customers. During 2006, 2007 and 2008, Crédito y Casa providedmortgages with respect to some of the homes sold by us.

 

On November 19, 2007, Hipotecaria Créditoy Casa, S.A. de C.V. was purchased by an independent group of investors, and isno longer an affiliate.

 

d) The terms and conditionsamong related parties are as follows:

 

Thebalances receivable from related parties are considered recoverable. For theyears ended December 31, 2008 and 2007, there are no uncollectible amountsfor related party receivables.

 

e) Compensation paid to the Company’s key managerialpersonnel or relevant directors is as follows:

 
| ** **                           | ** ** | **2008**   | ** **  | **2007**   | ** ** | **2006** | ** ** |
|--------------------------------------|------------|------------|-------------|------------|------------|----------|------------|
| ** **                           | ** ** | ** ** | ** **  | ** ** |       |     |       |
| Short  and long-term direct benefits | ** ** | **Ps.**    | **191,148** |       | Ps.        | 140,326  |       | Ps. | 106,713 |   |
| Termination  benefits                | ** ** | **35,276** |        | 40,781     |       | —   |       |
| Stock  option benefits               | ** ** | **616**    |        | —     |       | —   |       |
| ** **                           |       | **Ps.**    | **227,040** |       | Ps.        | 181,107  |       | Ps. | 106,713 |   |

 

During 2007, certainstock option benefits were granted to key employees as disclosed in Note 16e.During the year ended December 31, 2008, there were stock option benefitspayments for Ps. 616 to these employees; although no new stock option grantswere made.

 

There were no postretirement benefits payments during the years presented herein.

 

F-36

----

 

**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*.

 

**General description of the productsor services**

 

Mexico’s developer-built housing industry isdivided into 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 focus is to provide affordable entry-level and middle-incomehousing for our customers. Therefore, the operating segments that will bepresented in detail are the affordable entry-level and the middle-incomesegments, in conformity with guidelines of Bulletin B-5.

 

Affordable entry-level developments range insize from 500 to 20,000 homes and are developed in stages typically comprising300 homes each. During 2008, 2007 and 2006, affordable entry-level homes had anaverage price of approximately Ps. 276, Ps. 260 and Ps. 243, respectively. Atypical affordable entry-level home consists of a kitchen, living-dining area,one to three bedrooms, and one bathroom.

 

Middle-income developments range in size from400 to 2,000 homes and are developed in stages typically comprising 200 homeseach. During 2008, 2007 and 2006, middle-income homes had an average price ofapproximately Ps. 817, Ps. 781 and Ps. 572, respectively. A typicalmiddle-income home consists of a kitchen, dining room, living room, two orthree bedrooms, and two bathrooms.

 

The following table showsthe operating results by each segment identified as of December 31, 2008,2007 and 2006:

 
| **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          |       |
|                                        |            |                 |            |                   |            |                  |            |  |  |  |

 
| **Year ending December 31, 2006** | ** ** | **Entry-level** | ** ** | **Middle-income** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|-----------------|------------|-------------------|------------|------------------|------------|
| Revenues                               |       | Ps.             | 10,544,154 |              | Ps.        | 2,895,365        |       | Ps. | 13,439,519 |   |
| Income  from operations                |       | 2,266,891       |       | 622,476           |       | 2,889,367        |       |
| Depreciation  and amortization         |       | 192,499         |       | 52,859            |       | 245,358          |       |
|                                        |            |                 |            |                   |            |                  |            |  |  |  |

 

The income from operations caption in thetables above were calculated as the total revenue from each segment, lessallocated total consolidated operating cost and expenses. The allocation oftotal consolidated operating costs and expenses into the segments was based onthe percentage that the sales in each segment represent of the totalconsolidated sales. Depreciation and amortization expense is allocated to eachsegment using the same basis as operating costs and expenses.

 

F-37

----

 

The Company does not segregate its totalassets by operating segment.

 

**20. Operating expenses**

** **
| ** **                              | ** ** | **2008**      | ** **    | **2007** | ** ** | **2006**  | ** ** |
|-----------------------------------------|------------|---------------|---------------|----------|------------|-----------|------------|
| Administrative                          | ** ** | **Ps.**       | **1,259,870** |     | Ps.        | 855,687   |       | Ps. | 595,234 |   |
| Selling                                 | ** ** | **1,026,722** |          | 849,784  |       | 669,436   |       |
| Amortization  expense of BETA trademark | ** ** | **91,054**    |          | 92,958   |       | 94,477    |       |
|                                    | ** ** | **Ps.**       | **2,377,646** |     | Ps.        | 1,798,429 |       | Ps. | 1,359,147 |   |

 

The table below shows the most significantoperating expenses:

 
| ** **                  | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Salaries and other benefits | ** ** | **Ps.**     | **614,560** |     | Ps.        | 439,113  |       | Ps. | 285,947 |   |
| Office  expenses            | ** ** | **99,411**  |        | 70,761   |       | 52,048   |       |
| Advertising                 | ** ** | **203,211** |        | 31,997   |       | 29,949   |       |
|                             |            |             |             |          |            |          |            |  |  |  |

 

**21. Other (expenses) income**

** **
| ** **                       | ** ** | **2008**    | ** **   | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|-------------|--------------|----------|------------|----------|------------|
| Brazilian settlement (1)         | ** ** | **Ps.**     | **(48,536**  | **)**    | Ps.        | —   |       | Ps. | — |   |
| Recovery of taxes (2)            | ** ** | **—**  |         | 394,510  |       | —   |       |
| Current profit-sharing           | ** ** | **(67,707** | **)**        | (30,684  | )          | (36,728  | )          |
| Deferred profit-sharing          | ** ** | **(3,061**  | **)**        | —   |       | —   |       |
| Other income (expenses), net (3) | ** ** | **9,378**   |         | (154,603 | )          | 47,732   |       |
|                             | ** ** | **Ps.**     | **(109,926** | **)**    | Ps.        | 209,223  |       | Ps. | 11,004 |   |

 

----

(1) See Note 25.

 

(2) During 2007, the Company recoveredfrom tax authorities value-added tax related to the years 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**

** **
| ** **                                               | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Interest expense related to senior guaranteed  notes (1) | ** ** | **Ps.**     | **—**  |     | Ps.        | 141,532  |       | Ps. | 328,573 |   |
| Other interest expense                                   | ** ** | **127,526** |        | 86,850   |       | 246,285  |       |
| Commissions and financing costs (2)                      | ** ** | **109,507** |        | 116,546  |       | 99,721   |       |
|                                                     | ** ** | **Ps.**     | **237,033** |     | Ps.        | 344,928  |       | Ps. | 674,579 |   |

 

----

(1) As of December 31, 2008 theinterest expense related to senior guaranteed notes was Ps. 269,052. Howeverdue to the MFRS D-6 application, this amount was fully capitalized (see Note6). As of December 31, 2007 the interest expense related to seniorguaranteed notes was Ps. 290,509, of which Ps. 149,157 was capitalized, whilePs. 141,352 remained in the comprehensive financing cost. During 2007, theCompany adopted the provisions of MFRS D-6, resulting in the capitalization ofa portion of its net financing cost. Because MFRS D-6 was adoptedprospectively, 2008 and 2007 interest expense is not comparable to amountspresented for 2006.

 

F-38

----

 

(2) Includes the commissions paid by theCompany to INFONAVIT and Registro Único de Vivienda (RUV), when obtaining approvalof individual 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 2008, 2007 and 2006 werePs. 75,818, Ps. 65,585 and Ps. 51,756, respectively.

 

**23. Income tax, asset tax and**Flat Rate Business Tax (IETU)**

 

In accordance with Mexican tax law, the Companyis subject to income tax (ISR), since 2008 Flat Rate Business Tax(“IETU”) and until 2007 asset tax (IMPAC). TheISR is computed taking into consideration the taxable and deductible effects ofinflation, such as depreciation calculated on restated asset values. Taxableincome is increased or reduced by the effects of inflation on certain monetaryassets and liabilities through the inflationary component, which is similar tothe gain or loss from monetary position. On December 1, 2004 certain amendments to the ISRand IMPAC laws were enacted and were effective in 2005. The most significantamendments were as follows: a) the ISRrate was reduced to 30% in 2005 and was further reduced to 29% in 2006 and 28%in 2007 and thereafter; b) for income tax purposes, cost of sales is deductedinstead of inventory purchases and related conversion costs; c) taxpayers had the ability to elect, in 2005,to ratably increase taxable income over a period from 4 to 12 years by the taxbasis of inventories as of December 31, 2004 determined in conformity withthe respective tax rules; when electing to amortize the tax basis of inventoriesinto taxable income, any remaining tax balance of inventories that had not beendeducted and any unamortized tax loss carryforwards were deducted from the taxbasis of the December 31, 2004 inventory balance; as a consequence, costof sales of such inventories were deducted; d) since 2006, employee statutory profit sharing paid is fully deductible;and e) bank liabilities andliabilities with foreign entities are included to determine the IMPAC taxablebase.

 

Until 2006, IMPAC was calculated by applying 1.8%on the net average of the majority of restated assets less certain liabilities.As of 2007 the rate decreased to 1.25% and the deduction of payables waseliminated; the IMPAC was payable only to the extent that it exceeded ISRpayable for the same period. Any required payment of IMPAC was creditableagainst the excess of ISR over IMPAC of the following ten years.

 

The Company files ISR and IMPACtax returns on an individual entity basis and the related tax results arecombined in the accompanying consolidated financial statements.

 

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.

 

F-39

----

 

a) As of December 31, 2008, 2007 and 2006 the ISRconsist of the following:

 
| ** ** | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|------------|------------|-------------|-------------|----------|------------|----------|------------|
| ISR:       |       |        |        |     |       |     |       |
| Current    | ** ** | **Ps.**     | **141,569** |     | Ps.        | 132,873  |       | Ps. | 143,304 |   |
| Deferred   | ** ** | **570,606** |        | 818,407  |       | 526,539  |       |
|       | ** ** | **Ps.**     | **712,175** |     | Ps.        | 951,280  |       | Ps. | 669,843 |   |

 

To determine deferred ISR as of December 31, 2008 and 2007, theCompany applied the different tax rates that will be in effect beginning in2009 and 2008, respectively, to temporary differences according to theirestimated dates of reversal. In addition, in accordance with tax regulations ineffect as of 2005, certain subsidiaries elected to amortize the tax inventoryof Ps. 415,208 at December 31, 2004 into taxable income over an 8-yearperiod beginning in 2005, based on inventory turnover. Accordingly, the initialeffect of the new regulation of no longer deducting inventory purchases isdeferred.

 

b) The reconciliation of the statutory andeffective ISR rates expressed as a percentage of income before the ISR is:

 
| ** **                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                             | ** ** | **%**      | ** ** | **%**    | ** ** | **%**    | ** ** |
| Statutory rate                                         | ** ** | **28**     |       | 28       |       | 29       |       |
| Add (deduct) effect of permanent differences  mainly:  | ** ** | ** ** |       |     |       |     |       |
| Nondeductible expenses                                 | ** ** | **1**      |       | 1        |       | 1        |       |
| Difference between book and tax inflation effects      | ** ** | **2**      |       | 2        |       | 3        |       |
| Recovered added-value tax                              | ** ** | **—** |       | (2       | )          | —   |       |
| Effect of reduction in statutory rate on deferred  ISR | ** ** | **—** |       | —   |       | (2       | )          |
| Effective tax rate                                     | ** ** | **31**     |       | 29       |       | 31       |       |

 

F-40

----

 

c) At December 31, 2008 and 2007 themain items comprising the asset (liability) balance of deferred ISR are:

 
| ** **                                    | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-----------------------------------------------|------------|----------------|----------------|------------|------------|
| Deferred ISR asset:                           |       |           |           |       |       |
| Effect of tax loss carryforwards              | ** ** | **Ps.**        | **994,555**    |       | Ps.        | 765,563 |   |
| Construction-in-process                       | ** ** | **1,489,578**  |           | 771,010    |       |
| Derivative financial instruments              | ** ** | **—**     |           | 22,148     |       |
| Labor obligations                             | ** ** | **23,842**     |           | 9,595      |       |
| Allowance for doubtful accounts               | ** ** | **13,491**     |           | 26,246     |       |
| Provisions                                    | ** ** | **473,756**    |           | 192,880    |       |
| PTU liability incurred                        | ** ** | **19,141**     |           | 9,335      |       |
| Asset tax recoverable                         | ** ** | **10,802**     |           | 11,122     |       |
| Deferred ISR asset                            | ** ** | **3,025,165**  |           | 1,807,899  |       |
|                                          | ** ** | ** **     |           |       |       |
| Deferred ISR liability:                       | ** ** | ** **     |           |       |       |
| Unbilled revenues on developments in progress | ** ** | **(2,959,612** | **)**          | (1,804,545 | )          |
| Inventories                                   | ** ** | **(3,078,035** | **)**          | (2,503,206 | )          |
| Property and equipment                        | ** ** | **(166,542**   | **)**          | (121,797   | )          |
| Other assets                                  | ** ** | **(30,940**    | **)**          | (39,974    | )          |
| BETA trademark                                | ** ** | **(38,243**    | **)**          | (63,738    | )          |
| Debt issuance costs                           | ** ** | **(17,513**    | **)**          | (19,594    | )          |
| Derivative financial instruments              | ** ** | **(18,473**    | **)**          | —     |       |
| Prepaid expenses                              | ** ** | **(3,063**     | **)**          | (3,232     | )          |
| Taxable inventory (1)                         | ** ** | **(125,245**   | **)**          | (93,708    | )          |
| Deferred ISR liability                        | ** ** | **(6,437,666** | **)**          | (4,649,794 | )          |
| Total deferred liability                      | ** ** | **Ps.**        | **(3,412,501** | **)**      | Ps.        | (2,841,895 | ) |

 

----

(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. 125,245 and Ps. 93,708 as of December 31, 2008 and 2007,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, 2008 the tax loss carryforward expiring in thefollowing ten years amounted to Ps. 3,551,984.

 

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 31,2008 and 2007 of the asset tax were Ps. 10,802 and Ps. 11,122, respectively.

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, 2008 and expirationdates are:

 

F-41

----

 

| ** **                       | ** ** | **Tax Loss** | ** ** | **Recoverable** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------|------------|
| **Year of Expiration** | ** ** | **Carryforwards** | ** ** | **IMPAC**       | ** ** |
| 2012                             |       | Ps.               | 7,573      |            | Ps.        | 362 |   |
| 2013                             |       | 98,357            |       | 1,167           |       |
| 2014                             |       | 486,726           |       | 2,172           |       |
| 2015                             |       | 405,769           |       | 1,545           |       |
| 2016                             |       | 72,797            |       | 1,458           |       |
| 2017                             |       | 1,296,539         |       | 4,098           |       |
| 2018                             |       | 1,184,223         |       | —          |       |
|                             |       | Ps.               | 3,551,984  |            | Ps.        | 10,802 |   |

 

No valuation allowance has been recognizedagainst the Company’s tax loss carry-forwards as the Company believes it ismore likely than not, that such amounts will ultimately be recovered. Recoveryis primarly anticipated by the reversal of deferred tax liabilities recorded inthe Company’s consolidated financial statements as of December 31, 2008.

 

e) The Federal tax authority has the right to perform reviewsof the taxes paid by Mexican companies for a period of five years; thereforetax years beginning with 2003 are subject to possible review.

 

f) The Company does not have any unrecognized tax benefits as ofDecember 31, 2008.

 

**24. Subsequent events**

 

On February 24, 2009, the Company entered into Ps. 700 million,revolving credit line with Banamex, S.A. a local Mexican bank. Borrowing bearsinterest at a rate of the TIIE + 5% and matures on March 23, 2010.

 

The short-term debt balances outstanding as of December 31, 2008were originally due in January 2009. However, they have been renewed bythe Company, maturing now in the months of June, July and August of2009.

 

**25. Contingencies and commitments**

 

*Constructionguarantees*

 

TheCompany provides a two-year warranty against construction defects to all of itscustomers which could be due to the Company’s own activities, to defects in theconstruction materials provided by third parties (electrical installations,plumbing, gas, waterproofing, etc.) or to other circumstances not within thecontrol of the Company.

 

TheCompany is insured against any defect, hidden or visible, that could occurduring the construction, and after the construction for a certain period oftime. In addition, 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 thewarranty period, which is returned to them once such period ends.

 

Insurancecoverage expensed for the years ended December 31, 2008, 2007 and 2006amounted to Ps. 2,904, Ps. 4,371 and Ps. 4,948, respectively.

 

*Contingencies*

 

InJuly 2007, the Company entered into a Quota holders’ Agreement withEmpreendimentos Imobiliarios Limitada (“E.O.M.”), pursuant to which the Companyagreed to contribute 67% and E.O.M. agreed to contribute 33% of the projected4.0 million Brazilian Reals capital stock of Homex Brasil Incorporacoes andConstrucoes Imobiliarios Limitada. Following disagreements with E.O.M., theCompany exercised its right to withdraw from the Quota holders’ Agreement.

 

F-42

----

 

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 members of the Khafif family in Homex Brasil, through E.O.M., for8,352,941 Brazilian Reals, equivalent to approximate Ps. 48,536, of which 2.1million (Ps. 11,730) has been paid as of December 31, 2008. The remainingbalance will be paid in four equal payments in the months of April and October of2009 and 2010.  The Company has treatedthe step acquisition of this minority interest as a transaction betweenentities under common control, as is appropriate under MFRS. Because E.O.M. hadnegligible identifiable tangible or intangible assets as of the date of thetransaction, the Company has recognized the entire amount of this transactionas a settlement expense (other expense) in the statement of income for 2008(See Note 21).

 

The Company now operates in Brazil through its 100%subsidiary.

 

**26. New accounting principles(2009)**

 

Throughout 2008, the following new accountingstandards were issued under MFRS. The Company was required to adopt thesestandards on January 1, 2009. However, at the date of the financialstatements the Company is still evaluating the effect of the observance ofthese new accounting standards will have on the Company’s consolidated resultsof operations and financial position.

 

**MFRS B-7, Business Acquisitions**

 

This MFRS substitutes MFRS B-7 *BusinessAcquisitions*, and 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.

 

**MFRS B-8, Consolidated or Combined Financial Statements**

 

This MFRS replaces MFRS 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) thisrule defines “Specific-purpose Entity” (SPE), establishes the cases inwhich an entity has control over a SPE, and when a company should consolidatethis type of entity; (b) addresses that potential voting rights should beanalyzed when evaluating the existence of control over an entity; and, (c) setnew terms for “controlling interest” instead of “majority interest,” and“non-controlling interest” instead of “minority interest.”

 

**MFRS C-7, Investments in Associates and Other Permanent Investments**

 

MFRS C-7 describes the accounting treatment forinvestments in associates and other permanent investments, which werepreviously treated within MFRS B-8 *Consolidated FinancialStatements*. This MFRS requires therecognitionof a Specific-Purpose Entity, through equity method. Also, this MFRSestablishes that potential voting rights should be considered when analyzingthe existence of significant influence.

 

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

 

F-43

----

 

**MFRS C-8, Intangible Assets**

 

This rule substitutes MFRS C-8 *Intangible Assets*. The new rule defines intangibleassets as non-monetary items and broadens the criteria of identification,indicating that an intangible asset must be separable; this means that suchasset could be sold, transferred, or used by the entity. In addition,intangible asset arises 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, affectingretained earnings, and without restating prior financial statements.

 

This amount should be presented as an accountingchange in consolidated financial statements.

 

**MFRS D-8, Share-Based Payments**

 

MFRS D-8 establishes the recognition of share-basedpayments. When an entity purchases goods or pay services with share-basedpayments, the entity is required to recognize those goods or services at fairvalue and the corresponding increase in equity. According with MFRS D-8, ifshare-based payments cannot be settled with equity instruments, they have to besettled using an indirect method considering MFRS D-8 parameters.

 

**IMFRS14, Construction, Sales and Services Agreements related to Real Estate**

 

InDecember 2008 IMFRS 14 was issued by the CINIF to complement Bulletin’sD-7 regulation, *Construction Agreements and Manufacturing ofCertain Capital Assets*. This Interpretation is applicable to therecognition of revenues, costs and expenses for all entities that undertake theconstruction of capital assets directly or through sub contractors.

 

Dueto the application of this Interpretation, effective January 1, 2010, theCompany will stop recognizing 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 shouldare recognized, when all of the following conditions are fulfilled:

 

a)              the entity has transferredthe control to the homebuyer, in other words, the significant risks andbenefits due to the property or the assets ownership;

b)             the entity does not keep foritself any continue participation on the actual management of the sold assets,in the usual grade associated with the property, nor does retain the effectivecontrol of the sold assets;

c)              the revenues amount can beestimated 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.

 

ThisInterpretation will be adopted as of January 1, 2010, with retrospectiveapplication to prior accounting periods presented with its 2010 consolidatedfinancial statements.  At the date of theconsolidated financial statements, management is evaluating what effect thisnew accounting pronouncement will have on the Company’s results of operationsand financial position. While differences in revenue recognition might stillexist between MFRS and US GAAP upon the adoption of INIF 14, it is anticipatedthat the Company’s MFRS revenue recognition will more closely approximate itsUS GAAP revenue recognition at that time. The Company’s US GAAP revenuerecognition is disclosed further in Note 28 below.

 

F-44

----

 

**InternationalFinancial Reporting Standards (IFRS)**

 

OnNovember 11, 2008 the Mexican Securities Commission (Comisión NacionalBancaria y de Valores) issued a press release in which it debriefed that thisCommission will perform the necessary regulatory adaptations on which it willbe established the requirements for the listed companies to prepare and revealtheir financial information under IFRS beginning the year 2012. Likewise it wasspecified that early adoption for the years 2008, 2009, 2010 and 2011 isallowed.

 

At the date of thefinancial statements, management is evaluating the effects of the adoption andimplementation of IFRS as well as the potential adoption date.

 

**27.****                 ****Summary of differences betweenMexican Financial Reporting Standards (MFRS) and US GAAP**

 

The consolidatedfinancial statements of the Company are prepared in accordance with MFRS, whichvary in certain significant respects from US GAAP. A reconciliation of thereported majority net income, majority stockholders’ equity and majoritycomprehensive income to US GAAP is presented in Note 28a and b.

 

Effective January 1,2008, and as a result of adopting Standard B-10, *Effects ofinflation*, the Company ceased recognizing the effects of inflationin its financial statements and considered the restated amounts of allnon-monetary items as as their carrying basis as of January 1, 2008. TheCompany has not reconciled inflation adjustments recorded prior to 2008, norhas it reconciled inflation adjustments still included in its non-monetaryitems, including depreciation.

 

The differences betweenMFRS and US GAAP included in the reconciliation that affect the accompanyingconsolidated financial statements of the Company are as follows:

** **

**a)****                        ****Revenue and costrecognition**

 

The Company recognizesits USGAAP revenues when all of the following events occur:

 

·  a sale is consummated;

 

·  a significant initial consideration isreceived (when applicable);

 

·  the earnings process is complete and thecollection of any remaining receivables is reasonably assured.

 

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 wesell customers a house with incremental improvements beyond the “basic” house,we recognize amounts from the customer on a cash-basis when received, which isessentially cost recovery accounting.

 

Under MFRS, the Companyuses the 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.

 

F-45

----

 

Accordingly, areconciling item for the additional revenues and additional costs recognizedunder the percentage-of-completion method of accounting under MFRS is includedin the US GAAP reconciliation of net income and stockholders’ equity.

** **

**b)         Deferredincome taxes**

 

The Companyfollows SFAS No. 109, “Accounting for Income Taxes” for US GAAP purposes,which differs from the MFRS. Under MFRS, the effects of inflation on thedeferred tax balance generated by monetary items are recognized in the resulton monetary position. Under US GAAP, the deferred tax balance is classified asa non-monetary item. As a result, the consolidated statement of operationsdiffers with respect to the presentation of the gain (loss) on monetaryposition and deferred income tax provision.

 

As a result of thedifferences related to the recognition of revenue, costs and interest capitalizationas described below, the related deferred income tax presented under MFRS isdifferent from the effect calculated in accordance with US GAAP.

 

Below is a reconciliationof deferred tax balances between MFRS and USGAAP:

 
| ** **                                               | ** ** | **2008**       | ** **    | **2007**   | ** ** |
|----------------------------------------------------------|------------|----------------|---------------|------------|------------|
| Deferred income tax liability according to MFRS, net     | ** ** | **Ps.**        | **3,412,501** |       | Ps.        | 2,841,895 |   |
| Effect of US GAAP adjustments:                           |       |           |          |       |       |
| Accounts receivable                                      | ** ** | **(2,989,550** | **)**         | (1,910,950 | )          |
| Inventories                                              | ** ** | **2,225,359**  |          | 1,571,775  |       |
| Other, net                                               | ** ** | **(8,845**     | **)**         | (10,382    | )          |
| Deferred income tax liability according to US GAAP,  net | ** ** | **Ps.**        | **2,639,465** |       | Ps.        | 2,492,338 |   |

 

Deferred income taxbalance sheet classification:

 
| ** **                         | ** ** | **2008**       | ** **     | **2007**        | ** ** |
|------------------------------------|------------|----------------|----------------|-----------------|------------|
| ** **                         | ** ** | **Current**    | ** **     | **Non-current** | ** ** | **Current** | ** ** | **Non-current** | ** ** |
|                               |       |           |           |            |       |   |   |   |   |
| Deferred tax assets                | ** ** | **Ps.**        | **2,006,768**  | ** **      | **Ps.**    | **1,027,242** |   | Ps. | 900,312 |   | Ps. | 807,689 |   |
| Deferred tax liability             | ** ** | **(5,512,244** | **)**          | **(161,231**    | **)**      | (4,087,037 | ) | (113,302 | ) |
| Net deferred tax (liability) asset | ** ** | **Ps.**        | **(3,505,476** | **)**           | **Ps.**    | **866,011** |   | Ps. | (3,186,725 | ) | Ps. | 694,387 |   |

 

At December 31, 2008and 2007, the Company had Ps. 866,011 and Ps. 694,387 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. Accordingly,no valuation allowance has been provided under US GAAP for these amounts.

** **

**c)****                         ****Effect of SAB No. 108**

 

In September 2006,the SEC Staff issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB No. 108”), which addresses how the effects ofprior year uncorrected financial statement misstatements should be considered.SAB No. 108 requires registrants to quantify misstatements using bothbalance sheet and income statement approaches and to evaluate whether eitherapproach results in quantifying an error that is material in light of relativequantitative and qualitative factors. The requirements of SAB No. 108 wereeffective for annual financial statements covering the first fiscal year-endingafter November 15, 2006.

 

Through December 31,2005, receivables obtained from homebuyers representing downpayments wereconsidered as revenue under US GAAP, consistent with the accounting policyunder MFRS. During 2006, the Company reevaluated this accounting policy anddetermined that under US GAAP, a cost recovery method should have been appliednot 

 

F-46

----

 

recognizing revenue untilcollection. The Company believes that the impact of its prior accounting wasnot material to its 2005 consolidated financial statements.

 

Through December 31,2005, the amortization of the prepaid sales commissions was based on anamortization methodology tied to MFRS revenue recognition (percentage-of-completion).For US GAAP purposes, this prepaid expense should have been amortized in amanner similar to the Company’s US GAAP revenue recognition (a completedcontract method). The Company believes that the impact of its prior accountingwas not material to its 2005 consolidated financial statements.

 
| ** **                                  | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|
| SAB No. 108 prior  period adjustments: |       |     |       |
| Unsecured homebuyers’  receivables     |       | Ps.      | (148,728   | ) |
| Commissions on sales                        |       | 84,473   |       |
| Sub-total                                   |       | Ps.      | (64,255    | ) |
| Tax effect on SAB  No. 108 adjustments |       | 17,993   |       |
| Net effect of SAB  No. 108 adoption    |       | Ps.      | (46,262    | ) |

 

**d)****                         ****Statement of cash flows**

 

Until the year ended December 31, 2007 under MFRS, the Companypresented a consolidated statement of changes in financial position inaccordance with Bulletin B-12, “Statement of Changes in Financial Position”(B-12), which identified the generation and application of resources by thedifferences between beginning and ending financial statement balances inconstant Mexican pesos. B-12 also required that monetary and foreign exchangegains and losses be treated as cash items for the determination of resourcesgenerated by operations. Effective January 1, 2008, MFRS B-2, “Statementof Cash Flows” was issued to replace Bulletin B-2. This standard establishesthat the statement of changes in financial position is substituted by astatement of cash flows as part of the basic financial statements. Thetransitory rules of MFRS B-2 establish that the application of thisstandard is prospective. Therefore, the financial statements for years endedprior to 2008 include a statement of changes in financial position, aspreviously established by Mexican accounting Bulletin B-12.

 

In accordance with US GAAP the Company follows the requirements of SFASNo. 95, “Statement of Cash Flows”, excluding the effects of inflation.Refer to the Company’s condensed USGAAP statement of cash flow below.

** **

**e)****                         ****Classificationdifferences**

 

Under MFRS, advances for thepurchase of land and construction materials are recorded as part of the cost ofreal estate inventories. Under US GAAP, such advances are classified as prepaidexpenses.

 

Under MFRS, deferred taxesare classified as non-current. US GAAP requires a current or non-currentclassification based on the classification of the related asset or liability.

 

Under MFRS, the commissionspaid by the Company to INFONAVIT and Registro Unico de Vivienda (RUV), whenobtaining approval of individual financing for its clients, which facilitatehome sales and cash inflows recovery are consider part of the financing costs; USGAAP requires that such amounts be recorded as operating costs.

 

Under MFRS, amounts dueunder the Company’s factoring agreements are included in trade accountspayable; US GAAP requires that such amounts be recorded as a borrowing from thefinancial intermediary.

 

Under MFRS, interest expensefrom the factoring program sponsored by Nafinsa is included in the netcomprehensive financing cost; US GAAP requires that such amounts be recorded aspart of the operating expenses.

 

F-47

----

 

Through 2006, employee profit-sharing was presentedafter pre-tax income. In 2007, profit- sharing costs were considered as otherexpense and not a tax. These provisions  were  applied retroactively; therefore,  and according to the Interpretation of MFRS 4, Presentation of employee  profit-sharing in the statement of income,the amounts related to this category  have  been reclassified in other income, net (not deducted from  operating income). The reclassified balancesfor the years 2008, 2007 and 2006 were Ps. 70,768, Ps. 30,684 and Ps. 36,728,respectively. 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; there were no additional reclassifications for 2006.

 

**f)****                               ****Backlog**

 

The amount of backlog recorded in purchaseaccounting under US GAAP differs from the amount reported under MFRS. Under MFRS, sales are recognized using the percentage-of-completionmethod. Accordingly, a greater portion of the housing costs for houses inconstruction has already been recognized in the cost of operations;however, under US GAAP, sales are not recognized until collection has beenassured, therefore the portion of the housing costs that is included in thestatement of operations under MFRS has not yet been recognized under US GAAPand is considered backlog, thereby resulting in a greater backlog under USGAAP. This backlog is considered inventory under US GAAP.

 

**g)****                            ****Inventory**

 

Inventories under US GAAP are stated at cost,based on the average cost method. Inventories for the years ended December 31,2008 and 2007 are as follows:

 
| ** **                         | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|------------------------------------|------------|----------------|----------------|------------|------------|
| Land:                              | ** ** | ** **     | ** **     | ** ** | ** ** |
| Titled land                        | ** ** | **Ps.**        | **7,742,436**  |       | Ps.        | 5,160,074 |   |
| Contracted land                    | ** ** | **4,939,990**  |           | 4,782,862  |       |
| ** **                         |       | **12,682,426** |           | 9,942,936  |       |
| Land held for  future developments | ** ** | **(9,254,469** | **)**          | (7,091,074 | )          |
| Total land                         | ** ** | **3,427,957**  |           | 2,851,862  |       |
|                               |       |           |           |       |       |
| Other  inventories:                |       |           |           |       |       |
| Construction-in-process            | ** ** | **8,612,476**  |           | 6,072,906  |       |
| Construction  materials            | ** ** | **638,488**    |           | 629,869    |       |
| Total other  inventories           | ** ** | **9,250,964**  |           | 6,702,775  |       |
| Total  inventories                 | ** ** | **Ps.**        | **12,678,921** |       | Ps.        | 9,554,637 |   |

 

**h)****                            ****Goodwill**

 

The amount of goodwill under US GAAP is greaterthan that reported under MFRS, due to the difference in the revenue recognitionmethods between MFRS and US GAAP. Under MFRS, accounts receivable isgreater than under US GAAP. However, under MFRS, inventories are lower thanunder US GAAP. Accordingly, profit recognized under MFRS that has not yetbeen recognized for US GAAP purposes is included within goodwill under US GAAP,resulting in a higher goodwill for US GAAP purposes.

 

Goodwill is not amortized; however, it is subject to annual impairmenttests as required by SFAS 142, and is adjusted for any impairment losses.Goodwill is allocated to the affordable entry-level segment.

 

**i)****                               ****Laborobligations**

 

The Company has recorded liabilities for theseniority premium and termination indemnity (severance) liabilities for itsMexican subsidiaries with employees (Administradora Picsa, Desarrolladora deCasas del Noroeste and Altos Mandos 

 

F-48

----

 

de Negocios). For its MFRS consolidatedfinancial statements, 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. Similar recognitioncriteria under US GAAP are established in 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 SFAS No. 87, whichresults in an immaterial difference in the amount recorded under the twoaccounting principles.

 

Prior to the adoption of SFAS No. 158, there wasno difference in the liabilities recorded for pension plans and senioritypremiums between MFRS and US GAAP.

 
| ** **              | ** ** | **2008********Total** | ** ** | **2007********Total** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|
| Unrecognized items:     |       |                  |       |                  |       |
| Transition obligation   | ** ** | **Ps.**               | **11,251** |                  | Ps.        | 12,889 |   |
| Prior service cost      | ** ** | **10,691**            |       | 11,860                |       |
| Net actuarial loss      | ** ** | **(5,603**            | **)**      | 19,609                |       |
| Unrecognized ítems | ** ** | **Ps.**               | **16,339** |                  | Ps.        | 44,358 |   |

 

As disclosed in Note 13, during 2007, theCompany amended its plan resulting in the admission of additional employeeparticipants who have received credit for prior service costs.

 

For purposes of determining the cost of our pensionplans, seniority premiums and severance indemnities under US GAAP, the Companyapplies SFAS No. 87, as amended by SFAS No. 158, and SFAS No. 112.The Company uses a December 31 measurement date for its seniority premiumsand severance indemnities.

 
| ** **                              | ** ** | **2008**    | ** **  | **2007** | ** ** |
|-----------------------------------------|------------|-------------|-------------|----------|------------|
| **Change in benefit obligations:**      |       |        |        |     |       |
| Benefit obligation at beginning of year | ** ** | **Ps.**     | **116,177** |     | Ps.        | 58,154 |   |
| Net periodic cost                       | ** ** | **105,290** |        | 35,127   |       |
| Benefits paid                           | ** ** | **(76,148** | **)**       | —   |       |
| Other comprehensive income              | ** ** | **(28,570** | **)**       | 22,896   |       |
| **Unfunded status**                     | ** ** | **Ps.**     | **116,749** |     | Ps.        | 116,177 |   |

 

Net periodic costs for 2008, 2007 and 2006 aresummarized below:

 
| ** **                         | ** ** | **2008**   | ** **  | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
| Integration of Net Periodic Costs: |       |       |        |     |       |     |       |
| Labor cost                         | ** ** | **Ps.**    | **15,750**  |     | Ps.        | 10,033   |       | Ps. | 15,257 |   |
| Financial cost                     | ** ** | **9,393**  |        | 5,378    |       | 2,862    |       |
| Transition liability               | ** ** | **1,639**  |        | 13,473   |       | 2,965    |       |
| Actuarial losses                   | ** ** | **78,508** |        | 6,243    |       | 1,402    |       |
| Inflation adjustment               |       | —     |        | —   |       | 561      |       |
| Net periodic costs                 | ** ** | **Ps.**    | **105,290** |     | Ps.        | 35,127   |       | Ps. | 23,047 |   |

 

F-49

----

 

**j)****                               ****Disclosureabout fair value of financial instruments**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Statement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS157 establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value.  The hierarchy gives thehighest 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 under FAS 157 are described below:

 

Level1 - Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets or liabilities;

 

Level2 - Quoted prices in markets that are not active, or inputs that areobservable, either directly or indirectly, for substantially the full term ofthe asset or liability;

 

Level3 - Prices or valuation techniques that require inputs that are bothsignificant to the fair value measurement and unobservable (supported by littleor no market activity).

 

InFebruary 2007, the FASB issued FASB Statement No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (“FAS 159”).  FAS159 permits entities to choose to measure eligible financial instruments andother items at fair value.  Theprovisions of FAS 159 were adopted January 1, 2008.  The Companydid not elect the Fair Value Option for any of its financial assets orliabilities, and therefore, the adoption of FAS 159 had no impact on theCompany’s financial position, results of operations or cash flows.

 

Under Statements of Financial Accounting Standards No. 107,Disclosures about Failr Value of Financial Instruments (SFAS 107), whenpossible we use quoted prices to determine fair value. Where quoted prices arenot available, the fair value is internally derived based upon appropriatevaluation methodologies with respect to the amount and timing of future cashflows and estimated discount rates. However, considerable judgment is requiredin interpreting market data to develop estimates of fair value, so theestimates are not necessarily indicative of the amounts that could be realizedor wouold be paid in a current market exchange. The effect of using differentmarket assumptions or estimation methodologies could be material to theestimated fair values. Fair value presented herein is based on informationavailable at December 31, 2008 and 2007. Although management is not awareof any factors that would be significantly affect the fair value amounts, suchamounts have not been updated since those dates; therefore the currentestimates of fair value at dates after December 31, 2008 and 2007, coulddiffer 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 at December 31,2008 and 2007. As of December 31, 2008 and 2007, the carrying value oftotal debt is Ps. 7,332,999 and Ps. 3,283,997, respectively. The fair value isPs. 5,625,724 at December 31, 2008 and Ps. 3,408,134 at December 31,2007.

 

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 cancelation of the Principal-Only Swap agreement as it wasalready recorded at fair value. As of December 31, 2008 and 2007, the fairvalue of the Principal-Only Swap was Ps. - and Ps.79,098 (US$7.2 million),respectively, which represents the estimated present value of future cash flowsto be paid by the Company.

 

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 for US$250million (“Interest-Only Swap”). This new transaction also does not meet hedgeaccounting requirements, and thus changes in the fair value of the underlyingderivative have been and will be recorded in the Company’s current earnings asa component of comprehensive financing cost within the exchange (gain) lossesaccount. As of December 31, 2008 the fair value of this derivative was afavorable asset position of Ps. 65,975 (US$4.8 million) (see Note 9). TheCompany’s estimate of the derivative’s fair value was made using Level 2evidence as per the FAS 157 hierarchy discussed above.

 

F-50

----

 

**k)****                           ****Prepaidsales commissions**

 

The amortization of the prepaid sales commissionexpense asset is based on an amortization methodology tied to FRS revenuerecognition (percentage-of-completion). For US GAAP purposes this prepaidexpense is amortized linked to the revenue recognition method applied under USGAAP (a completed contract method).

 

**l)****                               ****Capitalizationof net comprehensive financing 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 isobligatory as of the fiscal year 2007. The Company capitalizes the integralcost of financing for MFRS reporting from the year 2007.

 

In accordance with US GAAP, if interest isincurred during the construction of qualifying assets, capitalization isrequired as part of the cost of such assets. The Company applies theweighted-average interest rate on all outstanding debt to the balance ofconstruction-in-progress additions during the period. Accordingly, areconciling item for the capitalization of interest is included in the US GAAPreconciliation of net income and stockholders’ equity, and the effect ofinterest capitalized to the cost of inventories is included within operatingincome for US GAAP purposes.

 

**m)           Commitments and contingencies**

 

TheCompany holds insurance that covers defects, hidden or visible, duringconstruction and which also covers the warranty period provided by the Companyto home buyers. As mentioned in Note 25 to the 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 recognizea warranty accrual in our consolidated financial statements since we obtain asecurity bond from our contractors to cover the claims related to theirwork. We withhold a guarantee deposit from them, which is reimbursed toour contractors once the warranty for manufacturing defects periodexpires. We believe that at December 31, 2008 we had no unrecordedlosses with respect to these warranties.

 

F-51

----

 

**28.****      ****Reconciliationof MFRS net income and equity to US GAAP net income and equity and thepresentation of condensed financial statements in accordance with US GAAP.**

 

a.**                            **Reconciliation ofMajority Net Income for the Year

 
| ** **                                                                                     | ** ** | **2008**       | ** **    | **2007**   | ** ** | **2006**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------|---------------|------------|------------|-----------|------------|
| Majority net income according to MFRS                                                          | ** ** | **Ps.**        | **1,580,876** |       | Ps.        | 2,233,066 |       | Ps. | 1,391,281 |   |
|                                                                                           | ** ** | ** **     |          |       |       |      |       |
| US GAAP adjustments:                                                                           | ** ** | ** **     |          |       |       |      |       |
| Reversal of revenue recognized under  percentage-of-completion method of accounting (Note 27a) | ** ** | **(3,957,078** | **)**         | (2,366,873 | )          | (220,766  | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting (Note 27a)    | ** ** | **2,617,373**  |          | 1,608,498  |       | 150,121   |       |
|                                                                                           | ** ** | ** **     |          |       |       |      |       |
| Amortization of backlog (Notes 27f)                                                            |       | —         |          | (16,747    | )          | (47,682   | )          |
|                                                                                           |       |           |          |       |       |      |       |
| Labor obligations (Note 27i)                                                                   | ** ** | **11,109**     |          | (17,416    | )          | (6,408    | )          |
| Capitalization of interest (Note 27l)                                                          | ** ** | **(203,914**   | **)**         | (261,734   | )          | 198,772   |       |
| Deferral of unsecured homebuyers’ receivables                                             | ** ** | **(8,705**     | **)**         | 3,451      |       | 82,366    |       |
| Deferral of future involvement                                                                 | ** ** | **3,529**      |          | 2,119      |       | (7,574    | )          |
| Prepaid sales commissions (Note 27k)                                                           | ** ** | **71,449**     |          | 36,825     |       | 2,490     |       |
| Other items                                                                                    | ** ** | **29,667**     |          | —     |       | —    |       |
| Effects of inflation on US GAAP adjustments                                                    |       | —         |          | 203,634    |       | 171,736   |       |
| Total US GAAP adjustments before tax effects                                                   | ** ** | **(1,436,570** | **)**         | (808,243   | )          | 323,055   |       |
| Tax effects on US GAAP adjustments                                                             | ** ** | **423,476**    |          | 242,411    |       | 81,759    |       |
| Total US GAAP adjustments                                                                      | ** ** | **(1,013,094** | **)**         | (565,832   | )          | 241,296   |       |
|                                                                                           | ** ** | ** **     |          |       |       |      |       |
| Net income according to US GAAP                                                                | ** ** | **Ps.**        | **567,782**   |       | Ps.        | 1,667,234 |       | Ps. | 1,632,577 |   |

 

F-52

----

 

b.**           **Reconciliation ofMajority Stockholders’ Equity

 
| ** **                                                                                     | ** ** | **2008**        | ** **     | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|----------------|------------|------------|------------|------------|
| Majority stockholders’ equity according to MFRS                                           | ** ** | **Ps.**         | **11,270,914** |       | Ps.        | 9,632,918  |       | Ps. | 7,503,771 |   |
| US GAAP adjustments:                                                                           | ** ** | ** **      |           |       |       |       |       |
|                                                                                           | ** ** | ** **      |           |       |       |       |       |
| Reversal of revenue recognized under percentage-of-completion  method of accounting (Note 27a) | ** ** | **(10,837,314** | **)**          | (6,880,237 | )          | (4,789,556 | )          |
| Reversal of cost recognized under  percentage-of-completion method of accounting (Note 27a)    | ** ** | **7,937,971**   |           | 5,320,597  |       | 3,754,735  |       |
| Backlog (Note 27f)                                                                             | ** ** | **(237,001**    | **)**          | (237,001   | )          | (211,674   | )          |
| Labor obligations (Note 27i)                                                                   | ** ** | **(31,589**     | **)**          | (67,175    | )          | (28,703    | )          |
| Prepaid sales commissions (Note 27k)                                                           | ** ** | **195,229**     |           | 123,782    |       | 86,957     |       |
| Deferral of unsecured homebuyers’ receivables of the  year                                | ** ** | **(71,616**     | **)**          | (62,911    | )          | (66,362    | )          |
| Deferral of future involvement                                                                 | ** ** | **(1,926**      | **)**          | (5,455     | )          | (7,574     | )          |
| Acquisition of minority interest                                                               | ** ** | **79,437**      |           | 79,437     |       | 79,437     |       |
| Capitalization of interest (Note 27l)                                                          | ** ** | **14,593**      |           | 218,506    |       | 480,240    |       |
| Goodwill, net (Note 27h)                                                                       | ** ** | **86,754**      |           | 86,754     |       | 86,754     |       |
| Total US GAAP adjustments before tax effects                                                   | ** ** | **(2,865,462**  | **)**          | (1,423,703 | )          | (615,746   | )          |
| Tax effects on US GAAP adjustments                                                             | ** ** | **841,766**     |           | 418,289    |       | 194,964    |       |
| Total US GAAP adjustments                                                                      | ** ** | **(2,023,696**  | **)**          | (1,005,414 | )          | (420,782   | )          |
|                                                                                           | ** ** | ** **      |           |       |       |       |       |
| Stockholders’ equity according to US GAAP                                                 | ** ** | **Ps.**         | **9,247,218**  |       | Ps.        | 8,627,504  |       | Ps. | 7,082,989 |   |

 

c.**                            **Reconciliation ofMajority Comprehensive Income

 
| ** **                                | ** ** | **2008**       | ** **    | **2007** | ** ** | **2006**  | ** ** |
|-------------------------------------------|------------|----------------|---------------|----------|------------|-----------|------------|
| Majority net income according to MFRS     | ** ** | **Ps.**        | **1,580,876** |     | Ps.        | 2,233,066 |       | Ps. | 1,391,281 |   |
|                                      | ** ** | ** **     |          |     |       |      |       |
| Comprehensive income adjustments          | ** ** | **23,362**     |          | (481     | )          | —    |       |
|                                      | ** ** | ** **     |          |     |       |      |       |
| Labor obligations                         | ** ** | **28,570**     |          | (22,896  | )          | 13,941    |       |
|                                      | ** ** | ** **     |          |     |       |      |       |
| Net US GAAP adjustments:                  | ** ** | ** **     |          |     |       |      |       |
| Net income                                | ** ** | **(1,013,094** | **)**         | (565,832 | )          | 241,296   |       |
|                                      | ** ** | ** **     |          |     |       |      |       |
| Comprehensive income according to US GAAP | ** ** | **Ps.**        | **619,714**   |     | Ps.        | 1,643,857 |       | Ps. | 1,646,518 |   |

 

F-53

----

 

d.**                           **Condensed balancesheets according to US GAAP

 
| ** **                                      | ** ** | ** ** | ** ** | **2008**      | ** **     | **2007**  | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------|----------------|-----------|------------|
| **Assets**                                      | ** ** | ** ** |       |          |           |      |       |
| Current assets                                  |       |       | ** ** | **Ps.**       | **18,052,424** |      | Ps.        | 14,488,606 |   |
| Land for development                            |       |       | ** ** | **9,254,469** |           | 7,091,074 |       |
| Property and equipment                          |       |       | ** ** | **1,402,928** |           | 1,155,729 |       |
| Goodwill                                        |       |       | ** ** | **650,344**   |           | 650,344   |       |
| Other assets                                    |       |       | ** ** | **1,414,114** |           | 1,193,614 |       |
|                                            |       |       |       |          |           |      |       |
| Total assets                                    |       |       | ** ** | **Ps.**       | **30,774,279** |      | Ps.        | 24,579,367 |   |
|                                            |       |       |       |          |           |      |       |
| **Liabilities and stockholders’  equity**  |       |       |       |          |           |      |       |
| Current liabilities                             |       |       | ** ** | **Ps.**       | **14,274,161** |      | Ps.        | 11,054,629 |   |
| Long-term liabilities                           |       |       | ** ** | **7,006,557** |           | 4,689,022 |       |
| Minority interest                               |       |       | ** ** | **246,343**   |           | 208,212   |       |
| Majority stockholders’ equity              |       |       | ** ** | **9,247,218** |           | 8,627,504 |       |
|                                            |       |       |       |          |           |      |       |
| Total liabilities and stockholders’ equity |       |       | ** ** | **Ps.**       | **30,774,279** |      | Ps.        | 24,579,367 |   |

 

e.                             Condensed statements ofoperations according to US GAAP

 
| ** **                                                   | ** ** | **2008**       | ** **     | **2007**  | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------|------------|----------------|----------------|-----------|------------|------------|------------|
| Revenues                                                     | ** ** | **Ps.**        | **14,884,701** |      | Ps.        | 13,849,728 |       | Ps. | 13,224,145 |   |
| Costs                                                        | ** ** | **10,398,464** |           | 9,814,725 |       | 9,311,415  |       |
| Gross profit                                                 | ** ** | **4,486,237**  |           | 4,035,003 |       | 3,912,730  |       |
| Operating income                                             | ** ** | **2,108,793**  |           | 2,116,650 |       | 2,519,346  |       |
| Income before income taxes                                   | ** ** | **894,612**    |           | 2,504,715 |       | 2,432,458  |       |
| Income taxes                                                 | ** ** | **288,699**    |           | 708,869   |       | 751,603    |       |
| Minority interest                                            | ** ** | **38,131**     |           | 128,612   |       | 48,278     |       |
| Net income according to US GAAP                              | ** ** | **Ps.**        | **567,782**    |      | Ps.        | 1,667,234  |       | Ps. | 1,632,577 |   |
|                                                         | ** ** | ** **     |           |      |       |       |       |
| Weighted average shares outstanding (in thousands)           | ** ** | **334,870**    |           | 335,688   |       | 335,869    |       |
|                                                         | ** ** | ** **     |           |      |       |       |       |
| Earnings per share according to US GAAP (basic and  diluted) | ** ** | **Ps.**        | **1.70**       |      | Ps.        | 4.96       |       | Ps. | 4.86 |   |

 

F-54

----

 

f.                              Reconciliation of changes instockholders’ equity according to US GAAP

 
| ** **                                        | ** ** | **2008**    | ** **    | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------------------------|------------|-------------|---------------|-----------|------------|-----------|------------|
| Stockholders’ equity at beginning of year    | ** ** | **Ps.**     | **8,627,504** |      | Ps.        | 7,082,989 |       | Ps. | 5,509,272 |   |
| Adoption of SFAS 158                              |       | —      |          | —    |       | (26,539   | )          |
| Cumulative effect of SAB No. 108 adoption    |       | —      |          | —    |       | (46,262   | )          |
| Net income according to US GAAP                   | ** ** | **567,782** |          | 1,667,234 |       | 1,632,577 |       |
| Labor obligations                                 | ** ** | **28,570**  |          | (22,896   | )          | 13,941    |       |
| Shares repurchased for employee stock option plan |       | —      |          | (99,342   | )          | —    |       |
| Comprehensive income adjustment                   | ** ** | **23,362**  |          | (481      | )          | —    |       |
|                                              |       |        |          |      |       |      |       |
| Stockholders’ equity at end of year          | ** ** | **Ps.**     | **9,247,218** |      | Ps.        | 8,627,504 |       | Ps. | 7,082,989 |   |

 

g.                            Condensed statements of cashflows 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 (SFAS 95), statements of cash flows present only cashitems and exclude non-cash items. SFAS 95 does not provide guidance withrespect toinflation-adjusted financialstatements. The differences between MFRS and US GAAP in the amounts reportedare mainly due to: (i) the treatment of restrictive cash balances, (ii) eliminationof inflationary effects of monetary assets and liabilities from financing andinvesting activities against the corresponding monetary position result inoperating activities, and (iii) the recognition in operating, financingand investing activities of the US GAAP adjustments, and the presentation ofshort-term debt activity with financing activities.

 

The following cash flow statements wereprepared in accordance with SFAS 95 provided by operating, financing andinvesting activities, giving effect to the US GAAP adjustments, excluding theeffect of inflation required by Bulletin B-10. The following information ispresented in thousands of historical pesos and is not presented in pesos ofconstant purchasing power:

 

F-55

----

 
| ** **                                                 | ** ** | **2008**       | ** **    | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------|------------|----------------|---------------|------------|------------|------------|------------|
| Operating activities:                                      |       |           |          |       |       |       |       |
| Adjusted consolidated net income **(1)**                   | ** ** | **Ps.**        | **567,782**   |       | Ps.        | 1,667,234  |       | Ps. | 1,607,362 |   |
| Non-cash items:                                            |       |           |          |       |       |       |       |
| Depreciation                                               | ** ** | **323,727**    |          | 175,717    |       | 112,404    |       |
| Deferred income tax and statutory profit-sharing           | ** ** | **150,191**    |          | 575,996    |       | 586,260    |       |
| Amortization                                               | ** ** | **91,054**     |          | 106,566    |       | 156,335    |       |
| Exchange loss                                              | ** ** | **715,500**    |          | 20,000     |       | 53,250     |       |
| Change in valuation effects of derivative  instruments     | ** ** | **313,962**    |          | (139,749   | )          | 100,594    |       |
| Changes in operating assets and liabitilies                | ** ** | **(5,965,595** | **)**         | (1,823,793 | )          | (1,282,408 | )          |
| Recoverable tax, net                                       | ** ** | **—**     | ** **    | **—** |       | (5,725     | )          |
| Net cash flows (used in) provided by operating  activities | ** ** | **(3,803,379** | **)**         | 581,971    |       | 1,328,072  |       |
| ** **                                                 |       |           |          |       |       |       |       |
| Investing activities:                                      | ** ** | ** **     |          |       |       |       |       |
| Investments in:                                            | ** ** | ** **     |          |       |       |       |       |
| Property and equipment                                     | ** ** | **(575,379**   | **)**         | (680,748   | )          | (291,437   | )          |
| Restricted cash                                            | ** ** | **28,045**     |          | (119,855   | )          | (35,924    | )          |
| Net cash flows used in investing activities                | ** ** | **(547,334**   | **)**         | (800,603   | )          | (327,361   | )          |
|                                                       |       |           |          |       |       |       |       |
| Financing activities:                                      |       |           |          |       |       |       |       |
| Debt issuance costs, net                                   |       | —         |          | —     |       | (12,523    | )          |
| Short-term borrowings, net                                 | ** ** | **1,143,732**  |          | —     |       | —     |       |
| Proceeds from long-term borrowings                         | ** ** | **2,377,795**  |          | 2,647,276  |       | 1,537,908  |       |
| Repayments of long-term borrowings                         | ** ** | **(237,508**   | **)**         | (2,408,739 | )          | (1,549,468 | )          |
| Shares repurchased for employee stock option plan          | ** ** | **—**     |          | (99,342    | )          | —     |       |
| Dividends paid by subsidiary                               | ** ** | **—**     |          | (9,133     | )          | —     |       |
| Net cash flows provided by (used in) financing  activities | ** ** | **3,284,019**  |          | 130,062    | )          | (24,083    | )          |
|                                                       |       |           |          |       |       |       |       |
| Net (decrease) increase in cash and cash equivalents       | ** ** | **(1,066,694** | **)**         | (88,570    | )          | 976,628    |       |
| Cash and cash equivalents at the beginning of the  year    | ** ** | **2,206,834**  |          | 2,295,404  |       | 1,318,776  |       |
| Cash and cash equivalents at the end of the year           | ** ** | **Ps.**        | **1,140,140** |       | Ps.        | 2,206,834  |       | Ps. | 2,295,404 |   |
|                                                       |       |           |          |       |       |       |       |
| Supplemental cash flow information:                        |       |           |          |       |       |       |       |
| Interest paid                                              | ** ** | **Ps.**        | **665,807**   |       | Ps.        | 399,943    |       | Ps. | 428,489 |   |
| Income tax and tax on assets paid                          | ** ** | **Ps.**        | **123,351**   |       | Ps.        | 132,873    |       | Ps. | 17,473 |   |
| Non-cash financing activities:                             |       |           |          |       |       |       |       |
| Capital lease obligation incurred                          | ** ** | **Ps.**        | **97,131**    |       | Ps.        | 350,331    |       | Ps. | 8,704 |   |

 

----

**(1) ** Net income underUS GAAP was Ps. 1,632,577 during 2006, after giving effect to inflationaryadjustments recorded in preparing the Company’s 2008 consolidated financialstatements. The Company has excluded the effects of inflation from thepresentation of its 2006 statements of cash flows above, and accordingly netincome numbers as presented above differ from those reported elsewhere in theseconsolidated financial statements.

 

F-56

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h.           Consolidated Statements of Changes in Stockholders’ Equityaccording to US GAAP

 
| ** **                                        | ** ** | **Common  stock** | ** **  | **Additional  paid-****in  capital** | ** ** | **Shares  repurchased  for employee  stock option  plan** | ** ** | **Retained  earnings** | ** **  | **Other  comprehensive  income** | ** ** | **Majority  stockholders’  equity** | ** ** | **Comprehensive  income  of the  year** | ** **   |
|---------------------------------------------------|------------|-------------------|-------------|--------------------------------------|------------|-----------------------------------------------------------|------------|------------------------|-------------|----------------------------------|------------|------------------------------------------|------------|----------------------------------------------|--------------|
| Balances as of Januart 1, 2006                    |       | Ps.               | 528,011     |                                 | Ps.        | 3,280,222                                                 |       |                   |        | Ps.                              | 1,709,903  |                                     | Ps.        | (8,864                                       | )            | Ps. | 5,509,272 |   | Ps. |  832,928 |   |
|                                              |       |              |        |                                 |       |                                                      |       |                   |        |                             |       |                                     |       |                                         |         |
| Adoption of SFAS 158                              |       |              |        |                                 |       |                                                      |       |                   |        | (26,539                          | )          | (26,539                                  | )          |                                         |         |
| Cumulative effect of SAB No. 108 adoption    |       |              |        |                                 |       |                                                      |       | (46,262                | )           |                             |       | (46,262                                  | )          |                                         |         |
| Labor obligations                                 |       |              |        |                                 |       |                                                      |       |                   |        | 13,941                           |       | 13,941                                   |       | Ps.                                          |  13,941 |   |
| Net income                                        |       | —            |        | —                               |       | —                                                    |       | 1,632,577              |        |                             |       | 1,632,577                                |       | 1,632,577                                    |         |
| Balances as of December 31, 2006             |       | 528,011           |        | 3,280,222                            |       |                                                      |       | 3,296,218              |        | (21,462                          | )          | 7,082,989                                |       | 1,646,518                                    |         |
| Shares repurchased for employee stock option plan | ** ** | ** **        | ** **  | ** **                           |       | Ps.                                                       | (99,342    | )                      | ** **  |                             |       |                                     | (99,342    | )                                            | ** **   | ** ** |
| Comprehensive income adjustment                   | ** ** | ** **        | ** **  | ** **                           | ** ** | ** **                                                | ** ** | ** **             |        | (481                             | )          | (481                                     | )          | (481                                         | )            |
| Labor obligations                                 | ** ** | ** **        | ** **  | ** **                           | ** ** | ** **                                                | ** ** | ** **             |        | (22,896                          | )          | (22,896                                  | )          | (22,896                                      | )            |
| Net income                                        | ** ** | ** **        | ** **  | ** **                           | ** ** | ** **                                                |       | 1,667,234              |        |                             |       | 1,667,234                                |       | 1,667,234                                    |         |
| Balances as of December 31, 2007             |       | 528,011           |        | 3,280,222                            |       | (99,342                                                   | )          | 4,963,452              |        | (44,839                          | )          | 8,627,504                                |       | 1,643,857                                    |         |
| Comprehensive income adjustment                   | ** ** | ** **        | ** **  | ** **                           | ** ** | ** **                                                | ** ** | ** **             |        | 23,362                           |       | 23,362                                   |       | 23,362                                       |         |
| Labor obligations                                 | ** ** | ** **        | ** **  | ** **                           | ** ** | ** **                                                | ** ** | ** **             |        | 28,570                           |       | 28,570                                   |       | 28,570                                       |         |
| Net income                                        | ** ** | ** **        | ** **  | ** **                           | ** ** | ** **                                                |       | 567,782                |        |                             |       | 567,782                                  |       | 567,782                                      |         |
| Balances as of December 31, 2008             | ** ** | **Ps.**           | **528,011** | ** **                           | **Ps.**    | **3,280,222**                                             | ** ** | **Ps.**                | **(99,342** | **)**                            | **Ps.**    | **5,531,234**                            | ** ** | **Ps.**                                      | **7,093**    | ** ** | **Ps.** | **9,247,218** | ** ** | **Ps.** | **619,714** | ** ** |
|                                                   |            |                   |             |                                      |            |                                                           |            |                        |             |                                  |            |                                          |            |                                              |              |  |  |  |  |  |  |  |  |

 

F-57

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**29.****                              ****AdditionalUS GAAP disclosure information**

 

**a) Accounting for uncertainty in income taxes:**

 

TheCompany adopted the provisions of FASB Interpretation No. 48,”Accounting forUncertainty in Income Taxes” (FIN48) as of January 1, 2007. The adoption of FIN48 did not have an impact on the Company’s financial statements and did notresult in a cumulative adjustment to retained earnings at adoption,

 

Weestablish reserves to remove some or all of the tax benefit of any of our taxpositions at the time we determine that it becomes uncertain based upon one ofthe following conditions: (1) the tax position is not “more likely than not” tobe sustained, (2) the tax position is “more likely than not” to be sustained,but for a lesser amount, or (3) the tax position is “more likely than not” tobe sustained, but not in the financial period in which the tax position wasoriginally taken.

 

Forpurposes of evaluating whether or not a tax position is uncertain, (1) wepresume the tax position will be examined by the relevant taxing authority thathas full knowledge of all relevant information, (2) the technical merits of atax position 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.

 

Anumber of years may elapse before a particular uncertain tax position isaudited and finally resolved or when a tax assessment is raised. The number ofyears subject to tax assessments varies depending on the tax jurisdiction andis generally five years for the countries in which the Company principallyoperates. The tax benefit that has been previously reserved because of afailure to meet the “more likely than not” recognition threshold would berecognized in our income tax expense in the first period when the uncertaintydisappears under any one of the following conditions: (1) the tax position is “morelikely than not” to be sustained, (2) the tax position, amount, and/or timingis ultimately settled through negotiation or litigation, or (3) the statute oflimitations for the relevant taxing authority to examine and challenge the taxposition has expired.

 

**b) Recent accountingpronouncements**

 

**FAS160**

 

In December 2007, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 160, “Noncontrolling Interest in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (FAS 160). FAS 160 requiresnoncontrolling interests held by parties other than the parent in subsidiariesto be clearly identified, labeled, and presented in the consolidated statementsof financial position within equity, but separate from the parent’s equity. FAS160 is effective for fiscal years beginning after December 15, 2008. At December31, 2008, the Company had Ps. 246,343 of noncontrolling interest under MFRSthat has been treated as a difference between MFRS and US GAAP.

 

**FAS141 (R)**

 

In December 2007, theFASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),“Business Combinations” (FAS 141 (R)). FAS 141 (R) is a revision of FAS 141 andrequires that costs incurred to effect the acquisition (i.e.,acquisition-related cost) be recognized separately from the acquisition. Inaddition, in accordance with Statement of Financial Accounting Standards No. 141,“Business combinations” (FAS 141), restructuring costs that the acquirerexpected but was not obligated to incur, which included changes to benefitplans, were recognized as if they were a liability assumed at the acquisitiondate. FAS 141 (R) requires the acquirer to recognized those costs separatelyfrom the business combination. FAS 141 (R) is effective for the Company in2009, and its impact will vary with each acquisition.

 

**FAS161**

 

In March 2008, the FASBissued Statement of Financial Accounting Standards No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No.133” (FAS 161). FAS 161 requires enhanced disclosures about an entity’sderivatives and hedging activities to improve the transparency of financial 

 

F-58

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reporting. It iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008. FAS 161 is expected to increase annualdisclosures but will not have an impact on the Company’s financial position andresults of operations.

 

**FAS 162**

** **

**In May2008, the FASB issued Statement No. 162, *TheHierarchy of Generally Accepted Accounting Principles (FAS 162)*,which identifies the sources of accounting principles and the framework forselecting principles to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (GAAP) in the United States.  This statement is effective 60 days followingthe SEC’s approval of the Public Company Accounting Oversight Board amendmentsto AU Section 411, “The Meaning of Present Fairly in Conformity With GenerallyAccepted Accounting Principles.” This statement is not expected to result in achange in current practice.**

** **

**FSPFAS 142-3**

 

In April 2008, the FASBissued FASB Staff Position FAS 142-3, “Determination of the Useful Life ofIntangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 is effective forfinancial statements issued for fiscal years beginning after December 15, 2008.The Company is currently evaluating the impact that FSP FAS 142-3 will have inits accounting for intangible assets.

 

**FSP157-3**

 

In October 2008, the FASBissued FASB Staff Position 157-3, “Determining the Fair Value of a FinancialAssets When the Market of that Asset is not Active” (FSP 157-3). FSP 157-3provides an example that clarifies and reiterates certain provisions of theexisting fair value standard, including basing fair value on orderlytransactions and usage of management and broker inputs. FSP 157-3 is effectiveimmediately but is not expected to have a material impact on financial positionor results of operations of the Company.

 

**EITF 08-6**

 

In November 2008, theEmerging Issues Task Force (EITF) reached a consensus on EITF 08-6, “EquityMethod Investment Accounting Considerations”. EITF 08-6 provides guidance onthe application of the equity method. It states equity-method investmentsshould be recognized using a cost accumulation model. Also, it requires that equity method investments as a whole beassessed for other-than-temporary impairment in accordance with AccountingPrinciples Board Opinion No. 18. EITF 08-6 is effective on a prospective basisfor transactions in an investee’sshares occurring or impairments recognized in fiscal years beginning on orafter December 15, 2008. Currently, the Company’s equity method investments donot represent a significant component of its operations. Accordingly, it doesnot anticipate that the adoption of this EITF will have a significant impact onits financial statements.

 

F-59

----

 

**EITF08-7**

 

In November 2008, theEITF reached a consensus on EITF 08-7 “Accounting for Defensive IntangibleAssets”. EITF 08-7 provides that intangible assets that an acquirer intends touse as defensive assets, intangible assets acquired in a business combinationor an asset acquisition that an entity does not intend to actively use but doesintend to prevent others from using, are a separate unit of account from theexisting intangible assets of the acquirer. It also states that a defensiveintangible asset should be amortized over the period that fair value of thedefensive intangible asset diminishes. EITF 08-7 is effective on a prospectivebasis for transactions occurring in fiscal years beginning on or after December15, 2008. This EITF will not have a material impact on the Company’s financialposition and results of operations.

 

**FSPFAS 132(R)-1**

 

In December 2008, theFASB issued FASB Staff Position FAS 132(R)-1, “Employers ́ Disclosures aboutPostretirement Benefit Plan Assets” (FSP FAS 132(R)-1). FSP FAS 132(R)-1 amendsFASB Statement No.132(R), “Employers ́ Disclosures about Pensions and OtherPostretirement Benefit” (FAS132(R)). This FASB Staff Position replaces therequirement to disclose the percentage of fair value of total plan assets witha requirement to disclose the fair value of each major asset category. It alsoamends FASB Statement 157, “Fair Value Measurements” (FAS 157), to clarify thatdefined benefits pension or other postretirement plan assets not subject to FAS157 ́s disclosure requirements. FSO FAS 132(R)-1 is effective for fiscal yearsending after December 2009. This FSP will increase the amount of disclosuresfor plan assets in the Company’s 2009 audited financial statements.

 

**FAS 166**

 

FASB Statement No. 166 “Accountingfor Transfers of Financial Assets - an amendment of FASB Statement No. 140” (“FAS166”) provides for removal of the concept of a qualifying special-purposeentity from FAS 140 and removes the exception from applying FIN 46R*,* to qualifying special-purpose entities.It also clarifies that one objective of FAS 140 is to determine whether atransferor and all of the entities included in the transferor’s financialstatements being presented have surrendered control over transferred financialassets. FAS 166 modifies the financial-components approach used in FAS 140 andlimits the circumstances in which a financial asset, or portion of a financialasset, should be derecognized when the transferor has not transferred theentire original 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. FAS166 also defines the term *participatinginterest* to establish specific conditions for reporting a transferof a portion of a financial asset as a sale. FAS 166 requires that a transferorrecognize and initially measure at fair value all assets obtained (including atransferor’s beneficial interest) and liabilities incurred as a result of atransfer of financial assets accounted for as a sale. Enhanced disclosures arealso required by FAS 166. FAS 166 must be applied as of the beginning of eachreporting entity’s first annual reporting period that begins after November 15,2009. This statement must be applied to transfers occurring on or after theeffective date. The Company is currently evaluating the impact that theadoption of this standard will have on its consolidated financial statements.

 

**FAS 167**

 

The FASB’s objective inissuing FAS 167 “Amendments to FIN 46R” is to improve financial reporting byenterprises involved with variable interest entities. The Board undertook thisproject to address (1) the effects on certain provisions of FIN 46R, *Consolidation of Variable Interest Entities,*as a result of the elimination of the qualifying special-purpose entity conceptin FAS 166*,* and (2) constituent concerns about the applicationof certain key provisions of FIN 46R, including those in which the accountingand disclosures under FIN 46R do not always provide timely and usefulinformation about an enterprise’s involvement in a variable interest. ThisStatement retains the scope of FIN 46R with the addition of entities previouslyconsidered qualifying special-purpose entities, as the concept of theseentities was eliminated in FAS 166. FAS 167 shall be effective as of thebeginning of each reporting entity’s first annual reporting period that beginsafter November 15, 2009. Earlier application is prohibited. The Company iscurrently evaluating the impact that the adoption of this standard will have onits consolidated financial statements.

 

F-60

----

 

**c) Consolidation policies for US GAAP purposes**

 

Under MFRS and US GAAP, the Company consolidates thetwo 50%-owned subsidiaries disclosed in Note 2 (b) above.  The Company consolidates these entities as itis the primary beneficiary of theentities. The Company believes it controls the entities, taking all importantdecisions that impact the subsidiaries’ financial position and operations. Theassets and revenues of these subsidiaries accounted for less than 1% of assetsand revenues during all periods presented.

 

**30.          Valuation and qualifying accounts forthe years ended December 31, 2008, 2007 and 2006**

 
| **Description**                                                                | ** ** | **Beginning  balance  accrual** | ** **   | **Additions  charged to  income** | ** ** | **Writte-off** | ** ** | **Ending  balance  accrual** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|--------------|-----------------------------------|------------|----------------|------------|------------------------------|------------|
|                                                                           |       |                            |         |                              |       |           |       |                         |       |
| Allowance for doubtful accounts                                                |       |                            |         |                              |       |           |       |                         |       |
| 2008                                                                           |       | Ps.                             |  89,318 |                              | Ps.        |  29,173   |       | Ps.                          | (70,307    | ) | Ps. | 48,184 |   |
| 2007                                                                           |       | 73,554                          |         | 115,572                           |       | (99,808        | )          | 89,318                       |       |
| 2006                                                                           |       | 27,899                          |         | 45,655                            |       |           |       | 73,554                       |       |
|                                                                           |       |                            |         |                              |       |           |       |                         |       |
| Allowance for doubtful accounts sundry debtors  included within current assets |       |                            |         |                              |       |           |       |                         |       |
| 2008                                                                           |       | Ps.                             | —       |                              | Ps.        | 29,098         |       | Ps.                          | 23,455     |   | Ps. | 5,643 |   |

 

**31.          Supplemental guarantor information**

 

**Supplemental guarantorinformation**

 

The Senior Guaranteed Notes are fully andunconditionally guaranteed, on an unsecured senior, joint and several basis, byeach of the Company’s significant subsidiaries. Each of the guarantor subsidiaries (ProyectosInmobiliarios de Culiacán, S. A. de C. V., Desarrollodora de Casas delNoroeste, S. A. de C. V., Casas Beta del Centro, S. de R.L. de C.V., Casas Betadel Norte, S. de R.L. de C.V.,  CasasBeta del Noroeste, S. de R.L. de C.V., Edificaciones Beta, S. de R.L. de C.V.,Edificaciones Beta del Norte, S. de R. L. de C.V. and Edificaciones Beta delNoroeste, S. de R.L. de C.V.) is a wholly-owned subsidiary. The followingcondensed combining financial information includes the guarantor subsidiaries,non-guarantor-subsidiaries and the parent company.

 

Investments in subsidiaries are accounted forby the parent 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.

 

F-61

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**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Balance Sheet as of 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** | ** **      |
|----------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-----------------|-----------------------------------|------------|------------------|------------|------------------|-----------------|
| 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                                                             |            | 115,934                           |       |             |       | 5,106,832        |            |
| Other current assets, net                          |       | (91,819             | )          | 340,129                                     |       | (1,200           | )          | 247,110                                                               |            | 177,084                           |       | 3,044            |       | 427,238          |            |
| 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          |            |
| **Total**                                          | ** ** | **Ps.**             | 17,387,335 | ** **                                  | **Ps.**    | 37,684,129       | ** ** | **Ps.**                                                               | (25,738,244     | )                                 | **Ps.**    |  29,333,220 | ** ** | **Ps.**          |  5,039,486 | ** ** | **Ps.** | (3,867,294 | ) | **Ps.** | 30,505,412 | ** ** |
|                                               |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |            |
| Liabilities and stockholders’ equity          |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |            |
| Current liabilities:                               |       |                |       |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |            |
| Current 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                                       |       | 7,589               |       | 104,991                                     |       | (1,160           | )          | 111,420                                                               |            | 17,721                            |       |             |       | 129,141          |            |
| Employee profit-sharing                            |       |                |       | 69,432                                      |       |             |       | 69,432                                                                |            | 1,013                             |       |             |       | 70,445           |            |
| Total current liabilities                          |       | 959,612             |       | 21,717,053                                  |       | (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                              |       | (49,432             | )          | 3,375,283                                   |       |             |       | 3,325,851                                                             |            | 86,650                            |       |             |       | 3,412,501        |            |
| Total liabilities                                  |       | 6,431,629           |       | 26,325,858                                  |       | (14,632,280      | )          | 18,124,607                                                            |            | 3,782,584                         |       | (2,919,036       | )          | 18,988,155       |            |
| 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**                                          | ** ** | **Ps.**             | 17,387,335 | ** **                                  | **Ps.**    | 37,684,129       | ** ** | **Ps.**                                                               | **(25,738,244** | **)**                             | **Ps.**    | 29,333,220       | ** ** | **Ps.**          |  5,039,486 | ** ** | **Ps.** | **(3,867,294** | **)** | **Ps.** |  30,505,412 | ** ** |

 

F-62

----

 

**DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental CondensedCombining Financial Information**

**Balance Sheet as of 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** | ** **    |
|---------------------------------------------------|------------|---------------------|----------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-----------------|-----------------------------------|------------|------------------|------------|------------------|---------------|
| Assets                                            |       |                |           |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |          |
| Currents assets:                                  |       |                |           |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |          |
| Cash and cash  equivalents                        |       | Ps.                 | 1,724          |                                        | Ps.        | 2,168,389        |       | Ps.                                                                   | —          |                              | Ps.        | 2,170,113        |       | Ps.              | 36,721        |   | Ps. | — |   | Ps. | 2,206,834 |   |
| Restricted cash                                   |       | —              |           |                                        |       | —           |       |                                                                  |            | 156,090                           |       | —           |       | 156,090          |          |
| Trade accounts  receivable, net                   |       | —              |           | 5,874,237                                   |       | —           |       | 5,874,237                                                             |            | 2,250,525                         |       | (575,504         | )          | 7,549,258        |          |
| Accounts receivable from  affiliates              |       | 1,289,930           |           | 10,227,519                                  |       | (10,558,752      | )          | 958,697                                                               |            | 855,343                           |       | (1,814,040       | )          | —           |          |
| Inventories                                       |       | 4,883               |           | 4,124,689                                   |       | 20,946           |       | 4,150,518                                                             |            | 241,521                           |       | —           |       | 4,392,039        |          |
| Other current assets,  net                        |       | (8,640              | )              | 327,840                                     |       | 17,600           |       | 336,800                                                               |            | 153,554                           |       | —           |       | 490,354          |          |
| Total current assets                              |       | 1,287,897           |           | 22,722,674                                  |       | (10,520,206      | )          | 13,490,365                                                            |            | 3,693,754                         |       | (2,389,544       | )          | 14,794,575       |          |
| Land held for future development                  |       | —              |           | 7,091,074                                   |       | —           |       | 7,091,074                                                             |            | —                            |       | —           |       | 7,091,074        |          |
| Property and equipment,  net                      |       | —              |           | 765,582                                     |       | —           |       | 765,582                                                               |            | 390,147                           |       | —           |       | 1,155,729        |          |
| Investment in shares                              |       | 10,231,143          |           | 319,575                                     |       | (9,628,965       | )          | 921,753                                                               |            | —                            |       | (921,753         | )          | —           |          |
| Other assets                                      |       | 388,360             |           | 42,241                                      |       | (66,013          | )          | 364,588                                                               |            | 52,177                            |       | (748             | )          | 416,017          |          |
| Goodwill                                          |       | 731,861             |           | —                                      |       | —           |       | 731,861                                                               |            | —                            |       | —           |       | 731,861          |          |
| **Total**                                         |       | **Ps.**             | 12,639,261     |                                        | **Ps.**    | 30,941,146       |       | **Ps.**                                                               | (20,215,184     | **)**                             | **Ps.**    | 23,365,223       |       | **Ps.**          | 4,136,078     |   | **Ps.** | (3,312,045 | **)** | **Ps.** | 24,189,256 |   |
|                                              |       |                |           |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |          |
| Liabilities and  stockholders’ equity        |       |                |           |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |          |
| Current liabilities:                              |       |                |           |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |          |
| Current portion of long-term debt                 |       | Ps.                 | 73,106         |                                        | Ps.        | 182,860          |       | Ps.                                                                   | —          |                              | Ps.        | 255,966          |       | Ps.              | 4,792         |   | Ps. | — |   | Ps. | 260,758 |   |
| Current portion of leases                         |       | —              |           | 68,187                                      |       | —           |       | 68,187                                                                |            | —                            |       | —           |       | 68,187           |          |
| Trade accounts payable                            |       | 25,034              |           | 3,390,104                                   |       | —           |       | 3,415,138                                                             |            | 616,635                           |       | (575,504         | )          | 3,456,269        |          |
| Land suppliers                                    |       | —              |           | 2,688,698                                   |       | —           |       | 2,688,698                                                             |            | 66,208                            |       |             |       | 2,754,906        |          |
| Advance from customers                            |       | —              |           | 353                                         |       | —           |       | 353                                                                   |            | 279,470                           |       | —           |       | 279.823          |          |
| Taxes other than income taxes                     |       | 5,921               |           | 58,768                                      |       | —           |       | 64,689                                                                |            | 14,805                            |       | —           |       | 79,494           |          |
| Due to related parties                            |       | 184,575             |           | 10,374,177                                  |       | (10,558,752      | )          | —                                                                |            | 1,814,040                         |       | (1,814,040       | )          | —           |          |
| Income tax payable                                |       | 6,131               |           | (4,525                                      | )          | —           |       | 1,606                                                                 |            | 31,386                            |       | —           |       | 32,992           |          |
| Employee profit-sharing                           |       | —              |           | 33,257                                      |       | —           |       | 33,257                                                                |            | 1,906                             |       | —           |       | 35,163           |          |
| Total current  liabilities                        |       | 294,767             |           | 16,791,879                                  |       | (10,558,752      | )          | 6,527,894                                                             |            | 2,829,242                         |       | (2,389,544       | )          | 6,967,592        |          |
| Long-term debt                                    |       | 2,729,627           |           | 359,911                                     |       | —           |       | 3,089,538                                                             |            | 9,248                             |       | —           |       | 3,098,786        |          |
| Long-term leases                                  |       | —              |           | 288,857                                     |       | —           |       | 288,857                                                               |            | —                            |       | —           |       | 288,857          |          |
| Swap payable                                      |       | 79,098              |           | —                                      |       | —           |       | 79,098                                                                |            | —                            |       | —           |       | 79,098           |          |
| Long-term land suppliers                          |       | —              |           | 992,801                                     |       | —           |       | 992,801                                                               |            |                              |       | —           |       | 992,801          |          |
| Employee retirement  obligations                  |       | —              |           | 37,544                                      |       | —           |       | 37,544                                                                |            | 41,553                            |       | —           |       | 79,097           |          |
| Deferred income taxes                             |       | (72,958             | )              | 2,841,190                                   |       | (66,014          | )          | 2,702,218                                                             |            | 139,677                           |       |             |       | 2,841,895        |          |
| Total liabilities                                 |       | 3,030,534           |           | 21,312,182                                  |       | (10,624,766      | )          | 13,717,950                                                            |            | 3,019,720                         |       | (2,389,544       | )          | 14,348,126       |          |
| Stockholders’ equity:                        |       |                |           |                                        |       |             |       |                                                                  |            |                              |       |             |       |             |          |
| Common stock                                      |       | 528,011             |           | 2,683,789                                   |       | (2,683,789       | )          | 528,011                                                               |            | 526,011                           |       | (526,011         | )          | 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                                 |       | 5,554,920           |           | 6,790,979                                   |       | (6,752,433       | )          | 5,593,466                                                             |            | 594,924                           |       | (607,192         | )          | 5,581,198        |          |
| Other stockholders’  equity accounts         |       | 344,915             |           | 154,196                                     |       | (154,196         | )          | 344,915                                                               |            | (4,577                            | )          | 2,490            |       | 342,828          |          |
| Majority stockholders’  equity               |       | 9,608,727           |           | 9,628,964                                   |       | (9,590,418       | )          | 9,647,273                                                             |            | 1,116,358                         |       | (1,130,713       | )          | 9,632,918        |          |
| Minority interest in consolidated subsidiaries    |       | —              |           | —                                      |       | —           |       | —                                                                |            | —                            |       | 208,212          |       | 208,212          |          |
| Total stockholders’  equity                  |       | 9,608,727           |           | 9,628,964                                   |       | (9,590,418       | )          | 9,647,273                                                             |            | 1,116,358                         |       | (922,501         | )          | 9,841,130        |          |
| **Total**                                         |       | **Ps.**             | **12,639,261** |                                        | **Ps.**    | **30,941,146**   |       | **Ps.**                                                               | **(20,215,184** | **)**                             | **Ps.**    | **23,365,223**   |       | **Ps.**          | **4,136,078** |   | **Ps.** | **(3,312,045** | **)** | **Ps.** | **24,189,256** |   |

 

F-63

----

 

 **DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Income for the 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** |      |
|-----------------------------------------------|--------|---------------------|-----------|---------------------------------------------|---------|------------------|--------|-----------------------------------------------------------------------|-------------|-----------------------------------|---------|------------------|--------|------------------|-----------|
| 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 income (expense), 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 taxes                    |   | 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 majority  stockholders          |   | 1,580,876           |      | 1,436,742                                   |    | (1,483,693       | )      | 1,533,925                                                             |        | 45,017                            |    | 1,934            |   | 1,580,876        |      |
| Net income of minority  stockholders          |   | 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-64

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Income 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** |      |
|-----------------------------------------------|--------|---------------------|-----------|---------------------------------------------|---------|------------------|--------|-----------------------------------------------------------------------|------------|-----------------------------------|---------|------------------|--------|------------------|-----------|
| 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  taxes            |   | 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.                                                                   | (2,267,699 | )                                 | Ps.     | 1,884,826        |   | Ps.              | 308,014   |   | Ps. | 168,838 |   | Ps. | 2,361,678 |   |
| Net income of majority  stockholders          |   | 2,233,066           |      | 2,051,427                                   |    | (2,528,279       | )      | 1,756,214                                                             |       | 308,014                           |    | 168,838          |   | 2,233,066        |      |
| Net income of minority  stockholders          |   | 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-65

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Income for the Year Ended December 31,2006**

**(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.                 | —        |                                        | Ps.     | 20,722,296       |   | Ps.                                                                   | (7,321,650     | )                                 | Ps.     | 13,400,646       |   | Ps.              | 1,288,070  |   | Ps. | (1,249,197 | ) | Ps. | 13,439,519 |   |
| Costs                                        |   | 10,714              |          | 16,666,173                                  |    | (7,738,143       | )      | 8,938,744                                                             |           | 252,261                           |    |             |   | 9,191,005        |       |
| Gross profit                                 |   | (10,714             | )             | 4,056,123                                   |    | 416,493          |   | 4,461,902                                                             |           | 1,035,809                         |    | (1,249,197       | )      | 4,248,514        |       |
| Selling, general and administrative expenses |   | 171,027             |          | 1,149,811                                   |    | —           |   | 1,320,838                                                             |           | 872,076                           |    | (833,767         | )      | 1,359,147        |       |
| Income (loss) from  operations               |   | (181,741            | )             | 2,906,312                                   |    | 416,493          |   | 3,141,064                                                             |           | 163,733                           |    | (415,430         | )      | 2,889,367        |       |
| Other income, net                            |   | 6,243               |          | 45,270                                      |    | —           |   | 51,513                                                                |           | (5,759                            | )       | (34,750          | )      | 11,004           |       |
| Net comprehensive  financing cost:           |   |                |          |                                        |    |             |   |                                                                  |           |                              |    |             |   |             |       |
| Interest expense                             |   | 377,961             |          | 649,899                                     |    | 407,295          |   | 620,565                                                               |           | 54,014                            |    | —           |   | 674,579          |       |
| Interest income                              |   | (153,162            | )             | (300,863                                    | )       | (407,295         | )      | (46,730                                                               | )              | (62,062                           | )       | —           |   | (108,792         | )          |
| Exchange loss                                |   | 165,696             |          | (17,684                                     | )       | —           |   | 148,011                                                               |           | 385                               |    | —           |   | 148,396          |       |
| Monetary position loss  (gain)               |   | (48,129             | )             | 113,982                                     |    | —           |   | 65,853                                                                |           | 10,933                            |    | —           |   | 76,786           |       |
|                                         |   | 342,365             |          | 445,334                                     |    | —           |   | 787,699                                                               |           | 3,270                             |    | —           |   | 790,969          |       |
| Income (loss) before income taxes            |   | (517,863            | )             | 2,506,248                                   |    | 416,493          |   | 2,404,878                                                             |           | 154,704                           |    | (450,180         | )      | 2,109,402        |       |
| Income tax (benefit)  expense                |   | (220,094            | )             | 816,297                                     |    | —           |   | 596,203                                                               |           | 73,640                            |    | —           |   | 669,843          |       |
| Equity in income of associated companies     |   | 1,737,328           |          | (3,304                                      | )       | (1,734,024       | )      | —                                                                |           | —                            |    | —           |   | —           |       |
| Consolidated net income                      |   | Ps.                 | 1,439,559     |                                        | Ps.     | 1,686,647        |   | Ps.                                                                   | (1,317,531     | )                                 | Ps.     | 1,808,675        |   | Ps.              | 81,064     |   | Ps. | (450,180 | ) | Ps. | 1,439,559 |   |
| Net income of majority stockholders          |   | 1,391,281           |          | 1,686,647                                   |    | (1,317,531       | )      | 1,760,397                                                             |           | 81,064                            |    | (450,180         | )      | 1,391,281        |       |
| Net income of minority stockholders          |   | (48,278             | )             | —                                      |    | —           |   | (48,278                                                               | )              | —                            |    | —           |   | (48,278          | )          |
| Consolidated net income                      |   | **Ps.**             | **1,439,559** |                                        | **Ps.** | **1,686,647**    |   | **Ps.**                                                               | **(1,317,531** | **)**                             | **Ps.** | **1,808,675**    |   | **Ps.**          | **81,064** |   | **Ps.** | **(450,180** | **)** | **Ps.** | **1,439,559** |   |

 

F-66

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows**

**Statement of Cash Flows for the 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          |    |
| 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 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       | )       |
| 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          |    |
| 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 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                            |   |                |   | (368,997                                    | )       |             |       | (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 decrease of cash and  cash equivalents                           |   | (1,289              | )      | (1,158,494                                  | )       |             |       | (1,159,783                                                           | )       | 54,104                            |    |             |   | (1,105,679       | )       |
| Translation adjustment                                               |   |                |   |                                        |    |             |       |                                                                 |    | 10,940                            |    |             |   | 10,940           |    |
| Cash, cash equivalents and  restricted cash at the beginning of year |   | 1,724               |   | 2,168,389                                   |    |             |       | 2,170,113                                                            |    | 192,811                           |    |             |   | 2,632,924        |    |
| Cash, cash equivalents and  restricted cash at the end of year       |   | **Ps.**             | 435    |                                        | **Ps.** | 1,009,894        | ** ** | **Ps.**                                                              |    |                              | **Ps.** | 1,010,330        |   | **Ps.**          | 257,855 |   |   |   | **Ps.** | 1,268,185 |   |
|                                                                      |        |                     |        |                                             |         |                  |            |                                                                      |         |                                   |         |                  |        |                  |         |  |  |  |  |  |  |  |  |

 

F-67

----

 

**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                                     |    | —           |   | 762,587                                                             |       | 55,870                            |    | —           |   | 818,407          |    |
|                                               |   | 111,745             |      | 2,939,581                                   |    | (130,290         | )      | 2,921,036                                                           |       | 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             |      | 126,607                                     |    | —           |   | 459,703                                                             |       | 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               |      | 155,399                                     |    | —           |   | (153,776                                                            | )          | (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.** | 2,168,839        |   | **Ps.**                                                             | —     |                              | **Ps.** | 2,170,563        |   | **Ps.**          | 36,721  |   | — |   | **Ps.** | 2,206,834 |   |
|                                                    |        |                     |           |                                             |         |                  |        |                                                                     |            |                                   |         |                  |        |                  |         |  |  |  |  |  |  |  |

 

F-68

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Changes in Financial Position for the YearEnded December 31, 2006**

**(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.                 | 1,439,559  |                                        | Ps.        | 1,686,647        |       | Ps.                                                                   | (1,317,531 | )                                 | Ps.           | 1,808,675        |       | Ps.              | 81,064     |   | (450,180 | ) | Ps. | 1,439,559 |   |
| Add items that did not require resources:        |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Depreciation                                     |       | —              |       | 117,428                                     |       | —           |       | 117,428                                                               |       | 13,401                            |          | —           |       | 130,829          |       |
| Equity in income  subsidiaries                   |       | (1,737,329          | )          | 3,304                                       |       | 1,734,025        |       | —                                                                |       | —                            |          | —           |       | —           |       |
| Amortization of BETA trademark and backlog       |       | 20,052              |       | 94,477                                      |       | —           |       | 114,529                                                               |       | —                            |          | —           |       | 114,529          |       |
| Labor obligations                                |       | —              |       | 13,623                                      |       | —           |       | 13,623                                                                |       | 5,724                             |          | —           |       | 19,347           |       |
| Deferred income taxes                            |       | (220,094            | )          | 702,441                                     |       | —           |       | 482,347                                                               |       | 44,192                            |          | —           |       | 526,539          |       |
|                                             |       | (497,812            | )          | 2,617,920                                   |       | 416,494          |       | 2,536,602                                                             |       | 144,381                           |          | (450,180         | )          | 2,230,803        |       |
| Changes in operating assets and liabilities      |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| (Increase) decrease in:                          |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Trade accounts  receivable                       |       | —              |       | 151,277                                     |       | —           |       | 151,277                                                               |       | —                            |          | —           |       | 151,277          |       |
| Accounts receivable from  affiliates             |       | (12,285             | )          | (10,860,771                                 | )          | 10,431,157       |       | (441,899                                                              | )          | (1,273,706                        | )             | 1,715,605        |       | —           |       |
| Inventories and land held for future development |       | —              |       | (3,409,786                                  | )          | —           |       | (3,409,786                                                            | )          | (93,705                           | )             | —           |       | (3,503,491       | )          |
| Other assets                                     |       | 208,147             |       | 49,558                                      |       | —           |       | 257,705                                                               |       | (30,320                           | )             | —           |       | 227,385          |       |
| Increase (decrease) in:                          |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Trade accounts payable                           |       | —              |       | 559,288                                     |       | —           |       | 559,288                                                               |       | —                            |          | —           |       | 559,288          |       |
| Land suppliers                                   |       | —              |       | 1,623,150                                   |       | —           |       | 1,623,150                                                             |       | —                            |          | —           |       | 1,623,150        |       |
| Accrued expenses and  taxes                      |       | —              |       | (81,775                                     | )          | —           |       | (81,775                                                               | )          | —                            |          | —           |       | (81,775          | )          |
| Due to related parties                           |       | 12,285              |       | 10,835,366                                  |       | (10,847,651      | )          | —                                                                |       | 1,265,425                         |          | (1,265,425       | )          | —           |       |
| Other liabilities                                |       | 94,678              |       | 5,772                                       |       | —           |       | 100,450                                                               |       | —                            |          | —           |       | 100,450          |       |
| Net resources used in operating activities       |       | (194,987            | )          | 1,489,999                                   |       | —           |       | 1,295,012                                                             |       | 12,075                            |          | —           |       | 1,307,087        |       |
|                                             |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Financing activities:                            |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Proceeds from new  borrowings                    |       | 49,557              |       | (46,121                                     | )          | —           |       | 3,436                                                                 |       | —                            |          | —           |       | 3,436            |       |
| Payments of notes  payable                       |       | (12,994             | )          | —                                      |       | —           |       | (12,994                                                               | )          | —                            |          | —           |       | (12,994          | )          |
| Net resources generated by financing activities  |       | 36,563              |       | (46,121                                     | )          | —           |       | (9,558                                                                | )          | —                            |          | —           |       | (9,558           | )          |
|                                             |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Investing activities:                            |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Restricted Investments                           |       | —              |       | —                                      |       | —           |       | —                                                                |       | (37,597                           | )             | —           |       | (37,597          | )          |
| Acquisition of property and equipment            |       | —              |       | (302,392                                    | )          | —           |       | (302,392                                                              | )          | —                            |          | —           |       | (302,392         | )          |
| Net resources used in investing activities       |       | —              |       | (302,392                                    | )          | —           |       | (302,392                                                              | )          | (37,597                           | )             | —           |       | (339,989         | )          |
|                                             |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Cash, cash equivalents and restricted cash:      |       |                |       |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |       |
| Net increase (decrease)                          |       | (158,424            | )          | 1,141,486                                   |       | —           |       | 983,062                                                               |       | 25,522                            |          | —           |       | 957,540          |       |
| Balance at beginning of year                     |       | 158,525             |       | 1,182,752                                   |       | —           |       | 1,341,277                                                             |       | 82,872                            |          | —           |       | 1,424,149        |       |
| Balance at end of year                           | ** ** | **Ps.**             | **101**    | ** **                                  | **Ps.**    | **2,324,238**    |       | —                                                                | ** ** | **Ps.**                           | **2,324,339** | ** **       | **Ps.**    | **57,350**       |       | — | ** ** | **Ps.** | **2,381,689** |   |
|                                                  |            |                     |            |                                             |            |                  |            |                                                                       |            |                                   |               |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

F-69

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Combining Reconciliation of MexicanFinancial Reporting Standards (MFRS) to US GAAP**

**As of and for the 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** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------------|-------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Majority net income  according to MFRS                                              |       | Ps.                       | 1,580,876  |                                        | Ps.        | 1,436,742        |       | Ps.                                                                         | (1,483,693  | )                                 | Ps.        | 1,533,925        |       | Ps.              | 45,017     |   | Ps. | 1,934 |   | Ps. | 1,580,876 |   |
| 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 and  BETA trademark                                         |       |                      |       |                                        |       |             |       |                                                                        |        |                              |       |             |       |             |       |
| Labor obligations                                                                   |       |                      |       | (23,780                                     | )          |             |       | (23,780                                                                     | )           | 34,889                            |       |             |       | 11,109           |       |
| Deferral of down payment                                                            |       |                      |       | (8,003                                      | )          |             |       | (8,003                                                                      | )           | (702                              | )          |             |       | (8,705           | )          |
| Deferral of future involvement                                                      |       |                      |       | 3,529                                       |       |             |       | 3,529                                                                       |        |                              |       |             |       | 3,529            |       |
| Other                                                                               |       |                      |       | 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 adjustments                                                                   |       | (110,164                  | )          | (932,411                                    | )          |             |       |                                                                        |        |                              |       |             |       |             |       |
| Net income according to US  GAAP                                                    | ** ** | **Ps.**                   | 1,470,712  | ** **                                  | **Ps.**    | 504,331          | ** ** | **Ps.**                                                                     | (1,483,693  | )                                 | **Ps.**    | 491,350          | ** ** | **Ps.**          | 74,498     | ** ** | **Ps.** | 1,934 | ** ** | **Ps.** | 567,782 | ** ** |
|                                                                                |       |                      |       |                                        |       |             |       |                                                                        |        |                              |       |             |       |             |       |
| Majority stockholders’  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. | (1,194,601 | ) | Ps. | 11,270,914 |   |
| 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                                                                            |       | 86,754                    |       |                                        |       |             |       | 86,754                                                                      |        |                              |       |             |       | 86,754           |       |
| Backlog and BETA trademark                                                          |       | (237,001                  | )          |                                        |       |             |       | (237,001                                                                    | )           |                              |       |             |       | (237,001         | )          |
| Labor obligations                                                                   |       |                      |       | (14,779                                     | )          |             |       | (14,779                                                                     | )           | (16,810                           | )          |             |       | (31,589          | )          |
| Sales commissions                                                                   |       |                      |       | 166,332                                     |       |             |       | 166,332                                                                     |        | 28,897                            |       |             |       | 195,229          |       |
| Deferral of future involvement                                                      |       |                      |       | (1,926                                      | )          |             |       | (1,926                                                                      | )           |                              |       |             |       | (1,926           | )          |
| Acquisition of minority 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                                       |       | (169,162                  | )          | (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 adjustments                                                                   |       | (98,281                   | )          | (1,626,963                                  | )          |             |       | (1,725,244                                                                  | )           | (298,452                          | )          |             |       | (2,023,696       | )          |
| Stockholders’ 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.** | (1,194,601 | ) | **Ps.** | 9,247,218 | ** ** |

 

F-70

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Combining Reconciliation of MexicanFinancial Reporting Standards (MFRS) to US GAAP**

**As of and 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** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| Majority net income  according to MFRS                                              |       | Ps.                       | 2,233,065  |                                        | Ps.        | 2,051,427        |       | Ps.                                                                         | (2,528,279 | )                                 | Ps.        | 1,756,213        |       | Ps.              | 308,015    |   | Ps. | 168,838 |   | Ps. | 2,233,066 |   |
| 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 and  BETA trademark                                         |       | (16,747                   | )          |                                        |       | —           |       | (16,747                                                                     | )          | —                            |       | —           |       | (16,747          | )          |
| Labor obligations                                                                   |       | —                    |       | (8,382                                      | )          | —           |       | (8,382                                                                      | )          | (9,034                            | )          | —           |       | (17,416          | )          |
| Deferral of down payment                                                            |       | —                    |       | 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 adjustments                                                                   |       | (164,572                  | )          | (329,422                                    | )          | —           |       | (493,994                                                                    | )          | (71,838                           | )          | —           |       | (565,832         | )          |
| Net income according to US  GAAP                                                    | ** ** | **Ps.**                   | 2,068,493  | ** **                                  | **Ps.**    | 1,722,005        | ** ** | **Ps.**                                                                     | (2,528,279 | )                                 | **Ps.**    | 1,262,219        | ** ** | **Ps.**          | 236,177    | ** ** | **Ps.** | 168,838 | ** ** | **Ps.** | 1,667,234 | ** ** |
|                                                                                |       |                      |       |                                        |       |             |       |                                                                        |       |                              |       |             |       |             |       |
| Majority stockholders’  equity according to MFRS                               |       | Ps.                       | 9,608,727  |                                        | Ps.        | 9,628,965        |       | Ps.                                                                         | (9,590,418 | )                                 | Ps.        | 9,647,274        |       | Ps.              | 1,116,359  |   | Ps. | (1,130,715 | ) | Ps. | 9,632,918 |   |
| 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                                                                            |       | 86,754                    |       | —                                      |       | —           |       | 86,754                                                                      |       | —                            |       | —           |       | 86,754           |       |
| Backlog and BETA trademark                                                          |       | (237,001                  | )          | —                                      |       | —           |       | (237,001                                                                    | )          | —                            |       | —           |       | (237,001         | )          |
| Labor obligations                                                                   |       | —                    |       | (33,810                                     | )          | —           |       | (33,810                                                                     | )          | (33,365                           | )          | —           |       | (67,175          | )          |
| Sales commissions                                                                   |       | —                    |       | 92,933                                      |       | —           |       | 92,933                                                                      |       | 30,849                            |       | —           |       | 123,782          |       |
| Deferral of future involvement                                                      |       | —                    |       | (5,455                                      | )          | —           |       | (5,455                                                                      | )          | —                            |       | —           |       | (5,455           | )          |
| Acquisition of minority 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                                     |       | —           |       | 375,210                                                                     |       | 117,462                           |       | —           |       | 418,289          |       |
| Total adjustments                                                                   |       | 38,191                    |       | (644,403                                    | )          |             |       | (606,212                                                                    | )          | (399,202                          | )          |             |       | (1,005,414       | )          |
| Stockholders’ equity  according to US GAAP                                     | ** ** | **Ps.**                   | 9,646,918  | ** **                                  | **Ps.**    | 8,984,562        | ** ** | **Ps.**                                                                     | (9,590,418 | **)**                             | **Ps.**    | 9,041,062        | ** ** | **Ps.**          | 717,157    | ** ** | **Ps.** | (1,130,715 | **)** | **Ps.** | 8,627,504 | ** ** |
|                                                                                     |            |                           |            |                                             |            |                  |            |                                                                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

F-71

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Combining Reconciliation of MexicanFinancial Reporting Standards (MFRS) to US GAAP**

**As of and for the Year Ended December 31, 2006**

**(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** | ** **  |
|-------------------------------------------------------------------------------------|------------|---------------------------|---------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------------|----------------|-----------------------------------|------------|------------------|------------|------------------|-------------|
| Majority net income according to MFRS                                               |       | Ps.                       | 1,391,281     |                                        | Ps.        | 1,686,647        |       | Ps.                                                                         | (1,317,531     | )                                 | Ps.        | 1,760,397        |       | Ps.              | 81,064      |   | Ps. | (450,180 | ) | Ps. | 1,391,281 |   |
| US GAAP adjustments:                                                                |       |                      |          |                                        |       |             |       |                                                                        |           |                              |       |             |       |             |        |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       | —                    |          | 102,040                                     |       | —           |       | 102,040                                                                     |           | (322,806                          | )          | —           |       | (220,766         | )           |
| Reversal of cost recognized under  percentage-of-completion method of accounting    |       | —                    |          | (69,389                                     | )          | —           |       | (69,389                                                                     | )              | 219,510                           |       | —           |       | 150,121          |        |
| Capitalization of  interest                                                         |       | 164,507                   |          | 33,135                                      |       |             |       | 197,642                                                                     |           | 1,130                             |       |             |       | 198,772          |        |
| Backlog                                                                             |       | (47,682                   | )             | —                                      |       | —           |       | (47,682                                                                     | )              | —                            |       | —           |       | (47,682          | )           |
| Labor obligations                                                                   |       | —                    |          | (3,204                                      | )          | —           |       | (3,204                                                                      | )              | (3,204                            | )          | —           |       | (6,408           | )           |
| Deferral of down payment                                                            |       | —                    |          | 82,366                                      |       | —           |       | 82,366                                                                      |           | —                            |       | —           |       | 82,366           |        |
| Deferral of future  involvement                                                     |       | —                    |          | (7,574                                      | )          | —           |       | (7,574                                                                      | )              | —                            |       | —           |       | (7,574           | )           |
| Prepaid sales commissions                                                           |       | —                    |          | 2,490                                       |       | —           |       | 2,490                                                                       |           |                              |       |             |       | 2,490            |        |
| Effects of inflation on US GAAP adjustments                                         |       | —                    |          | 141,644                                     |       | —           |       | 141,644                                                                     |           | 30,092                            |       | —           |       | 171,736          |        |
| Tax effects on US GAAP adjustments                                                  |       | (32,701                   | )             | (39,170                                     | )          | —           |       | (71,871                                                                     | )              | (9,888                            | )          | —           |       | (81,759          | )           |
| Total adjustments                                                                   |       | 84,124                    |          | 242,338                                     |       | —           |       | 326,462                                                                     |           | (85,166                           | )          | —           |       | 241,296          |        |
| Net income according to US GAAP                                                     | ** ** | **Ps.**                   | **1,475,403** | ** **                                  | **Ps.**    | **1,928,992**    | ** ** | **Ps.**                                                                     | **(1,317,531** | **)**                             | **Ps.**    | **2,086,862**    | ** ** | **Ps.**          | **(4,103**  | **)** | **Ps.** | **(450,180** | **)** | **Ps.** | **1,632,577** | ** ** |
|                                                                                |       |                      |          |                                        |       |             |       |                                                                        |           |                              |       |             |       |             |        |
| Majority stockholders’ equity according to MFRS                                |       | Ps.                       | 7,535,098     |                                        | Ps.        | 7,529,902        |       | Ps.                                                                         | (7,838,475     | )                                 | Ps.        | 7,226,525        |       | Ps.              | 781,554     |   | Ps. | (504,308 | ) | Ps. | 7,503,771 |   |
| US GAAP adjustments:                                                                |       |                      |          |                                        |       |             |       |                                                                        |           |                              |       |             |       |             |        |
| Reversal of revenue recognized under  percentage-of-completion method of accounting |       | —                    |          | (3,952,029                                  | )          | —           |       | (3,952,029                                                                  | )              | (837,527                          | )          | —           |       | (4,789,556       | )           |
| Reversal of cost recognized under percentage-of-completion  method of accounting    |       | —                    |          | 3,090,132                                   |       | —           |       | 3,090,132                                                                   |           | 664,603                           |       | —           |       | 3,754,735        |        |
| Backlog and BETA  trademark                                                         |       | (211,674                  | )             | —                                      |       | —           |       | (211,674                                                                    | )              | —                            |       | —           |       | (211,674         | )           |
| Goodwill                                                                            |       | 86,754                    |          | —                                      |       | —           |       | 86,754                                                                      |           | —                            |       | —           |       | 86,754           |        |
| Labor obligations                                                                   |       | —                    |          | (23,082                                     | )          | —           |       | (23,082                                                                     | )              | (5,621                            | )          | —           |       | (28,703          | )           |
| Sales commissions                                                                   |       | —                    |          | 86,957                                      |       | —           |       | 86,957                                                                      |           | —                            |       | —           |       | 86,957           |        |
| Deferral of future  involvement                                                     |       | —                    |          | (7,574                                      | )          |             |       | (7,574                                                                      | )              | —                            |       | —           |       | (7,574           | )           |
| Deferral of unsecured homebuyers’ receivables of the  year                     |       | —                    |          | (66,362                                     | )          | —           |       | (66,362                                                                     | )              | —                            |       | —           |       | (66,362          | )           |
| Acquisition of minority  interest                                                   |       |                      |          | 79,437                                      |       |             |       | 79,437                                                                      |           |                              |       |             |       | 79,437           |        |
| Capitalization of  interest                                                         |       | 397,415                   |          | 80,079                                      |       | —           |       | 477,494                                                                     |           | 2,746                             |       | —           |       | 480,240          |        |
| Total US GAAP adjustments before tax effects                                        |       | 272,495                   |          | (712,442                                    | )          | —           |       | (439,947                                                                    | )              | (175,799                          | )          | —           |       | (615,746         | )           |
| Tax effects on US GAAP adjustments                                                  |       | (115,782                  | )             | 261,523                                     |       | —           |       | 145,741                                                                     |           | 49,223                            |       | —           |       | 194,964          |        |
| Total adjustments                                                                   |       | 156,713                   |          | (450,919                                    | )          | —           |       | (294,206                                                                    | )              | (126,576                          | )          | —           |       | (420,782         | )           |
| Stockholders’ equity according to US GAAP                                      | ** ** | **Ps.**                   | **7,691,811** | ** **                                  | **Ps.**    | **7,078,983**    | ** ** | **Ps.**                                                                     | **(7,838,475** | )                                 | **Ps.**    | **6,932,319**    | ** ** | **Ps.**          | **654,978** | ** ** | **Ps.** | **(504,308** | ) | **Ps.** | **7,082,989** | ** ** |

 

F-72

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows — US GAAP**

**Statement of Cash Flows for the 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.                 | 1,470,712  |                                        | Ps.        | 504,331          |       | Ps.                                                                 | (1,483,693 | )                                 | Ps.        | 491,350          |       | Ps.              | 74,498     |   | Ps. | 1,934 |   | Ps. | 567,782 |   |
| 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 loss                                              |       | 714,347             |       | (900                                        | )          |             |       | 713,447                                                             |       | 2,053                             |       |             |       | 715,500          |       |
| Changes in fair value of  derivative instruments           |       | 313,962             |       |                                        |       |             |       | 313,962                                                             |       |                              |       |             |       | 313,962          |       |
| Changes in operating assets  and liabilities               |       | 8,947,394           |       | (16,539,560                                 | )          |             |       | (7,592,166                                                          | )          | 1,628,505                         |       | (1,934           | )          | (5,965,595       | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Net cash flows provided by  (used in) 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 provided by  (used in) investing activities |       |                |       | (478,975                                    | )          |             |       | (478,975                                                            | )          | (68,359                           | )          |             |       | (547,334         | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Financing activities:                                      |       |                |       |                                        |       |             |       |                                                                |       |                              |       |             |       |             |       |
| Proceeds and payments from  affiliates                     |       | (12,760,368         | )          | 14,309,035                                  |       |             |       | 1,548,667                                                           |       | (1,548,667                        | )          |             |       |             |       |
| Short-term 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) of  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 year        |       | 1,724               |       | 2,168,389                                   |       |             |       | 2,170,113                                                           |       | 36,721                            |       |             |       | 2,206,834        |       |
| Cash and cash equivalents  at the end of year              | ** ** | **Ps.**             | 435        | ** **                                  | **Ps.**    | 1,009,895        | ** ** | **Ps.**                                                             | ** ** | ** **                        | **Ps.**    | 1,010,330        | ** ** | **Ps.**          | 129,810    |   |   | ** ** | **Ps.** | 1,140,140 | ** ** |
|                                                            |            |                     |            |                                             |            |                  |            |                                                                     |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

F-73

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows — US GAAP**

**Statement of Cash Flows 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                                       |       |                |       |                                        |       |             |       |                                                                |        |                              |       |             |       |             |       |
| Adjusted consolidated net income                           |       | Ps.                 | 2,068,493  |                                        | Ps.        | 1,722,005        |       | Ps.                                                                 | (2,528,279) |                              | Ps.        | 1,262,219        |       | Ps.              | 236,177    |   | Ps. | 168,838 |   | Ps. | 1,667,234 |   |
| 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                                              |       | 20,000              |       |                                        |       |             |       | 20,000                                                              |        |                              |       |             |       | 20,000           |       |
| Changes in fair value of  derivative instruments           |       | (139,749            | )          |                                        |       |             |       | (139,749                                                            | )           |                              |       |             |       | (139,749         | )          |
| Changes in operating assets  and liabilities               |       | 2,456,793           |       | (4,318,194                                  | )          | 130,290          |       | (1,731,111                                                          | )           | 76,156                            |       | (168,838         | )          | (1,823,793       | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                |        |                              |       |             |       |             |       |
| Net cash flows provided by  (used in) 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 provided by  (used in) investing activities |       |                |       | (600,961                                    | )          |             |       | (600,961                                                            | )           | (199,642                          | )          |             |       | (800,603         | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                                |        |                              |       |             |       |             |       |
| Financing activities:                                      |       |                |       |                                        |       |             |       |                                                                |        |                              |       |             |       |             |       |
| Proceeds and payments from  affiliates                     |       | (1,922,084          | )          | 2,086,828                                   |       |             |       | 164,744                                                             |        | (164,744                          | )          |             |       |             |       |
| Proceeds from new  borrowings                              |       | 503,911             |       | 2,148,761                                   |       |             |       | 2,652,672                                                           |        | (5,396                            | )          |             |       | 2,647,276        |       |
| Payments of notes payable  to financial institutions       |       | (588,066            | )          | (1,820,673                                  | )          |             |       | (2,408,739                                                          | )           |                              |       |             |       | (2,408,739       | )          |
| Shares repurchased from  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) of  cash and cash equivalents      |       | 1,627               |       | (71,645                                     | )          |             |       | (70,018                                                             | )           | (18,552                           | )          |             |       | (88,570          | )          |
| Cash and cash equivalents  at the beginning of year        |       | 97                  |       | 2,240,034                                   |       |             |       | 2,240,131                                                           |        | 55,273                            |       |             |       | 2,295,404        |       |
| Cash and cash equivalents  at the end of year              | ** ** | **Ps.**             | 1,724      | ** **                                  | **Ps.**    | 2,168,389        | ** ** | **Ps.**                                                             |        | ** **                        | **Ps.**    | 2,170,113        | ** ** | **Ps.**          | 36,721     |   |   | ** ** | **Ps.** | 2,206,834 | ** ** |
|                                                            |            |                     |            |                                             |            |                  |            |                                                                     |             |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |

 

F-74

----

 

**Desarrolladora Homex, S.A.B deC.V. and Subsidiaries**

**SupplementalCondensed Statement of Cash Flows — US GAAP**

**Statement of Cash Flows for the Year Ended December 31,2006**

**(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.                 | 1,455,881  |                                        | Ps.        | 1,859,107        |       | Ps.                                                                | (1,269,800) |                              | Ps.        | 2,045,188        |       | Ps.              | (3,954)    |   | Ps. | (433,872) |   | Ps. | 1,607,362 |   |
| Non-cash items:                                            |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Depreciation                                               |       |                |       | 100,890                                     |       |             |       | 100,890                                                            |        | 11,514                            |       |             |       | 112,404          |       |
| Equity income in  subsidiaries                             |       | (1,674,389          | )          | 3,185                                       |       | 1,671,204        |       |                                                               |        |                              |       |             |       |             |       |
| Deferred income tax and  statutory profit-sharing          |       | (180,604            | )          | 714,744                                     |       |             |       | 534,140                                                            |        | 52,120                            |       |             |       | 586,260          |       |
| Amortization                                               |       | 156,335             |       |                                        |       |             |       | 156,335                                                            |        |                              |       |             |       | 156,335          |       |
| Exchange gain                                              |       | 53,250              |       |                                        |       |             |       | 53,250                                                             |        |                              |       |             |       | 53,250           |       |
| Changes in fair value of  derivative instruments           |       | 100,594             |       |                                        |       |             |       | 100,594                                                            |        |                              |       |             |       | 100,594          |       |
| Changes in operating assets  and liabilities               |       | 1,580,033           |       | (3,673,255                                  | )          | (401,404         | )          | (2,494,626                                                         | )           | 778,346                           |       | 433,872          |       | (1,282,408       | )          |
| Recoverable tax, net                                       |       |                |       | (5,725                                      | )          |             |       | (5,725                                                             | )           |                              |       |             |       | (5,725           | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Net cash flows provided by  (used in) operating activities |       | 1,491,100           |       | (1,001,054                                  | )          |             |       | 490,046                                                            |        | 838,026                           |       |             |       | 1,328,072        |       |
|                                                       |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Investing activities:                                      |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Investments in:                                            |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Property and equipment                                     |       |                |       | (291,437                                    | )          |             |       | (291,437                                                           | )           |                              |       |             |       | (291,437         | )          |
| Restricted cash                                            |       |                |       |                                        |       |             |       |                                                               |        | (35,924                           | )          |             |       | (35,924          | )          |
| Net cash flows provided by  (used in) investing activities |       |                |       | (291,437                                    | )          |             |       | (291,437                                                           | )           | (35,924                           | )          |             |       | (327,361         | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Financing activities:                                      |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Proceeds and payments from  affiliates                     |       | (1,637,223          | )          | 2,463,922                                   |       |             |       | 826,699                                                            |        | (826,699                          | )          |             |       |             |       |
| Debt issuance costs, net                                   |       | (12,523             | )          |                                        |       |             |       | (12,523                                                            | )           |                              |       |             |       | (12,523          | )          |
| Proceeds from new  borrowings                              |       |                |       | 1,537,908                                   |       |             |       | 1,537,908                                                          |        |                              |       |             |       | 1,537,908        |       |
| Payments of notes payable  to financial institutions       |       | 59,739              |       | (1,609,207                                  | )          |             |       | (1,549,468                                                         | )           |                              |       |             |       | (1,549,468       | )          |
| Net cash flows provided by  (used in) financing activities |       | (1,590,007          | )          | 2,392,623                                   |       |             |       | 802,616                                                            |        | (826,699                          | )          |             |       | (24,083          | )          |
|                                                       |       |                |       |                                        |       |             |       |                                                               |        |                              |       |             |       |             |       |
| Net increase (decrease) of  cash and cash equivalents      |       | (98,907             | )          | 1,100,132                                   |       |             |       | 1,001,225                                                          |        | (24,597                           | )          |             |       | 976,628          |       |
| Cash and cash equivalents  at the beginning of year        |       | 99,004              |       | 1,139,902                                   |       |             |       | 1,238,906                                                          |        | 79,870                            |       |             |       | 1,318,776        |       |
| Cash and cash equivalents  at the end of year              | ** ** | **Ps.**             | 97         | ** **                                  | **Ps.**    | 2,240,034        | ** ** | **Ps.**                                                            |        | ** **                        | **Ps.**    | 2,240,131        | ** ** | **Ps.**          | 55,273     |   |   | ** ** | **Ps.** | 2,295,404 | ** ** |
|                                                            |            |                     |            |                                             |            |                  |            |                                                                    |             |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |

 

F-75

----