**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, 2007**                                                                                                                                                                 |
| ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| **OR**     |
| ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                          |
| ** ** |
| ** ** | **For the transition period from                        to                        ** |
| ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| **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

 

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

 

(APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicateby check mark whether the registrant has filed all documents and reports requiredto be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of1934 subsequent to the distribution of securities under a plan confirmed by acourt.

 

o Yes   o No

 

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

 

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| ** **        | ** ** | ** **                                                                    | ** ** | **PAGE  #** |
|-------------------|------------|-------------------------------------------------------------------------------|------------|-------------|
| **PART I**   |       |                                                                          |       |        |
| ITEM 1.           |       | IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISORS                        |       | 1           |
| ITEM 2.           |       | OFFER STATISTICS AND  EXPECTED TIMETABLE                                      |       | 1           |
| ITEM 3.           |       | KEY INFORMATION                                                               |       | 1           |
| ITEM 4.           |       | INFORMATION ON  THE COMPANY                                                   |       | 12          |
| ITEM 4A.          |       | UNRESOLVED  STAFF COMMENTS                                                    |       | 32          |
| ITEM 5.           |       | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 |       | 32          |
| ITEM 6.           |       | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |       | 49          |
| ITEM 7.           |       | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |       | 56          |
| ITEM 8.           |       | FINANCIAL  INFORMATION                                                        |       | 58          |
| ITEM 9.           |       | THE OFFER AND  LISTING                                                        |       | 58          |
| ITEM 10.          |       | ADDITIONAL  INFORMATION                                                       |       | 63          |
| ITEM 11.          |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |       | 77          |
| ITEM 12.          |       | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       |       | 79          |
| ** **        | ** ** | ** **                                                                    | ** ** | ** **  |
| **PART II**  |       |                                                                          |       |        |
| ITEM 13.          |       | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              |       | 79          |
| ITEM 14.          |       | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |       | 79          |
| ITEM 15.          |       | CONTROLS AND  PROCEDURES                                                      |       | 79          |
| ITEM 16A.         |       | FINANCIAL EXPERT                                                              |       | 84          |
| ITEM 16B.         |       | CODE OF ETHICS                                                                |       | 84          |
| ITEM 16C.         |       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       |       | 85          |
| ITEM 16D.         |       | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |       | 85          |
| ITEM 16E.         |       | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |       | 85          |
| ** **        | ** ** | ** **                                                                    | ** ** | ** **  |
| **PART III** |       |                                                                          |       |        |
| ITEM 17.          |       | FINANCIAL  STATEMENTS                                                         |       | 86          |
| ITEM 18.          |       | FINANCIAL  STATEMENTS                                                         |       | 86          |
| ITEM 19.          |       | EXHIBITS                                                                      |       | 86          |

 

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**PRESENTATION OF FINANCIAL INFORMATION**

 

Throughoutthis annual report, unless the context otherwise requires, the terms “we,”“us,” “our,” “the Company” and “Homex” refer to Desarrolladora Homex, S.A.B. deC.V. and its subsidiaries, including Controladora Casas Beta, S.A. de C.V. andits subsidiaries, which we acquired through a merger on July 1, 2005. Inthis annual report, Controladora Casas Beta, S.A. de C.V. is sometimes referredto as “Beta.”

 

**FinancialInformation**

 

Thisannual report includes our audited consolidated financial statements as ofDecember 31, 2006 and 2007 and for each of the three years endedDecember 31, 2005, 2006 and 2007. Our consolidated financial statementsand other financial information included in this annual report, unlessotherwise specified, are restated in constant pesos as of December 31,2007.

 

Weprepare our financial statements in constant pesos and in accordance withMexican Financial Reporting Standards, referred to as MFRS, which differ incertain significant respects from accounting principles generally accepted inthe United States, referred to as U.S. GAAP. See Notes 27, 28 and 29 to ouraudited consolidated financial statements for information relating to thenature and effect of such differences and for a quantitative reconciliation ofour majority net income and majority stockholders’ equity according to MFRS toconsolidated net income, and consolidated stockholders’ equity according toU.S. GAAP.

 

UnderBulletin B-10, issued by the Mexican Institute of Public Accountants, we arerequired to present our respective financial information in inflation-adjustedmonetary units to allow for more accurate comparisons of financial line itemsover time and to mitigate the distortive effects of inflation on our financialstatements. Unless otherwise indicated, all financial information in thisannual report has been restated in pesos of constant purchasing power as ofDecember 31, 2007. The Mexican National Consumer Price Index, or NCPI,increased by 3.7590% from December 31, 2006 to December 31, 2007.

 

Weare also required to determine any gain or loss in our respective monetarypositions to reflect the effect of inflation on monetary assets and liabilitiesunder MFRS. This is done by subtracting monetary liabilities from monetaryassets and then adjusting net monetary position by the appropriate inflationrate for the period with the resulting monetary gain or loss reflected inearnings.

 

Pursuantto MFRS, we recognize 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 the homebuyerwill obtain the required financing from the mortgage lender;

 

·      the homebuyer has signed a purchase applicationfor the processing and granting of a loan to buy a property to be used ashousing; and

 

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

 

Weuse “deliver” and refer to homes “delivered” in connection with homes for whichtitle has passed to the homebuyer and for which we have received the saleproceeds.

 

i

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***CurrencyInformation***

 

Unlessotherwise specified, references to “US$,” “U.S. dollars” and “dollars” are tothe lawful currency of the United States. References to “Ps.” and “pesos” areto the lawful currency of Mexico. References to “UDI” and “UDIs” are toUnidades de Inversión, units of account whose value in pesos is indexed toinflation on a daily basis by Banco de México (Mexico’s central bank) andpublished periodically.

 

Thisannual report contains translations of various peso amounts into U.S. dollarsat specified rates solely for the convenience of the reader. You should notunderstand these translations as representations that the peso amounts actuallyrepresent these U.S. dollar amounts or could be converted into U.S. dollars atthe rate indicated. Unless otherwise indicated, we have translated U.S. dollaramounts in this annual report at the exchange rate of Ps.10.9185 to US$1.00,which was the buying rate published by Banco de México, expressed in pesos perU.S. dollar, on December 31, 2007. On June 26, 2008, such noon buyingrate was Ps. 10.2870 to US$1.00.

 

Unlessotherwise indicated, references to UDIs are to UDIs at Banco de México’s UDI conversionrate of Ps.3.932983 per UDI on December 31, 2007. On June 26, 2008,the UDI conversion rate was Ps. 4.012176 per UDI.

 

**Industryand Market Data**

 

Marketdata and other statistical information used throughout this annual report arebased on independent industry publications, government publications, reports bymarket research firms or other published independent sources. Some data arealso based on our estimates, which are derived from our review of internalsurveys, as well as independent sources. Although we believe these sources arereliable, we have not independently verified the information and cannotguarantee its accuracy or completeness.

 

ii

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**MARKET SHARE AND OTHER INFORMATION**

 

***OtherInformation Presented***

 

Thestandard measure of area in the real estate market in Mexico is the squaremeter (m(2)). Unless otherwise specified, all units of area shown in thisannual report are expressed in terms of m(2), acres or hectares. One squaremeter is equal to approximately 10.764 square feet. Approximately 4,047m(2) (or 43,562 square feet) are equal to one acre and one hectare isequal to 10,000 m(2) (or approximately 2.5 acres).

 

**FORWARD-LOOKING STATEMENTS**

 

Thisannual report and the documents incorporated by reference into this annualreport contain forward-looking statements. We may from time to time makeforward-looking statements in our periodic reports to the U.S. Securities andExchange Commission, or SEC, on Form 6-K, in our annual report to shareholders,in prospectuses, press releases and other written materials and in oralstatements made by our officers, directors or employees to analysts,institutional investors, representatives of the media and others. Words such as“believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,”“project,” “predict,” “forecast,” “guideline,” “should” and similar expressionsare intended to identify forward-looking statements, but are not the exclusivemeans of identifying these statements. Examples of these forward-lookingstatements include:

 

·      projections of revenues, net income (loss),earnings per share, capital expenditures, dividends, capital structure or otherfinancial items or ratios;

 

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

 

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

 

·      statements of assumptions underlying thesestatements.

 

Youshould not place undue reliance on forward-looking statements, which are basedon current expectations. Forward-looking statements are not guarantees ofperformance. They involve risks, uncertainties and assumptions. Our futureresults may differ materially from those expressed in forward-lookingstatements. Many of the factors that will determine these results and valuesare beyond our ability to control or predict. All forward-looking statementsand risk factors included in this annual report are made as of the date on thefront cover of this annual report, based on information available to us as ofsuch date, and we assume no obligation to update any forward-looking statementor risk factor.

 

iii

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# **PART I**

# ** **

**ITEM 1.       Identityof Directors, Senior Management and Advisors.**

 

Notapplicable.

 

**ITEM 2.       OfferStatistics and Expected Timetable.**

 

Notapplicable.

 

**ITEM 3.       KeyInformation.**

 

**SELECTED FINANCIAL DATA**

 

Thefollowing tables present our selected consolidated financial information as ofand for the periods indicated. Certain information presented in these tablesdoes not include our Beta subsidiary which we acquired on July 1, 2005.Information as of December 31, 2006 and 2007 and for each of the threeyears ended December 31, 2005, 2006 and 2007 is derived from and should beread together with our audited consolidated financial statements provided inthis annual report beginning on page F-1. Our consolidated financialstatements and other financial information included in this annual report,unless otherwise specified, are restated in constant pesos as ofDecember 31, 2007.

 

Theinformation in the following tables should also be read together with “Item 5.Operating and Financial Review and Prospects.”

 

Ourconsolidated financial statements are prepared in accordance with MFRS, whichdiffer in certain significant respects from U.S. GAAP. Notes 27, 28 and 29 toour audited consolidated financial statements provide information relating tothe nature and effect of such differences as they relate to us, and provide areconciliation to U.S. GAAP of consolidated net income and consolidatedstockholders’ equity.

 

Pursuantto MFRS, we use the percentage-of-completion method of accounting for revenuesand costs, which differs in certain significant respects from accountingprinciples generally accepted in the United States, referred to as U.S.GAAP.  Under MFRS, applying thepercentage-of-completion method, we measure the progress towards completion interms of actual costs incurred versus estimated expenditures for each stage ofa development.  Also, under thepercentage-of-completion method of accounting, revenues for work completed arerecognized prior to receipt of actual cash proceeds.  We receive consideration from the sale of ahome at closing when title to the home is transferred to the homebuyer.  We include revenues in excess of billings asaccounts receivable on our balance sheet, and any cash proceeds we receive asadvance payments prior to completion of the actual work related to thepayments, including customer down payments, are included in current liabilitiesas advances from customers.  See Note 3to our consolidated financial statements.

 

Weapply the percentage-of-completion method to recognize revenues from ourhousing developments subject to the following conditions:

 

·      the homebuyer hassubmitted all required documents in order to obtain financing from the mortgagelender;

 

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

 

·      the homebuyer hassigned a purchase application for the processing and granting of a loan to buya property to be used as housing; and

 

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

 

The variations in theCompany’s gross profit, gross profit margin and ultimately operating profitsarise due to the stated differences related to cost and revenue recognitionbetween MFRS and U.S. GAAP.  In 2007,revenues under MFRS were Ps.16,222 million while revenues under U.S. GAAP werePs.13,850 million.  In 2006, revenuesunder MFRS were Ps.13,439 million while revenues under U.S. GAAP were Ps.13,224million. See Notes 27 and 28 to our audited consolidated financial statements.

 

1

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Exceptfor ratios, percentages, and per share, per ADS, and operating data, allamounts are presented in thousands of constant pesos.

 

Foradditional information regarding financial information presented in this annualreport, see “Presentation of Financial and Other Information.”

 

**Homex Selected Consolidated FinancialInformation**

 
| ** **                                              | ** ** | **Years Ended December 31,**                                                                                                            | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2007 (5)**                                                                                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | **(In thousands of constant Ps. as of December 31, 2007,  except as otherwise specified)** | ** ** |
| Statement of  Operations Data:                          |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| **Mexican  Financial Reporting Standards:**             |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                            |       | 16,222,524                                                                                                                                             |       | 13,439,519 |   | 9,216,043 |   | 5,928,658 |   | 3,248,486 |   |
| Cost of sales                                           |       | 11,041,456                                                                                                                                             |       | 9,191,005 |   | 6,418,567 |   | 4,128,107 |   | 2,323,583 |   |
| Gross profit                                            |       | 5,181,068                                                                                                                                              |       | 4,248,514 |   | 2,797,476 |   | 1,800,551 |   | 924,903 |   |
| Selling and  administrative expenses                    |       | 1,798,429                                                                                                                                              |       | 1,359,147 |   | 913,165 |   | 483,574 |   | 297,598 |   |
| Income from  operations                                 |       | 3,382,639                                                                                                                                              |       | 2,889,367 |   | 1,884,311 |   | 1,316,977 |   | 627,305 |   |
| Other income,  net (4)                                  |       | 209,223                                                                                                                                                |       | 11,004 |   | 14,956 |   | 38,509 |   | 86,554 |   |
| Net comprehensive  financing cost (2)                   |       | 278,904                                                                                                                                                |       | 790,969 |   | 494,005 |   | 178,086 |   | 142,335 |   |
| Income before  income taxes                             |       | 3,312,958                                                                                                                                              |       | 2,109,402 |   | 1,405,262 |   | 1,177,400 |   | 571,524 |   |
| Income tax  expense                                     |       | 951,280                                                                                                                                                |       | 669,843 |   | 458,902 |   | 378,897 |   | 204,565 |   |
| Consolidated net  income                                |       | 2,361,678                                                                                                                                              |       | 1,439,559 |   | 946,360 |   | 798,503 |   | 366,959 |   |
| Net income of  majority stockholders                    |       | 2,233,066                                                                                                                                              |       | 1,391,281 |   | 953,611 |   | 788,389 |   | 361,045 |   |
| Net income  (loss) of minority stockholders             |       | 128,612                                                                                                                                                |       | 48,278 |   | (7,251 | ) | 10,114 |   | 5,915 |   |
| Weighted average  shares outstanding (in thousands)     |       | 335,688                                                                                                                                                |       | 335,869 |   | 324,953 |   | 281,997 |   | 241,521 |   |
| Basic and  diluted earnings per share (in pesos)        |       | 6.65                                                                                                                                                   |       | 4.14 |   | 2.93 |   | 2.80 |   | 1.49 |   |
| Basic and  diluted earnings per ADS (3) (in pesos) |       | 39.91                                                                                                                                                  |       | 24.85 |   | 17.60 |   | 16.78 |   | 8.96 |   |
| **U.S.  GAAP:**                                         |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                            |       | 13,849,728                                                                                                                                             |       | 13,224,145 |   | 8,212,918 |   | 4,402,410 |   | 3,039,534 |   |
| Cost of sales                                           |       | 9,814,725                                                                                                                                              |       | 9,311,415 |   | 6,150,813 |   | 3,318,605 |   | 2,331,198 |   |
| Gross profit                                            |       | 4,035,003                                                                                                                                              |       | 3,912,730 |   | 2,062,105 |   | 1,083,805 |   | 708,336 |   |
| Operating income  (4)                                   |       | 2,116,650                                                                                                                                              |       | 2,519,346 |   | 1,142,318 |   | 582,616 |   | 410,379 |   |
| Net income                                              |       | 1,667,234                                                                                                                                              |       | 1,632,577 |   | 841,792 |   | 471,062 |   | 274,842 |   |
| Weighted average  shares outstanding (in thousands)     |       | 335,688                                                                                                                                                |       | 335,869 |   | 324,953 |   | 281,997 |   | 241,521 |   |
| Basic and  diluted earnings per share (in pesos)        |       | 4.96                                                                                                                                                   |       | 4.86 |   | 2.59 |   | 1.67 |   | 1.14 |   |
| Basic and  diluted earnings per ADS (3) (in pesos) |       | 29.76                                                                                                                                                  |       | 29.16 |   | 15.54 |   | 10.02 |   | 6.84 |   |

 

2

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| ** **                                              | ** ** | **As of and for the Years Ended December 31,**                                                                  | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                                                                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | **(In thousands of constant Ps. as of December 31, 2007,  except as otherwise  specified)** | ** ** |
| Balance Sheet  Data:                                    |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| **Mexican  Financial Reporting Standards:**             |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                              |       | 2,206,834                                                                                                                                               |       | 2,381,689 |   | 1,423,813 |   | 570,294 |   | 245,627 |   |
| Restricted cash                                         |       | 156,090                                                                                                                                                 |       | 37,597 |   | 336 |   | 22,848 |   | — |   |
| Trade accounts  receivable                              |       | 7,549,258                                                                                                                                               |       | 5,541,086 |   | 5,999,812 |   | 3,537,424 |   | 2,058,411 |   |
| Total current  assets                                   |       | 14,794,575                                                                                                                                              |       | 12,572,239 |   | 11,578,697 |   | 6,573,449 |   | 3,469,735 |   |
| Land held for  future development                       |       | 7,091,074                                                                                                                                               |       | 5,180,583 |   | 1,927,217 |   | 562,338 |   | 267,694 |   |
| Property and  equipment                                 |       | 1,155,729                                                                                                                                               |       | 669,095 |   | 497,535 |   | 280,533 |   | 63,890 |   |
| Total assets                                            |       | 24,189,256                                                                                                                                              |       | 19,620,062 |   | 15,398,691 |   | 7,558,654 |   | 3,851,630 |   |
| Current portion  of long-term debt                      |       | 260,758                                                                                                                                                 |       | 91,392 |   | 92,235 |   | 443,070 |   | 749,805 |   |
| Current portion  of leases                              |       | 68,187                                                                                                                                                  |       | 8,704 |   | 7,588 |   | — |   | — |   |
| Total current  liabilities                              |       | 6,967,592                                                                                                                                               |       | 6,268,537 |   | 4,075,951 |   | 2,437,305 |   | 1,931,560 |   |
| Long-term debt  and swap payable                        |       | 3,466,741                                                                                                                                               |       | 3,605,029 |   | 3,601,864 |   | 201,066 |   | — |   |
| Long-term leases                                        |       | 288,857                                                                                                                                                 |       | — |   | — |   | — |   | — |   |
| Land suppliers —  long-term                        |       | 992,801                                                                                                                                                 |       | — |   | — |   | 22,415 |   | — |   |
| Total long-term  liabilities                            |       | 7,380,534                                                                                                                                               |       | 5,759,021 |   | 5,179,421 |   | 907,607 |   | 396,585 |   |
| Total  liabilities                                      |       | 14,348,126                                                                                                                                              |       | 12,027,558 |   | 9,255,372 |   | 3,344,912 |   | 2,328,144 |   |
| Common stock                                            |       | 528,011                                                                                                                                                 |       | 528,011 |   | 528,011 |   | 242,249 |   | 193,332 |   |
| Total  stockholders’ equity                        |       | 9,841,130                                                                                                                                               |       | 7,592,504 |   | 6,143,319 |   | 4,213,742 |   | 1,523,488 |   |
|                                                    |       | 24,189,256                                                                                                                                              |       | 19,620,062 |   | 15,398,691 |   | 7,558,654 |   | 3,851,630 |   |
|                                                    |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| **U.S.  GAAP:**                                         |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                              |       | 2,206,834                                                                                                                                               |       | 2,381,689 |   | 1,423,813 |   | 570,294 |   | 245,627 |   |
| Restricted cash                                         |       | 156,090                                                                                                                                                 |       | 37,597 |   | 336 |   | 22,848 |   | — |   |
| Accounts  receivable                                    |       | 600,655                                                                                                                                                 |       | 985,043 |   | 1,229,953 |   | 802,489 |   | 648,793 |   |
| Total current  assets                                   |       | 14,488,606                                                                                                                                              |       | 12,467,252 |   | 10,751,884 |   | 6,188,381 |   | 3,175,201 |   |
| Land held for  future development                       |       | 7,091,074                                                                                                                                               |       | 5,180,580 |   | 1,927,217 |   | 562,338 |   | 263,542 |   |
| Property and  equipment                                 |       | 1,155,729                                                                                                                                               |       | 669,095 |   | 497,535 |   | 280,533 |   | 63,890 |   |
| Total assets                                            |       | 24,579,367                                                                                                                                              |       | 20,079,591 |   | 14,795,096 |   | 7,173,586 |   | 3,544,477 |   |
| Total current  liabilities                              |       | 11,054,629                                                                                                                                              |       | 9,147,783 |   | 5,589,043 |   | 3,300,268 |   | 2,245,153 |   |
| Total majority  stockholders’ equity               |       | 8,627,504                                                                                                                                               |       | 7,082,989 |   | 5,509,272 |   | 3,604,828 |   | 1,247,973 |   |
| Other Financial  Data:                                  |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| **Mexican  Financial Reporting Standards:**             |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| Depreciation                                            |       | 196,307                                                                                                                                                 |       | 130,829 |   | 66,626 |   | 27,050 |   | 12,347 |   |
| Gross margin (6)                                        |       | 31.9                                                                                                                                                    | %          | 31.6 | % | 30.4 | % | 30.4 | % | 28.5 | % |
| Operating margin  (7)                                   |       | 20.8                                                                                                                                                    | %          | 21.5 | % | 20.4 | % | 22.2 | % | 19.3 | % |
| Net margin (8)                                          |       | 14.5                                                                                                                                                    | %          | 10.7 | % | 10.3 | % | 13.5 | % | 11.3 | % |
| Other Financial  Data:                                  |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| EBITDA (9)                                              |       | 4,031,097                                                                                                                                               |       | 3,173,119 |   | 2,151,208 |   | 1,392,043 |   | 726,514 |   |
| Net debt (10)                                           |       | 1,513,305                                                                                                                                               |       | 1,245,825 |   | 2,196,822 |   | 73,842 |   | 504,178 |   |
| Ratio of total  debt to total stockholders’ equity |       | 37.8                                                                                                                                                    | %          | 47.7 | % | 58.9 | % | 15.3 | % | 49.2 | % |
| Ratio of total  debt to total assets                    |       | 15.4                                                                                                                                                    | %          | 18.5 | % | 23.5 | % | 8.5 | % | 19.5 | % |
| **U.S.  GAAP:**                                         |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| Gross margin (6)                                        |       | 29.1                                                                                                                                                    | %          | 29.6 | % | 25.1 | % | 24.6 | % | 23.3 | % |
| Operating margin  (7)                                   |       | 15.2                                                                                                                                                    | %          | 19.1 | % | 13.9 | % | 13.2 | % | 13.5 | % |
| Net margin (8)                                          |       | 12.0                                                                                                                                                    | %          | 12.3 | % | 10.2 | % | 10.7 | % | 9.0 | % |
| Other Financial  Data:                                  |       |                                                                                                                                                    |       |   |   |   |   |   |   |   |   |
| EBITDA (9)                                              |       | 2,855,834                                                                                                                                               |       | 2,715,514 |   | 1,701,859 |   | 736,830 |   | 489,091 |   |

 

3

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(1)     For U.S. GAAP purposes, sales are  recognized  when title passes  to the homebuyer andthe homebuyer has the legal right to occupy the home, as  opposed to the percentage-of-completion  method of accounting  used for  MFRS purposes, under  which we recognize income from homes we sellas we incur the cost of their construction.

 

(2)     Represents interest  income,interest  expense, monetary position  gains and losses, and foreign exchange gains and losses.

 

(3)     Assumes all common shares are represented by ADSs. Each ADS representssix common shares. Any discrepancies between per share and per ADS amounts inthe tables are due to rounding.

 

(4)     Employee statutory profit-sharing expense is classified as an operatingexpense under U.S. GAAP, and as other expense under MFRS.

 

(5)     Interest capitalized as part of the cost of inventories is included incost of sales  under U.S. GAAP and MFRS.Due  to the initial application   of  MFRS D-6 during  2007, the net  comprehensive financing costcapitalized related to qualified assets for the same period was Ps.179,304, ofwhich Ps.119,286 related to inventories sold and subsequently was applied   to cost of sales  of  the same period and Ps.60,018 (Ps.43,213 net of taxes) representedan   increase in  net income. The approximate period for  the amortization of the capitalizedcomprehensive  financing cost isbetween  4 and 12 months. The annual capitalization  rate is 7.6%.

 

(6)     Represents gross profit divided by total revenues.

 

(7)     Represents operating income divided by total revenues.

 

(8)     Represents net income divided by total revenues.

 

(9)     EBITDA is not a financial measure computed under Mexican or U.S.GAAP.  EBITDA derived from our MFRSfinancial information means MFRS net income excluding (i) depreciation andamortization; (ii) net comprehensive financing costs (“CFC”) (which arecomposed of net interest expense (income), foreign exchange gain or loss andmonetary position gain or loss) including CFC capitalized to land balances thatis subsequently charged to cost of sales; and (iii) income tax expense andemployee statutory profit-sharing expense.

 

EBITDA derived from our U.S. GAAP financialinformation means U.S. GAAP net income excluding (i) depreciation andamortization; (ii) interest expense and monetary position gain or loss;and (iii) income tax expense. EBITDA does not exclude interest income(Ps.100,874 in 2007, Ps.61,407 in 2006, Ps. 25,799 in 2005, Ps. 19,085 in 2004and Ps. 6,912 in 2003).

 

EBITDA under MFRSexcludes the effect of CFC capitalized to land balances that is subsequentlycharged to cost of sales.   The Company’scomputation of EBITDA under US GAAP includes such expense in the computation ofEBITDA for all periods.  Accordingly, thetwo computations are not comparable.

 

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

 

EBITDA is also a useful basis for comparing ourresults with those of other companies because it presents operating results ona basis unaffected by capital structure. You should review EBITDA, along withnet income (loss) and cash flow from operating activities, investing activitiesand financing activities, when trying to understand our operating performance.While EBITDA may provide a useful basis for comparison, our computation ofEBITDA is not necessarily comparable to 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 EBITDA is a relevant and widely used measureof operating performance, it does not represent cash generated from operatingactivities in accordance with MFRS or U.S. GAAP and should not be considered asan alternative to net income, determined in accordance with MFRS or U.S. GAAP,as an indication of our financial performance, or to cash flow from operatingactivities, determined in accordance with MFRS or U.S. GAAP, as a measure ofour liquidity, nor is it indicative of funds available to fund our cash needs.

 

EBITDA has certain material limitations:  (i) itdoes not include interest expense, which, because we have borrowed money tofinance some of our operations, is a necessary and ongoing part of our costsand assisted us in generating revenue; (ii) it does not include taxes,which are a necessary and ongoing part of our operations; and (iii) itdoes not include depreciation, which, because we must utilize property and 

 

4

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equipment in order to generate revenues in ouroperations, is a necessary and ongoing part of our costs. Therefore, anymeasure that excludes any or all of interest expense, taxes and depreciationand amortization has material limitations.

 

***Reconciliationof Net Income to EBITDA Computed from Our MFRS Financial Information***

 
| ** **                                                                       | ** ** | **Years Ended December 31,**                                                             | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                       | ** ** | **(In thousands of constant Ps. as of December 31, 2007)** | ** ** |
| Net income                                                                       |       | 2,361,678                                                                                               |       | 1,439,559 |   | 946,360 |   | 798,503 |   | 366,959 |   |
| Depreciation                                                                     |       | 196,307                                                                                                 |       | 130,829 |   | 66,626 |   | 27,050 |   | 12,347 |   |
| Net comprehensive financing cost                                                 |       | 278,904                                                                                                 |       | 790,969 |   | 494,005 |   | 178,086 |   | 142,335 |   |
| Amortization of backlog (intangible)                                             |       | —                                                                                                  |       | 10,714 |   | 125,808 |   | — |   | — |   |
| Amortization of Beta trademark                                                   |       | 92,958                                                                                                  |       | 94,477 |   | 49,153 |   | — |   | — |   |
| Employee statutory profit-sharing                                                |       | 30,684                                                                                                  |       | 36,728 |   | 10,354 |   | 9,507 |   | 308 |   |
| Comprehensive financing cost  capitalized and subsequently charged cost of sales |       | 119,286                                                                                                 |       | — |   | — |   | — |   | — |   |
| Income tax expense                                                               |       | 951,280                                                                                                 |       | 669,843 |   | 458,902 |   | 378,897 |   | 204,565 |   |
| EBITDA                                                                           |       | 4,031,097                                                                                               |       | 3,173,119 |   | 2,151,208 |   | 1,392,043 |   | 726,514 |   |

 

***Reconciliationof Net Income to EBITDA Computed from Our U.S. GAAP Financial Information***

 
| ** **                                      | ** ** | **Years Ended December 31,**                                                             | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(In thousands of constant Ps. as of December 31, 2007)** | ** ** |
| Net income                                      |       | 1,667,234                                                                                               |       | 1,632,577 |   | 841,792 |   | 471,062 |   | 274,842 |   |
| Depreciation                                    |       | 196,307                                                                                                 |       | 130,829 |   | 66,626 |   | 27,050 |   | 12,347 |   |
| Interest (income) expense and  inflation effect |       | 173,719                                                                                                 |       | 47,631 |   | 49,653 |   | 9,503 |   | 26,057 |   |
| Amortization of backlog (intangible)            |       | 16,747                                                                                                  |       | 58,397 |   | 296,445 |   | — |   | — |   |
| Amortization of Beta trademark                  |       | 92,958                                                                                                  |       | 94,477 |   | 49,153 |   | — |   | — |   |
| Income tax expense                              |       | 708,869                                                                                                 |       | 751,603 |   | 398,190 |   | 229,215 |   | 175,845 |   |
| EBITDA                                          |       | 2,855,834                                                                                               |       | 2,715,514 |   | 1,701,859 |   | 736,830 |   | 489,091 |   |

 

(10)   Net debt is not a financial measure computed under MFRS. We compute netdebt as the sum of all debt less cash and cash equivalents, each of which iscomputed in accordance with MFRS. Management uses net debt as a measure of ourtotal amount of leverage, as it gives effect to cash accumulated on our balancesheets. Management believes net debt provides useful information to investorsbecause it reflects our actual debt as well as our available cash and cashequivalents that could be used to reduce this debt. Net debt has certainmaterial limitations in that it assumes the use of our cash and cashequivalents to repay debt that is actually still outstanding and not to fundoperating activities or for investment.

 

***Reconciliationof Total Debt to Net Debt Derived from Our MFRS Financial Information***

 
| ** **                         | ** ** | **As of December 31,**                                                                   | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands of constant Ps. as of December 31, 2007)** | ** ** |
| Current portion of long-term  debt |       | 185,211                                                                                                 |       | 13,781 |   | 11,183 |   | 443,070 |   | 749,805 |   |
| Current portion of leases          |       | 68,187                                                                                                  |       | 8,704 |   | 7,588 |   | — |   | — |   |
| Long-term debt                     |       | 3,466,741                                                                                               |       | 3,605,029 |   | 3,601,864 |   | 201,066 |   | — |   |
| Total debt                         |       | 3,720,139                                                                                               |       | 3,627,514 |   | 3,620,635 |   | 644,136 |   | 749,805 |   |
| Cash and cash equivalents          |       | 2,206,834                                                                                               |       | 2,381,689 |   | 1,423,813 |   | 570,294 |   | 245,627 |   |
| Net debt                           |       | 1,513,305                                                                                               |       | 1,245,825 |   | 2,196,822 |   | 73,842 |   | 504,178 |   |

 

5

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**DIVIDENDS**

 

Avote by the majority of our shareholders present at a shareholders’ meetingdetermines the declaration, amount, and payment of dividends. Under Mexicanlaw, dividends may only be paid from retained earnings and if losses for priorfiscal years have been recovered.

 

Wehave not paid dividends since we were formed in 1989 and we do not currentlyexpect to pay dividends. We intend to devote a substantial portion of ourfuture cash flow to funding working capital requirements and purchasing land.We may consider adopting a dividend policy in the future based on a number offactors, including our results of operations, financial condition, cash requirements,tax consideration, future prospects, and other factors that our board ofdirectors and our shareholders may deem relevant, including the terms andconditions of future debt instruments that may limit our ability to paydividends. On March 10, 2008 we approved a share repurchase program for upto US$250 million.

 

**EXCHANGE RATE INFORMATION**

 

Thefollowing table sets forth, for the periods indicated, the period-end, average,high and low exchange rate between the peso and U.S. dollar. The average annualrates presented in the following table were calculated by using the average ofthe exchange rates on the last day of each month during the relevant period.The data provided in this table is based on buying rates published by Banco deMéxico. 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.

 
| **Years Ended December 31,** | ** ** | **Noon Buying Rate (Ps. Per US$ )** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Low (1)**                                                  | ** ** | **High (1)** | ** ** | **Average  (2)** | ** ** | **Period-  End** | ** ** |
| 2003                                        |       | 10.09                                                             |       | 11.42 |   | 10.79 |   | 11.23 |   |
| 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 |   |

 
| **Month Ended**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| December 31, 2007 |       | 10.66      |       | 11.27      |       | 10.97      |       | 10.88      |       |
| January 31, 2008  |       | 10.84      |       | 10.98      |       | 10.91      |       | 10.84      |       |
| February 29, 2008 |       | 10.68      |       | 10.84      |       | 10.76      |       | 10.73      |       |
| March 31, 2008    |       | 10.67      |       | 10.94      |       | 10.76      |       | 10.70      |       |
| April 30, 2008    |       | 10.45      |       | 10.70      |       | 10.53      |       | 10.45      |       |
| May 31, 2008      |       | 10.31      |       | 10.57      |       | 10.46      |       | 10.31      |       |
| June 26, 2008     |       | 10.28      |       | 10.43      |       | 10.34      |       | 10.32      |       |

 

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

 

(2)               Average of month-endrates.

 

On June 26,2008, Banco de México’s UDI conversion rate was Ps. 4.012176 per UDI.

 

**Industryand Market Data**

 

Exceptduring a liquidity crisis lasting from September through December 1982,Banco de México has consistently made foreign currency available to Mexicanprivate segment entities (such as us) to meet their foreign currencyobligations. Nevertheless, in the event of renewed shortages of foreigncurrency, it is possible that foreign currency will not continue to beavailable to private segment companies or that foreign currency that we mayneed to service foreign currency obligations or to import goods will not beavailable for purchase in the open market without substantial additional cost.

 

6

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**RISK FACTORS**

 

**RiskFactors Related to Our Business**

 

***Decreases inthe Amount of Mortgage Financing Provided by******MexicanHousing Funds******on Which WeDepend, or Disbursement Delays, Could Result in a Decrease in Our Sales andRevenues***

 

Thehome building industry in Mexico has been characterized by a significantshortage of mortgage financing. Historically, the limited availability offinancing has restricted home building and contributed to the current shortageof affordable entry-level housing. Substantially all financing for affordableentry-level housing in Mexico is provided by entities established for thispurpose (“Mexican Housing Funds”) such as:

 

·                  the National Workers’Housing Fund Institute, or INFONAVIT (*Instituto del FondoNacional para la Vivienda de los Trabajadores*), which is financedprimarily through mandatory contributions from the gross wages of privatesegment workers, and securitization of mortgages in the capital markets;

 

·                  the Social Securityand Services Institute Public Segment Workers’ Housing Fund, or FOVISSSTE (*Fondo para la Vivienda y la Seguridad y Servicios Sociales para losTrabajadores del Estado*), which is financed primarily throughmandatory contributions from the gross wages of public sector workers; and

 

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

 

See “Item 4.Information on the Company— Business Overview–The Mexican Housing Market.”

 

Theamount of funding available and the level of mortgage financing from thesesources is limited and may vary from year to year.

 

TheseMexican Housing Funds have significant discretion in terms of the allocationand timing of disbursement of mortgage funds. We depend on the availability ofmortgage financing provided by these Mexican Housing Funds for substantiallyall of our sales of affordable entry-level housing, which represented 77.3% ofour revenues and 77.3% of our operating income for 2007, and 78.4% of ourrevenues and 78.4% of our operating income for 2006.

 

Accordingly,our financial results are affected by policies and administrative procedures ofINFONAVIT, FOVISSSTE, and SHF, as well as by the Mexican government’s housingpolicy. The availability of mortgage financing granted by INFONAVIT andFOVISSSTE has increased significantly during the past five years as compared tohistorical levels, while financing from SHF has decreased due to a change inits policy in 2005. 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.

 

Disruptionsin the operations of these Mexican Housing Funds, for any reason, may occur andresult in a decrease in our sales and revenues.

 

Decreasesor delays in the amount of funds available from INFONAVIT, FOVISSSTE, SHF orother sources, or substantially increased competition for these funds, couldresult in a decrease in our sales and revenues. These funds may not continue tobe allocated at their current levels or in regions in which we have or canquickly establish a significant presence.

 

Thecurrent administration 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 2008,the government believes that Mexican Housing Funds will provide 1.2 million residential mortgages.

 

7

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***A Slowdownin the Mexican Economy Could Limit the Availability of Private-SegmentFinancing in Mexico, on Which We Depend for Our Sales of Middle-Income Housing,Which Could Result in a Decrease in Our Sales and Revenues***

 

Oneof our principal strategies is to expand our operations in the middle-incomeand residential housing segments while maintaining our margins and withoutadversely affecting our financial condition. Our expansion into this marketdepends on private segment lenders, such as commercial banks and LimitedPurpose Financing Companies and Multiple Purpose Financing Companies (*Sociedades Financieras de Objeto Limitado y Sociedades Financieras deObjetivo Múltiple,*or**“sofoles” or “sofomes”),which provide a substantial majority of mortgage financing for themiddle-income segment. The availability of private segment mortgage financingin Mexico has been severely constrained in the past as a result of volatileeconomic conditions in Mexico, the level of liquidity and stability of theMexican banking system, and the resulting adoption of more stringent lendingcriteria and bank regulations. From 1995 through 2001, commercial bank mortgagelending was generally unavailable in Mexico. However, during the same period anumber of sofoles were formed, serving the mostly middle-income market. Since2002, private sector lenders have gradually increased their mortgage financingactivities as a result of improved economic conditions and increasing consumerdemand. However, it is possible that the amount of mortgage financing providedby private sector entities for the middle-income housing market will notincrease or be maintained at current levels.

 

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

 

Thetourism/resort homebuilding industry is sensitive to changes in economicconditions and other factors, such as the level of employment, consumerconfidence, consumer income, availability of financing, and interest ratelevels. Adverse changes in any of these conditions, or in the markets where ourtargeted clients operate, could decrease demand and pricing for new homes inthese areas or result in customer cancellations of pending contracts, whichcould adversely affect the number of home deliveries we make or reduce theprices we can charge for homes in the tourism/resort housing markets, either ofwhich could result in a decrease in our revenues and earnings and wouldadversely affect our financial condition. However, the Company believes thatthe targeted customers will consist of an exclusive sector of senior U.S. andEuropean residents, for whom the availability of financing is not a keyrequisite for purchasing a second home.

 

***WeExperience Significant Seasonality in Our Results of Operations***

 

TheMexican affordable entry-level housing industry experiences significantseasonality during the year, principally due to the operational and lendingcycles of INFONAVIT and FOVISSSTE. Payment by these lenders for home deliveriesis slow at the beginning of the year and increases gradually through the secondand third quarters with a rapid acceleration in the fourth quarter. We buildand deliver affordable entry-level homes based on the seasonality of this cyclebecause we do not begin construction of these homes until a mortgage providercommits mortgage financing to a qualified homebuyer in a particulardevelopment. Accordingly, we also tend to recognize significantly higher levelsof revenue in the third and fourth quarters and our debt levels tend to behighest in the first and second quarters. We anticipate that our quarterlyresults of operations and our level of indebtedness will continue to experiencevariability from quarter to quarter in the future.

 

***We May ExperienceDifficulty in Finding Desirable Land Tracts or Increases in the Price of Land May IncreaseOur Cost of Sales and Decrease Our Earnings***

 

Ourcontinued growth depends in large part on our ability to continue to be able toacquire land and to do so at a reasonable cost. As more developers enter orexpand their operations in the Mexican home building industry, land pricescould rise significantly and suitable land could become scarce due to increaseddemand or decreased supply. A resulting rise in land prices may increase ourcost of sales and decrease our earnings. We may not be able to continue toacquire suitable land at reasonable prices in the future.

 

***Increases inthe Price of Raw Materials May Increase Our Cost of Sales and Reduce OurNet Earnings***

 

Thebasic raw materials used in the construction of our homes include concrete,concrete block, steel, bricks, windows, doors, roof tiles and plumbingfixtures. Increases in the price of raw materials, including increases that mayoccur as a result of shortages, duties, restrictions, or fluctuations inexchange rates, could 

 

8

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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 WeRecognize Income from Sales of Homes Under the Percentage-of-Completion Methodof Accounting Before Receiving Cash Revenue, Failed Closings Could Result in aShortfall of Actual Cash Received and Require an Adjustment to RevenuePreviously Recorded***

 

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

 

***Loss of theServices of Our Key Management Personnel Could Result in Disruptions to OurBusiness Operations***

 

Ourmanagement and operations are dependent in large part upon the contributions ofa small number of key senior management personnel, including Eustaquio Tomás deNicolás Gutiérrez, our Chairman, and Gerardo de Nicolás Gutiérrez, our ChiefExecutive Officer. We do not have employment or non-compete agreements with ormaintain key-man life insurance in respect of either of these individuals.Because of their knowledge of the industry and our operations and their experiencewith Homex, we believe that our future results will depend upon their efforts,and the loss of the services of either of these individuals for any reasoncould result in disruptions to our business operations.

 

***Competitionfrom Other Home Builders Could Result in a Decrease in Our Sales and Revenues***

 

Thehome building industry in Mexico is highly competitive. Our principalcompetitors include public companies like Corporacion GEO, S.A.B. de C.V.,Consorcio ARA, S.A.B. de C.V., URBI Desarrollos Urbanos, S.A.B. de C.V. andSARE, S.A.B. de C.V. Our ability to maintain existing levels of home salesdepends to some extent on competitive conditions, including price competition,competition for available mortgage financing, and competition for availableland. Competition is likely to continue or intensify. Competitive conditionsmay prevent us from achieving our goal of increasing our volume of sales, orincreased competition may result in a decrease in our sales and revenues.

 

***Changes inBuilding and Zoning Regulations to Which We are Subject Could Cause Delays inConstruction and Result in Increased Costs***

 

TheMexican housing industry is subject to extensive building and zoning regulationby various federal, state and municipal authorities. These authorities overseeland acquisition, development and construction activities, and certain dealingswith customers. The costs associated with obtaining building and zoningpermits, paying purchase or development fees and taxes, securing utilityservice rights and titling new homes are substantially higher in Mexico than inother countries 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 toEnvironmental Laws and Regulations to Which We are Subject Could Cause Delaysin Construction and Result in Increased Costs***

 

Ouroperations are subject to Mexican federal, state and municipal environmentallaws and regulations. Changes to environmental laws and regulations, orstricter interpretation or enforcement of existing laws or regulations, couldcause delays in construction and result in increased costs.

 

9

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***OurUninsured Housing Developments under Construction Could Suffer UnforeseenCasualties, Which Could Result in Significant Losses to Us***

 

Wedo not generally obtain liability insurance to cover housing developments underconstruction unless it is required by providers of construction financing. Inthe event that our uninsured housing developments suffer unforeseen casualties,we may experience significant losses.

 

***A Reductionin Distributions from Our Operating Subsidiaries Could Limit Our Ability to payDividends and Service Our Debt Obligations***

 

Weare a holding company with no substantial operations and no significant assetsother than the common shares of our majority-owned subsidiaries. We depend onreceiving sufficient funds from our subsidiaries for virtually all our internalcash flow, including cash flow to pay dividends and service our debtobligations. As a result, our cash flow will be affected if we do not receivedividends and other income from our subsidiaries. The ability of oursubsidiaries to pay dividends and make other transfers to us is limited byrequirements that need to be satisfied under Mexican law. This ability may alsobe limited by credit agreements entered into by our subsidiaries.

 

**RiskFactors Related to Mexico**

 

***AdverseEconomic Conditions in Mexico May Result in a Decrease in Our Sales andRevenues***

 

Weare a Mexican company with substantially all of our assets located in Mexicoand all of our revenues derived from operations in Mexico. As such, ourbusiness may be significantly affected by the general conditions of the Mexicaneconomy.

 

Mexicoexperienced a period of slow growth from 2001 through 2003 primarily as aresult of the downturn in the U.S. economy. In 2004, GDP grew by 4.2% andinflation increased to 5.2%; in 2005, GDP grew by 3% and inflation decreased to3.3%; in 2006, GDP grew by 4.5% and inflation increased to 4.1%; and in 2007,GDP grew by 5.6% and inflation increased to 3.7%.

 

Mexicoalso has, and is expected to continue to have, high real and nominal interestrates. The interest rates on 28-day Mexican government treasury securities (*Certificados de la Tesoreria de la Federación*) averagedapproximately 9.20%, 7.00% and 7.44% for 2005, 2006 and 2007, respectively.Accordingly, if we incur peso-denominated debt in the future, it could be athigh interest rates.

 

Ifthe Mexican economy falls into a recession or if inflation and interest ratesincrease significantly, consumer purchasing power will be decreased and demandfor housing may decrease. In addition, a recession could affect our operationsto the extent that we are unable to reduce our costs and expenses in responseto falling demand. These factors could result in a decrease in our sales andrevenues.

 

***Fluctuationsof the Peso Relative to the U.S. Dollar Could Result in an Increase in Our Costof Financing and Limit Our Ability to Make Timely Payments on ForeignCurrency-Denominated Debt***

 

Becausesubstantially all of our revenues are and will continue to be denominated inpesos, if the value of the peso decreases against the U.S. dollar, our cost offinancing will increase. Severe depreciation of the peso may also result indisruption of the international foreign exchange markets. This may limit ourability to transfer or convert pesos into U.S. dollars and other currencies forthe purpose of making timely payments of interest and principal on oursecurities and any U.S. dollar-denominated debt that we may incur in thefuture. While the Mexican government has not restricted the right or ability ofMexican or foreign individuals to convert pesos into U.S. dollars or totransfer other currencies out of Mexico since 1982, the Mexican governmentcould institute restrictive exchange rate policies in the future.

 

***PoliticalEvents in Mexico May Result in Disruptions to Our Business Operations andDecreases in Our Sales and Revenues***

 

TheMexican government exercises significant influence over many aspects of theMexican economy. In addition, we depend on Mexican government housing policy,especially with regard to the operation of mortgage providers comprised ofMexican Housing Funds, for a large portion of our business. As a result, theactions of the Mexican government concerning the economy and regulating certainindustries could have a 

 

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significant effect onMexican private segment entities, including Homex, and on market conditions,prices of and returns on Mexican securities.

 

PresidentCalderón may implement significant changes in laws, public policy and/orregulations that could affect Mexico’s political and economic situation, whichcould adversely affect our business. Social and political instability in Mexicoor other adverse social or political developments in or affecting Mexico couldaffect us and our ability to obtain financing. It is also possible thatpolitical uncertainty may adversely affect Mexican financial markets.

 

Wecannot provide any assurance that future political developments in Mexico, overwhich we have no control, will not have an unfavorable impact on our financialposition or results of operations.

 

***Developmentsin Other Countries May Result in Decreases in the Price of Our Securities***

 

Asis the case with respect to securities of issuers from other emerging markets,the market value of securities of Mexican companies is, to varying degrees,affected by economic and market conditions in other emerging market countries.Although economic conditions in these countries may differ significantly fromeconomic conditions in Mexico, investors’ reactions to developments in any ofthese other countries may have an adverse effect on the market value ofsecurities of Mexican issuers. In recent years, for example, prices of bothMexican debt securities and Mexican equity securities dropped substantially asa result of developments in Russia, Asia and Brazil.

 

Inaddition, the direct correlation between economic conditions in Mexico and theUnited States has sharpened in recent years as a result of the North AmericanFree Trade Agreement (NAFTA) and increased economic activity between the twocountries. As a result of the slowing economy in the United States and theuncertainty it could have on the general economic conditions in Mexico and theUnited States, our financial condition and results of operations could beadversely affected. In addition, due to recent developments in theinternational credit markets, capital availability and cost could besignificantly affected and could restrict our ability to obtain financing orrefinance our existing indebtedness on favorable terms, if at all.

 

***We areSubject to Different Corporate Disclosure and Accounting Standards than U.S.Companies***

 

Aprincipal objective of the securities laws of the United States, Mexico andother countries is to promote full and fair disclosure of all materialcorporate information. However, there may be less or different publiclyavailable information about foreign issuers of securities than is regularlypublished by or about U.S. issuers of listed securities.

 

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

 

***FutureIssuances of Shares May Result in a Decrease in the Prices of Our ADSs andCommon Shares***

 

Inthe future, we may issue additional equity securities for financing and othergeneral corporate purposes, although there is no present intention to do so.Any such sales or the prospect of any such sales could result in a decrease inthe prices of our ADSs and common shares.

 

***Future Salesof Our Shares by Our Principal Shareholders May Result in a Decrease inthe Prices of Our Securities***

 

Ourprincipal shareholders, including the de Nicolás family, hold 40.0% of ouroutstanding share capital. Actions by these shareholders with respect to thedisposition of the shares they beneficially own, or the perception that suchactions might occur, may decrease the trading price of our shares on theMexican Stock Exchange and the price of the ADSs on the New York StockExchange. None of our principal shareholders is subject to any contractualrestrictions that limit their right to dispose of their common shares.

 

***Pre-emptiveRights May be Unavailable to Holders of Our ADSs, Which May Result ina Dilution of ADS Holders’ Equity Interest in Our Company***

 

UnderMexican law, if we issue new shares for cash as part of a capital increase, wemust grant pre-emptive rights to our shareholders, giving them the right topurchase a sufficient number of shares to maintain their pro rata interestunless we issue shares in a public offering. However, we may not be legallypermitted to 

 

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offer ADS holders inthe United States the right to exercise pre-emptive rights in any futureissuances of shares unless we file a registration statement with the SEC withrespect to that future issuance of shares, or the issuance qualifies for anexemption from the registration requirements of the U.S. Securities Act of1933, or the Securities Act. At the time of any future capital increase, wewill evaluate the costs and potential liabilities associated with filing a registrationstatement with the SEC, the benefits of enabling U.S. holders of ADSs toexercise pre-emptive rights, and any other factors that we consider importantin determining whether to file a registration statement to permit the exerciseof mandatory pre-emptive rights. It is possible that we will not file such aregistration statement. As a result, the equity interests of ADS holders wouldbe diluted to the extent that ADS holders cannot participate in a futurecapital increase.

 

Underthe terms of the ADSs, you may instruct the depositary, JPMorgan Chase Bank, tovote the ordinary shares underlying the ADSs, but only if we request thedepositary to ask for your instructions. Otherwise, you will not be able toexercise your right to vote unless you withdraw the common shares underlyingthe ADSs and vote such common shares. However, you may not receive sufficientnotice of a shareholders’ meeting to permit you to withdraw your common sharesto allow you to cast your vote with respect to any specific matter. Inaddition, the depositary and its agents may not be able to send out or receiveyour voting instructions on time or carry them out in the manner you haveinstructed. As a result, you may not be able to exercise your right to vote.

 

Inaddition, Mexican law and our bylaws require shareholders to deposit theircommon shares with our secretary or with a Mexican custodian or provideevidence of their status as shareholders through INDEVAL’s depositors’ list inorder to attend shareholders’ meetings. ADS holders will not be able to meetthis requirement and are therefore not entitled to attend shareholders’meetings. ADS holders will also not be permitted to vote the common sharesunderlying the ADSs directly at a shareholders’ meeting or to appoint a proxy todo so without withdrawing the common shares.

 

***MinorityShareholders Have Different Rights Against Us, Our Directors, or OurControlling Shareholders in Mexico***

 

UnderMexican law, the protections afforded to minority shareholders are differentfrom those afforded to minority shareholders in the United States. The groundsfor shareholder derivative actions under Mexican law are extremely limited,which effectively bars most of these kinds of lawsuits in Mexico. Proceduresfor class-action lawsuits do not exist under Mexican law. Therefore, it may bemore difficult for minority shareholders to enforce their rights against us,our directors or our controlling shareholders than it would be for minorityshareholders of a U.S. company.

 

***It May beDifficult to Enforce Civil Liabilities Against Us or Our Directors, ExecutiveOfficers and Controlling Persons***

 

Weare organized under the laws of Mexico. A majority of our directors, executiveofficers and controlling persons reside outside the U.S.; all or a significantportion of the assets of our directors, executive officers and controllingpersons, and substantially all of our assets, are located outside the U.S.; andcertain of the experts named in this annual report also reside outside the U.S.As a result, it may be difficult for you to effect service of process withinthe U.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.**

 

**BUSINESS OVERVIEW**

 

**HISTORYAND DEVELOPMENT**

 

DesarrolladoraHomex, S.A.B. de C.V. is a corporation (*sociedadanónima bursatil 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 is DesarrolladoraHomex, S.A.B. de C.V. Our principal executive offices are located at BoulevardAlfonso 

 

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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 Maytorena2204 Norte, 80020 Culiacán, Sinaloa, Mexico.

 

OurCompany traces its origins to 1989 and established its current structure in1998. Beginning in 1999, various strategic investors and, in 2002, EquityInternational Properties, Ltd., or EIP, an entity affiliated with Equity GroupInvestments, L.L.C., or EGI, an investment company founded by Samuel Zell,chairman of EIP, made equity investments in our Company. These strategic investorshave assisted us in developing and refining our operating and financialstrategies. In addition, this increased access to equity financing has allowedus to accelerate our growth.

 

**CapitalExpenditures**

 

Ouroperations do not require substantial capital expenditures, as we lease, on ashort-term basis, most of the construction equipment we use and subcontract asubstantial portion of the services necessary to build the infrastructure ofour developments. In 2007 we spent Ps.680 million on capital expenditures,primarily to purchase construction equipment and to support growth and topartially fund our corporate headquarters. Our purchases of land are treated asadditions to inventory and not as capital expenditures.

 

**OurCompany**

 

Weare a vertically-integrated home development company engaged in thedevelopment, construction and sale of affordable entry-level, middle-income andupper-income housing in Mexico. During 2007, we sold 51,672 homes, an increaseof 17.1% over 2006, when we sold 44,132 homes, an increase of 39.7% over the31,594 homes we sold in 2005. As of December 31, 2007, we had 98developments under construction in 33 cities located in 21 Mexican states. Wehad total land reserves under title of approximately 67.5 million m(2) asof December 31, 2007, on which we estimate we could build approximately298,398 affordable entry-level homes, approximately 26,322 middle-income homesand approximately 1,404 homes for the tourism and resort market.

 

Webelieve that we have grown faster than the three other largest publicly tradedMexican home development companies over the past three-year period ended December 31,2007, based on:

 

·                  number of homes sold,reflected by our compounded annual growth rate of 34.9% versus a 14.2% averagecompounded annual growth rate for these other three companies;

 

·                  revenues, reflectedby our compounded annual growth rate of 39.7% versus a 18.3% average compoundedannual growth rate for these other three companies; and

 

·                  net income, reflectedby our average compounded annual growth rate of 40.6% versus a 14.2% averagecompounded annual growth rate for these other three companies.

 

Inaddition, we believe our geographic diversity is one of the strongest amonghome builders in Mexico, reflected by our operations as of December 31,2007 in 33 cities located in 21 Mexican states. Furthermore, our sales are notconcentrated in a limited number of areas as compared to our competitors. In2007, 33% of our revenues were derived from the Mexico City Metropolitan Area.

 

Fromtime to time, we evaluate investments in real estate projects and companiesoutside Mexico with a view toward replicating our business model in otherjurisdictions. To this end, we may also enter into real estate developmentjoint ventures and strategic alliances with the assistance of knowledgeablelocal partners. Such investments, if any, are not expected to be material interms of cost or management time.

 

**Our Products**

 

Mexico’sdeveloper-built housing industry is divided into three tiers according tocost:  affordable entry-level, middle-income, and residential. We consideraffordable entry-level homes to range in price between Ps.180,000 andPs.500,000 (US$16,485 and US$45,794); middle-income homes to range in pricebetween Ps.500,000 and Ps.1,764,000 (US$45,794 and US$161,560); and residentialhomes to have a price above Ps.1,764,000 (US$161,560). We currently focus onproviding affordable entry-level and middle-income 

 

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housing for ourcustomers. For 2008, a new market will be launched focused on houses in touristand resort areas. This housing will range in price between US$450,000 and US$750,000.

 

Ouraffordable entry-level developments range in size from 500 to 20,000 homes andare developed in stages typically comprising 300 homes each. During 2007, ouraffordable entry-level homes had an average sale price of approximatelyPs.260,000 (US$23,813). 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, and the State of Mexico.

 

Ourmiddle-income developments range in size from 400 to 2,000 homes and aredeveloped in stages typically comprising 200 homes each. During 2007, ourmiddle-income homes had an average sale price of approximately Ps.781,000(US$71,530). A typical middle-income home consists of a kitchen, dining room,living room, two or three bedrooms, and two bathrooms. We are able to deliver acompleted middle-income home in approximately 12 to 14 weeks from the time ahomebuyer obtains mortgage approval. In response to the increase in demand formiddle-income housing in Mexico, we launched nine new middle-incomedevelopments in six cities in 2007. In 2007, 22.6% of our revenues wereattributable to sales of middle-income housing compared to 21.5% in 2006.

 

In early 2008, we commenced the development ofthefirst stage of the new tourism/resort division called “Las Villas de Mexico.”  As part of Homex’s entry into the developmentof housing targeting the tourist market, our developments will be located inthe three major tourism centers in Mexico, namely Los Cabos, Puerto Vallarta andCancún.  Developments in each of thethree areas will have three different housing styles: residential villas of upto 2,150 square feet in typical lots of 3,230 square feet, townhouses of up to1,725 square feet in typical lots of 2,690 square feet and apartments orcondominiums of up to 1,500 square feet in buildings with five to 10 floors onaverage.  Each style has been developedto maximize space but provide privacy and avoid the perception of high density.  The developments in each area will featurearchitectural and landscaping elements unique to the geographical region.  Owners will have the opportunity to choosefrom among the different layouts and a wide variety of architectural andlandscaping designs, as well as to tailor a property to their individualtastes.  Each development will featureeither a private beach or country club (with priority golf club access), aswell as a day spa, state-of-the-art fitness facilities, full-time conciergeservices, and space for exclusive commercial and service areas.

 

In targeting the new tourism resort division toforeign investors who will not live at their residences full-time, we haveincluded a number of important amenities. All of the developments will feature double gates, year-round, 24-hoursecurity, and a choice of two branded property services: Casa Care andOpendoor.  Casa Care will handle themaintenance and bill payments for the property while residents are away.  The services include payment of monthlyexpenses, property management, and individually customized packages tailored toresidents’ specific needs.  Opendoor willallow residents to share or rent their home within the Las Villas privateproperty partnership.  Owners will beable to travel throughout Mexico to stay at the different Las Villasdevelopments, use the amenities, and pay the same amount they would for theirown residence.

 

The different styles and amenities under developmentinclude:

 

·                 residential villas of1,725 sq. ft. single story;

 

·                 residential villas of2,150 sq. ft. (max.), two-story;

 

·                 townhouses of 1,725sq. ft. (max.) per story;

 

·                 apartments of 1,500sq. ft. (max.), private area;

 

·                 a beach club;

 

·                 commercial andservice areas;

 

·                 common areas andstylish landscaping;

 

·                 single-family villaswith a maximum enclosed floor plan of 1,725 sq. ft. in typical lots of 3,230sq. ft. (does not include balconies, terraces, etc.);

 

·                 single-family villaswith a maximum enclosed floor plan of 2,150 sq. ft. in typical lots of 3,230sq. ft. (does not include balconies, terraces, etc.);

 

·                 townhouses with amaximum enclosed floor plan of 1,725 sq. ft., in typical lots of 2,690 sq. ft.(does not include balconies, terraces, etc.); and

 

·                 condominiums with amaximum private floor plan of 1,500 sq. ft. developed in buildings with an  average of  between five and 10 floors.

 

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**LandReserves**

 

Wehave developed specific procedures to identify land that is suitable for ourneeds and perform ongoing market research to determine regional demand forhousing. Suitable land must be located near areas with sufficient demand,generally in areas where at least 500 homes can be built, and must betopographically amenable to housing development. We also consider thefeasibility of obtaining required governmental licenses, permits,authorizations, and adding necessary improvements and infrastructure, includesewage, roads and electricity in keeping with a purchase price that willmaximize margins within the limits of available mortgage financing. We conductengineering and environmental assessments, and in some cases urbanization andland composition studies, of land we consider for purchase in order todetermine whether it is suitable for construction. We budget the majority ofour land purchases for the second half of the year to coincide with peak cashflow. As a result, our total land reserves fluctuate between our targeted 36 to42 months of future home deliveries depending upon the time of year.

 

Asof December 31, 2007, we had total land reserves under title ofapproximately 67.5 million m(2), which includes both the titled land andland in process of being titled. This is equivalent to 326,124 homes, of which298,398 will be in the affordable entry-level segment, 26,322 in themiddle-income segment and 1,404 in the tourism/resort housing market. We haveestablished land reserve policies to maintain three years of future sales ofland bank on the balance sheet.

 

**OurRelationship with Equity International Properties, Ltd.**

 

Beginning in 2002, EIP became a major investor inHomex. However, EIP has been reducing its ownership position in the Company. OnFebruary 1, 2008 EIP sold 5.1% (17.1 million common shares) of Homexcommon stock to the de Nicolás family, who are Homex’s founders. On April 25,2008, pursuant to the liquidation plans for EIP’s investment fund, EIP decidedto sell the remainder of its stake in Homex, and sold approximately 11.0million common shares in private transactions.

 

**BusinessStrengths**

 

***StandardizedBusiness Processes***

 

Overseveral years, we have developed and refined scalable and standardized businessprocesses that allow us to enter new markets rapidly and efficiently. We havedesigned proprietary information technology systems that are intended tointegrate and monitor our operations, including land acquisition, construction,payroll, purchasing, sales, quality control, financing, delivery, andmaintenance. Our systems connect every one of our branch locations and help usmonitor and control the home building process, to administer our customerrelations, and to oversee the financing process for our customers. This standardizedmodel drives our growth, geographic diversification, and profitability, and isan integral component of our culture.

 

***EfficientWorking Capital Management***

 

Ourstandardized processes allow us to time the construction and delivery of ourhomes and payment to our suppliers efficiently, which has allowed us to reduceour borrowing needs and minimize working capital requirements. We do notcommence construction on a development stage until prospective buyersrepresenting at least 10% of the planned number of homes in that stage havequalified to receive mortgage financing. We seek to maintain a shortconstruction period of less than 10 weeks for affordable entry-level housingand less than 14 weeks for middle-income housing by using our systems to maximizethe efficiency of our standardized methods. This speed allows us to maximizeour working capital by minimizing overhead and coordinating payables withreceivables, which greatly reduce our borrowing needs, and to minimize ourcosts.

 

***GeographicDiversification***

 

Webelieve that we are one of the most geographically diversified housingdevelopment companies in Mexico. As of December 31, 2007, our operationsincluded 80 developments in 33 cities located in 21 Mexican states, whichrepresent 77.8% of Mexico’s population, according to the Mexican Institute ofStatistics, Geography and Computer Sciences, or INEGI (*InstitutoNacional de Estadistica, Geografia e Informática*). Many of ourdevelopments are located in markets where no major competitors currently operate.For instance, our sales are not concentrated in limited areas as compared toour competitors. In 2007, 34% of 

 

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our revenuesoriginated in the Mexico City Metropolitan Area, the largest city in Mexico,and 17% in Guadalajara, the second-largest city. The remaining revenuesoriginated in 31 cities.****Webelieve that this geographic diversification reduces our risk profile ascompared to our less-diversified competitors.

 

***Experiencedand Committed Management Team***

 

EustaquioTomás de Nicolás Gutiérrez, our Chairman, co-founded Homex’s predecessor in1989, and Gerardo de Nicolás Gutiérrez, our CEO, joined us in 1993. Our seniormanagement team is comprised of executives with an average of 15 years’ experiencein their respective areas of responsibility. Senior management owns anaggregate of 31.3% of our common shares. Consistent with our standardizedbusiness processes and geographic diversification, we delegate significantmanagerial responsibility to our seasoned team of branch managers. Uponcompletion of a development, we typically relocate our branch managers toanother development in order to capitalize on their significant experience.

 

**BusinessStrategies**

 

***Maintain a Conservative Financial Position***

 

Weoperate our business with the goal of reducing our exposure to interest rateand financing risk. We begin construction only when an approved homebuyer hasqualified for a mortgage and, if applicable, made a down payment, therebyreducing our working capital needs. We believe the resulting financialflexibility enhances our ability to respond quickly to market opportunities andminimizes any negative effects that might result from a downturn in theeconomy.

 

***Focus onGrowth Consolidation and High-Return Opportunities***

 

Ourstrategy is to consolidate our growth and to identify and target high-returnopportunities such as middle-income home sales. For the year ended December 31,2007, 22.6% of our revenues came from middle-income home sales as compared to21.5% in the same period in 2006. 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. In response to theseopportunities, during the year ended December 31, 2007 we launched 15 newaffordable entry-level developments in six cities. Increased availability ofprivate segment financing has also allowed us to expand our presence in themiddle-income segment. We launched nine new middle-income developments in sixcities in 2007. We expect to continue to expand our operations in the highermargin middle-income segment.

 

***TourismHousing******’s******Strategic Growth***

 

On February 7,2008 the Company announced plans to strengthen its position in the tourismmarket by developing communities for the second-home market in key touristdestinations within Mexico for potential customers in the United States, Canadaand Mexico. (See “—Our Products”).

 

Thefirst stage of development involves launches of three “Las Villas de Mexico”developments in the cities of Cancún, Los Cabos and Puerto Vallarta. Theseprivate communities, with a superior product and service offerings, willreflect the architecture and culture of Mexico adapted to the customs andliving traditions of our target markets. The developments will includeresidential villas, townhouses, and apartments.

 

***MaintainAppropriate and Balanced Land Reserves***

 

Ourability to identify, acquire and improve land is critical to our success.Because the success of our operations depends, among other things, on managingour reserves efficiently, we continually review our portfolio and seek newdevelopment opportunities. We balance our need for additional land for growthwith our desire to minimize leverage and avoid excessive land inventory. Ourcurrent goal is to maintain sufficient land reserves for a minimum of 36 to42 months of future home deliveries. This time period allows us to undertakethe lengthy processes necessary to prepare land for development, includingidentifying suitable parcels, locating adequate water supplies, obtainingrequired governmental permits and authorizations, and incorporating parcelsinto existing urban zones. We generally purchase large parcels of land in orderto amortize our acquisition and infrastructure costs over a large number ofhomes, minimize competition, and take advantage of economies of scale. As of December 31,2007, we had total land reserves under title of 

 

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approximately67.5 million m(2), which includes both the titled land and land in processof being titled. This is equivalent to 326,124 homes, of which 298,398 will bein the affordable entry-level segment, 26,322 in the middle-income segment and1,404 in the tourism/resort housing market. We have established land reservepolicies to maintain three years of future sales of land bank on the balancesheet.

 

***Continue toBuild and Contribute to Successful Communities***

 

Weseek to foster brand loyalty by enhancing the quality and value of ourcommunities through building and donating schools, day-care facilities,parks and churches, and by providing other social services to residents of thehousing we develop. We are committed to fulfilling our customers’ needs byresponding to and meeting their demands. Through market studies, for example,we determine that homebuyers prefer larger home sizes over higher-pricedfinishing details. We allow our customers to improve these details at their ownexpense in order to offer more square footage per house than similarly pricedhomes offered by our competitors. We have also entered into agreements withfurniture and appliance producers in order to offer our customers theopportunity to furnish their homes by making purchases with credit lines thatfeature very attractive terms and which are mainly funded by the government andsome private institutions. 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.

 

On January 16,2008 the Company introduced a new housing community concept called “Zona Dorada”located in Culiacán, Sinaloa. This affordable entry-level housing concept isthe first to be developed under the new concept “Comunidades Homex”; thisproject will require a total investment of approximately Ps.350 million overthe next 18 months and will create approximately 8,000 jobs. It will houseapproximately 2,500 families, forming the first family complex in Mexico toparticipate in this innovative real estate model. The creation of theseamenities did not imply a decrease in the operational margins of the Company.The residents of each community are responsible for the maintenance of all theamenities for each community.

 

**MoldConstruction System**

 

During2007, the Company acquired cutting-edge construction technology based onaluminium molds; which it will use in some, but not all, of its projects. Thisnew technology will significantly improve the efficiency of the constructionprocess. Among the advantages of the new molds are:

 

·                  shorter constructiontime;

 

·                  better quality andreduced reprocessing;

 

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

 

·                  versatility, becauseit permits construction ranging from simple floors to apartment buildings usingthe same system;

 

·                  labor savings;

 

·                  compatibility amonginternational suppliers;

 

·                  eco-friendlinessbecause, unlike traditional construction methods, mold construction does notutilize timber; and

 

·                  durability, due tothe use of concrete.

 

As of December 31, 2007 we had used thistechnology in the construction of 5,458 homes.

 

**OurMarkets**

 

Weoperate in geographically diverse markets throughout Mexico, from Tijuana inthe north to Tapachula in the south, which represent 21 states and 33 cities asof December 31, 2007. In 2007, 34% of our revenues originated in theMexico City Metropolitan Area, the largest city in Mexico, and 17% inGuadalajara, the second-largest city. The remaining revenues were originated in31 cities. We seek to continue operations in 

 

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markets where we havea strong presence and to expand into underserved markets where demand forhousing is high.

 

**TotalHomes Sold**

 

Thefollowing table sets forth information on our historical sales by state. During2004, 90.9% and 9.1% of the homes we sold were affordable entry-level  and middle-income, respectively; during 2005,89.3% and 10.7% of the homes we sold were affordable entry-level andmiddle-income, respectively; during 2006, 90.5% and 9.5% of the homes we soldwere affordable entry-level and middle-income, respectively, and during 2007,90.4% and 9.6% of the homes we sold were affordable entry-level andmiddle-income, respectively.

 
| ** **            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **State**             | ** ** | **Affordable  entry-level**                 | ** ** | **Middle-  income** | ** ** | **Affordable  entry-level** | ** ** | **Middle-  income** | ** ** | **Affordable  entry-level** | ** ** | **Middle-  income** | ** ** | **Affordable  entry-level** | ** ** | **Middle-  income** | ** ** |
| Baja California       |       | 2,810                                       |       | 387 |   | 2,170 |   | 423 |   | 1,682 |   | 350 |   | 220 |   | 389 |   |
| Baja California Sur   |       | 2,514                                       |       | 733 |   | 1,188 |   | 178 |   | 894 |   | 33 |   | 1,180 |   | — |   |
| Chiapas               |       | 1,071                                       |       | 287 |   | 1,369 |   | 192 |   | 1,126 |   | — |   | 1,317 |   | 18 |   |
| Chihuahua             |       | 188                                         |       | 62 |   | 481 |   | 96 |   | 562 |   | 37 |   | 1,171 |   | — |   |
| Guanajuato            |       | 1,236                                       |       | — |   | 209 |   | 134 |   | 376 |   | 637 |   | 783 |   | — |   |
| Estado de México |       | 15,815                                      |       | 1,224 |   | 15,666 |   | 554 |   | 6,403 |   | 715 |   | 30 |   | 262 |   |
| Guerrero              |       | 956                                         |       | 467 |   | 1,321 |   | 5 |   | 759 |   | — |   | 867 |   | — |   |
| Hidalgo               |       | —                                      |       | 263 |   | — |   | 161 |   | 156 |   | 93 |   | — |   | 31 |   |
| Jalisco               |       | 8,090                                       |       | 582 |   | 9,623 |   | 1,147 |   | 5,184 |   | 926 |   | 5,631 |   | 501 |   |
| Michoacan             |       | 890                                         |       | — |   | 646 |   | 323 |   | 821 |   | 105 |   | 686 |   | — |   |
| Nayarit (1)           |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Nuevo Leon            |       | 4,532                                       |       | — |   | 2,834 |   | — |   | 3,394 |   | — |   | 1,691 |   | — |   |
| Oaxaca                |       | 64                                          |       | — |   | 467 |   | — |   | 273 |   | — |   | 246 |   | — |   |
| Sinaloa               |       | 2,360                                       |       | — |   | — |   | 82 |   | 2,146 |   | 238 |   | 2,092 |   | 464 |   |
| Sonora                |       | 1,641                                       |       | 160 |   | 1,356 |   | 331 |   | 968 |   | 13 |   | 751 |   | 247 |   |
| Tamaulipas            |       | 341                                         |       | 379 |   | 375 |   | 153 |   | 2,188 |   | 244 |   | 2,471 |   | — |   |
| Veracruz              |       | 714                                         |       | 58 |   | 427 |   | 306 |   | 1,271 |   | — |   | 5 |   | — |   |
| Yucatan               |       | 3,468                                       |       | 380 |   | 1,808 |   | 107 |   | — |   | — |   | — |   | — |   |
| Coahuila (2)          |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Quintana Roo (2)      |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Querétaro (2)    |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total                 |       | 46,690                                      |       | 4,982 |   | 39,940 |   | 4,192 |   | 28,203 |   | 3,391 |   | 19,141 |   | 1,912 |   |

 

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(1) Due to thenature of our sales and construction process in compliance with MFRS(construction begins when we have a customer), this State did not contributerevenues during 2007; nevertheless, the Company did start operations here in2007.

 

(2) During thesecond half of 2007 we began operations at Cancún in the State of Quintana Roo,Torreón in the State of Coahuila, and Querétaro in the State of Queretaro.However, due to the nature of our sales and construction process, which is incompliance with MFRS, (construction begins when we have a customer), thesecities and states did not contribute revenues during 2007.  Accordingly the table does not include ouroperations in these locations, which were limited to land acquisitions.

 

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**THE MEXICAN HOUSING MARKET**

 

Wehave obtained the following information from public sources, includingpublications and materials from the Mexican Ministry of Social Development, orSEDESOL (*Secretaria de Desarrollo Social*), theMexican Population Council, or CONAPO (*Consejo Nacional dePoblacion*), INEGI, INFONAVIT, SHF, the Mexican Home Building andDevelopment Industry Chamber of Commerce, or CANADEVI (*CamaraNacional de la Industria de Desarrollo y Promocion de la Vivienda*),CONAVI and SOFTEC, S.C. We have not independently verified any of theinformation provided in this section.

 

**General**

 

Thehousing market in Mexico is influenced by several social, economic, industrial,and political factors, including demographics, housing supply, marketsegmentation, government policy, and available financing.

 

Weacquire land and plan the development of the homes we build through ProyectosInmobiliarios de Culiacán, S.A. de C.V., or PICSA, Casas Beta del Centro, S. deR.L. de C.V., Casas Beta del Norte, S. de R.L. de C.V. and Casas Beta delNoroeste, S. de R.L. de C.V. Desarrolladora de Casas del Noroeste, S.A. de C.V.or DECANO builds the developments that PICSA and Beta plan and promote. We alsoreceive executive and administrative services from Administradora PICSA, S.A.de C.V. and Altos Mandos de Negocios, S.A. de C.V. Homex Atizapan, S.A. deC.V., which we operate and control as a joint venture with strategic partnersin the region, owns one of our middle-income developments in the Mexico Cityarea and Hogares del Noroeste, S.A. de C.V. owns middle-income developments inHermosillo, Sonora. AeroHomex, S.A. de C.V. provides transportation services tous as well as building rental services for our corporate offices. Through AAAHomex Trust, a Mexican trust, we establish factoring facilities for thesettlement of trade payables to many of our suppliers. See “—Materials andSuppliers.”

 

**Demographics**

 

National demographic trends drive demand forhousing in Mexico. These trends include:

 

·                  sustained growth of arelatively young population;

 

·                  a high rate of newhousehold formation;

 

·                  a high urban areagrowth rate; and

 

·                  a decrease in numberof occupants per home.

 

Accordingto INEGI, Mexico had a population of approximately 103.2 million in 2005,or approximately 25.2 million households. CONAPO estimates that there willbe approximately 26.6 million households by year-end 2008, approximately28.6 million by year-end 2010, and approximately 31.9 million by year-end 2015.

 

Mexicoexperienced a period of particularly high population growth during the 1970sand 1980s. The children born during this boom are contributing to the currentincreased demand for housing. The target consumer group for our homes istypically between 25 and 50 years old. In 2007, the 25-50 year-old age grouprepresented approximately 38 million people or 35% of Mexico’s population.CONAPO estimates that by 2020, this age group will represent 46 million or38% of Mexico’s population. The growth of this group is expected to contributeto increased housing demand in Mexico.

 

**HousingSupply**

 

In2001, CONAVI’s housing statistics indicated there was a shortage of4.3 million homes in Mexico. This figure included the need for:

 

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

 

·      2.5 million substandard homes in need ofextensive repair and possible replacement.

 

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CONAVIestimates that the growth of the Mexican population will generate a sustaineddemand for new homes of at least 766,000 units per year into the near future.To address the immediate shortage of 5.9 million homes as well as theanticipated new demand, the Mexican government has committed to financingand/or building at least 1.2 million units a year in 2008.

 

*Instituto de Vivienda delDistrito Federal (INVI)*

 

INVIis a public, decentralized institution for the public administration in theFederal 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 de Desarrollo del DistritoFederal*) derived from the Housing Law for the Federal District (*Ley de Vivienda del Distrito Federal*).

 

Themission of INVI is to satisfy the need for housing of families with limitedeconomic resources located in the Federal District through the granting ofmortgages for affordable entry-level homes, with the goal of creating 200,000new housing units in the years 2007-2012. The Company entered into contracts ofPs.733,741 during 2007 with this institution.

 

**MarketSegments**

 

Ingeneral, Mexico’s developer-built (as opposed to self-built) housing market isdivided into four segments according to cost: affordable entry-level,middle-income, residential and tourism. The developer-built housing marketincludes homes built by contractors and developers, which are generallyfinanced by mortgage providers. These homes are built with official permits,have municipal services, and are located on land that is registered and titledby the homebuyer. Developers must obtain clear title to the land, proper zoningpermits, any necessary financing commitments from lenders, and installinfrastructure.

 

Mexico’sdeveloper-built housing market is categorized in the table below:

 

**HousingMarket Segments**

 
| **Segment**            | ** ** | **Cost**                                                    | ** ** | **Size**                                      | ** ** | **Characteristics**                                                                                                                       |
|------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Affordable entry-level |       | Between Ps.180,000  and Ps.500,000 (US$16,486-US$45,794)    |       | 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.500,000  and Ps.1,764,000 (US$45,794-US$161,561) |       | 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.1,764,000  (US$161,561)                        |       | 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 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 |

 

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**GovernmentPolicy and Available Financing**

 

Thesize of the developer-built market depends to a great extent on theavailability of mortgage financing. Due to liquidity issues over the last 20years, Mexico has experienced fluctuations in the availability of mortgagefinancing, particularly from private segment sources. As a result, the supplyof affordable entry-level and middle-income housing has also remained lowduring this period.

 

Duringthe 1980s, Mexican government policy focused on encouraging investment by theprivate segment, reducing development costs, and stimulating construction.Mexican Housing Funds provided mortgage loan guarantees and direct payment andsavings procedures. In 1994, Mexico experienced an economic crisis that led tothe devaluation of the Mexican peso and a steep rise in 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.

 

Followingthe 1994 economic crisis, government policy sought to counterbalance theshortage of available financing and the increases in interest rates thatresulted by focusing primarily on providing mortgages and constructionfinancing via Mexican Housing Funds in the affordable entry-level segment.Government funds no longer provided development or sales activities andfunctioned instead as true savings-and-loan programs. Legislative reforms withregard to community-owned agricultural 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 that underwrite mortgages with fundsand guarantees provided by government agencies, private investment, national,foreign or development bank loans, or through the Mexican capital markets.Furthermore, the government encouraged industry growth and private segmentlending by supporting consolidation in the housing development industry.

 

Between1997 and 1998, home sales stabilized, growing slightly in 1997 due to improvingeconomic conditions. During 1999 and 2000, mortgage financing increased due tostabilizing economic conditions. The level of available financing grew as aresult of Mexican government policies implemented following the crisis. FormerPresident Fox’s administration’s goal was to provide 750,000 new mortgages peryear by 2006. The administration set forth four objectives to achieve thisgrowth:

 

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

 

·                  increase deregulationof the housing industry;

 

·                  encourageconsolidation within the industry; and

 

·                  increase financingopportunities available to qualified homebuyers.

 

Inconjunction with these efforts, the Mexican legislature amended existing taxregulations in order to allow individuals to deduct a portion of their mortgageloan interest payments from their personal income taxes beginning in 2003,which the administration expects will lead to increased mortgage financingactivity.

 

Accordingto CONAVI, for the year ended December 31, 2007, 881,738 mortgageswere granted.

 

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

 

**Sourcesof Mortgage Financing**

 

Principal sources providing mortgage financingfor Mexico’s housing market are:

 

·                  mortgage providersfinanced by mandatory employer or member contributions to public funds,including:

 

·      INFONAVIT & FOVISSSTE, serving privatesegment employees; and

 

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

 

·                  commercial banks andsofoles using their own funds; and

 

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·                  direct subsidies frompublic housing agencies and state housing trusts, including the Mexican Fundfor Popular Housing, or FONHAPO (*Fideicomiso Fondo Nacionalde Habitaciones Populares*).

 

Accordingto CONAVI, these mortgage providers originated 718,255 home mortgages in 2007.

 

***INFONAVIT***

 

INFONAVITwas established by the Mexican government, labor unions, and private segmentemployees in 1972 as a mutual fund for the benefit of private segmentemployees. INFONAVIT functions as a savings and loan that provides financingprimarily for affordable entry-level housing to credit-qualified homebuyers.INFONAVIT makes loans for home construction, acquisition or improvement toworkers whose individual monthly earnings are generally less than five timesthe minimum monthly wage. It is funded through payroll contributions by privatesegment employers on behalf of their employees equal to 5% of their employees’gross wages.

 

Homebuyersqualify for INFONAVIT loans according to a point system whereby points areawarded based on income, age, amount of monthly contributions, and number ofdependents, among other factors.

 

 INFONAVIT is phasing in a requirement thatmortgage loan applicants make a down payment of between 5% to 10% of a home’stotal value, depending on price. The total loan amount may equal 100% of thecost of a home up to a maximum of between 300 and 350 times the monthly minimumwage, depending on geographical region. Repayment is calculated based on theborrower’s wages, for a term of up to 30 years, and is made by direct wagedeductions by employers. INFONAVIT generally grants loans at variable annualinterest rates, which are indexed to inflation and based on a borrower’sincome. INFONAVIT allows for a one-year grace period with no interest orprincipal payments in the event of job loss and seeks direct repayment from theborrower after this period.

 

INFONAVIThas a program called Apoyo INFONAVIT that is directed at assistinghigher-income borrowers obtain mortgage financing. Apoyo INFONAVIT customerscan use the amounts contributed via payroll deductions to their INFONAVITaccounts as collateral for mortgage loans held by private segment lenders. Inaddition, these customers can apply their monthly INFONAVIT contributionstoward the monthly mortgage payments owed to private segment lenders.

 

INFONAVITrecently inaugurated a new program called Cofinanciamiento, or Cofinavit, whichis meant to assist high-income borrowers in a manner similar to the ApoyoINFONAVIT program. This new program enables Cofinavit customers to obtain amortgage loan granted by INFONAVIT in conjunction with a commercial bank or asofol. In addition, the customers can use their individual contributions intheir INFONAVIT accounts as part of the financing or as collateral for themortgage loan.

 

Inaddition, during late 2004 and early 2005, INFONAVIT initiated a new mortgagefinancing system, enabling it to expedite the issuance of mortgages in responseto public demand by reducing documentation necessary for initial processingthereby helping it to achieve its year-end goals. In addition, this new systemenhances transparency and quality of service in connection with mortgageservices.

 

INFONAVITprovided approximately 40% of all mortgage financing in Mexico during the yearended December 31, 2007.

 

INFONAVIThas made a commitment to provide 500,000 new mortgages in 2008. In addition,this agency has agreed to guarantee mortgage loans granted to employees bycommercial banks and sofoles in the case of job loss. INFONAVIT expects tocontinue to modernize its operations and increase available financing byfocusing on reducing payment defaults, participating more closely with theprivate segment, and implementing a voluntary savings program. INFONAVIT hasalso recently begun securitizing its loan portfolio in order to contribute tothe growth of the secondary mortgage market in Mexico and expand its availablesources of funds.

 

Theforecasted lending strategy of INFONAVIT for President Calderón’sadministration has been recently announced as follows:

 

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| **Year** | ** ** | **Mortgages** |
|----------|------------|---------------|
| 2008     |       | 500,000       |
| 2009     |       | 550,000       |
| 2010     |       | 600,000       |
| 2011     |       | 625,000       |
| 2012     |       | 625,000       |

 

***FOVISSSTE***

 

TheMexican government established FOVISSSTE in 1972 as a pension fund on behalf ofpublic sector employees to provide financing for affordable housing. FOVISSSTEobtains funds from Mexican government contributions equal to 5% of publicsector employee wages. The Mexican government administers FOVISSSTE similarlyto INFONAVIT and permits FOVISSSTE to co-finance mortgage loans with privatesector lenders in order to maximize available funds.

 

FOVISSSTEmortgage financing is typically available for housing ranging from theaffordable entry-level segment through the lower end of the middle-incomesegment. Eligible applicants can obtain FOVISSSTE mortgage loans to purchasenew or used homes, remodel or repair existing homes, finance construction ofself-built homes, and make down payments on homes not financed throughFOVISSSTE. FOVISSSTE loans are granted based on seniority within the publicsector and allocated on a first-come first-served basis that also takes intoaccount wages, number of dependents, and geographic location. Once the programestablishes a number of approved applicants, it allocates mortgage loans bystate based on historical demand.

 

FOVISSSTEgenerally grants loans at variable interest rates, indexed to inflation, for amaximum amount of approximately Ps.436,740 (US$40,000). Repayment is calculatedbased on the borrower’s wages, for a term of up to 30 years, and is made bydirect wage deductions.

 

FOVISSSTEhas announced that it is seeking to increase the total number of mortgages itgrants and expects to grant 120,000 mortgages in 2008.

 

FOVISSSTEprovided approximately 6% of all mortgage financing in Mexico during the yearended December 31, 2007.

 

***SHF***

 

SHFwas created in 2002 as a public sector development bank. SHF obtains funds fromthe World Bank, the Mexican government, and SHF’s own portfolio and providesfinancing through intermediaries such as commercial banks and sofoles. In turn,financial intermediaries administer SHF-sponsored mortgage loans, includingdisbursement and servicing.

 

Traditionally,SHF has been an important source of construction financing for housingdevelopers by providing loans to commercial banks and sofoles (which in turnmake direct bridge loans to developers). As of September 1, 2004, however,SHF provided funding for bridge loans only for homes with a purchase price ofup to UDI 166,667 (approximately US$60,028 as of December 31, 2007). Inlieu of funding bridge loans for homes with a higher purchase price of up toUDI 500,000 (approximately US$180,083 as of December 31, 2007), SHF willprovide guarantees to support efforts by commercial banks and sofoles to raisecapital for the financing of bridge loans to build such homes.

 

Inaddition, SHF makes financing available to commercial banks and sofoles for thepurpose of providing 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 UDI 500,000(approximately US$180,083 as of December 31, 2007). Beginning in 2005,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$54,025 as of December 31,2007) with credit enhancements and loan guarantees for commercial banks andsofoles to 

 

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support theircapital-raising efforts for the financing of such individual mortgage loans. Interms of total homes financed, SHF (through commercial banks and sofoles)provided approximately 24% of all mortgage financing in Mexico during the yearended December 31, 2007.

 

***CommercialBanks, Sofoles and Sofomes***

 

Commercialbanks generally 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 provide mortgage loans to borrowers usingfunds from securities offerings on the Mexican stock market, loans from Mexicanand foreign lenders, their own portfolios, and public agencies such as SHF.They are not allowed to accept deposits from the public.

 

Althoughcommercial banks, sofoles and sofomes provide mortgage financing directly tohomebuyers, the financing is commonly coordinated through the home builder. Inorder to obtain 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.

 

Commercialbank, sofol and sofom mortgage loans are typically available for housingranging from the upper tier of the affordable entry-level segment through theresidential segment. Nevertheless, during 2007 homebuyers qualifying for theseprivate segment mortgages were generally assumed to be those purchasing homeswith a value in excess of Ps.250,000 (US$25,000). Private segment lenders requiredown payments of approximately 20% of a home’s total value and make loans atfixed or variable annual interest rates based on the consumer index andinflation.

 

Commercialbank, sofol and sofom mortgage loans generally mature in 10 to 30 years, andpayments are sometimes adjusted for increases in the monthly minimum wage andrates of inflation.

 

Commercialbanks, sofoles and sofomes provided approximately 22% of all mortgage financingin Mexico during the year ended December 31, 2007.

 

***Other PublicHousing Agencies***

 

Otherpublic housing agencies such as Fonhapo and the Mexican Housing and Social andUrban Development Trust Fund, or *Fividesu*(*Fideicomiso para Promover y Realizar Programas de Vivienda y DesarrolloSocial y Urbano*), operate at the federal and local levels and targetmainly non-salaried workers earning less than 25 times the minimum annual wage,often through direct subsidies. These agencies lend directly to organizationssuch as state and municipal housing authorities, housing cooperatives, andcredit unions representing low-income beneficiaries, as well as to individualborrowers. Financing is made available to both the self-built anddeveloper-built markets. The total amount of available funds depends on theMexican government budget.

 

Otherpublic housing agencies provided approximately 8% of all mortgage financing inMexico during the year ended December 31, 2007.

 

**Competition**

 

TheMexican home development and construction industry is highly fragmented andincludes a large number of regional participants and a few companies with amore national market presence, including publicly traded companies likeCorporacion GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. de C.V, SARE, S.A.B. deC.V., Consorcio Hogar, S.A.B. de C.V. and URBI Desarrollos Urbanos, S.A.B. deC.V.

 

Allthings considered, we estimate that approximately 1,200 different companiesoperate approximately 3,000 new home developments in Mexico at any one time.The following table sets forth the approximate operating information of the largesthome builders in Mexico with which we compete based on public information andour estimates:

 

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| **Competitor** | ** ** | **2007 Home Sales** | ** ** | **2007 Sales  (millions of Ps.)** | ** ** | **Location in Mexico**                   | ** ** |
|----------------|------------|---------------------|------------|-----------------------------------|------------|------------------------------------------|------------|
| GEO            |       | 46,004              |       | 14,976                            |       | National                                 |       |
| URBI           |       | 37,231              |       | 12,779                            |       | North, Mexico City and Guadalajara areas |       |
| ARA            |       | 23,781              |       | 9,257                             |       | National                                 |       |
| SARE           |       | 11,443              |       | 4,879                             |       | Mexico City  region                      |       |

 

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Source: Companies’fourth quarter financial releases.

 

Webelieve that we are well-positioned to capture future growth opportunities inthe affordable entry-level and middle-income housing segments because of ourprincipal business strengths and strategies, as described above.

 

**Seasonality**

 

TheMexican affordable entry-level housing market experiences significantseasonality during the year, principally due to the operational and lendingcycles of INFONAVIT and FOVISSSTE. The programs, budgets, and changes in theauthorized policies of these mortgage lenders are approved during the firstquarter of the year. Payment by these lenders for home deliveries is slow atthe beginning 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 budget the majority of our purchases for thesecond half of the year to coincide with peak cash flows. As a result, ourtotal land reserves fluctuate between our targeted 36 to 42 months offuture home deliveries depending upon the time of year. We anticipate that ourquarterly results of operations and our level of indebtedness will continue toexperience variability from quarter to quarter in the future. Mortgagecommitments from commercial banks and sofoles for middle-income housing aregenerally not subject to significant seasonality. We expect that as thepercentage of our sales from middle-income housing increases, the overallseasonality of our results of operations should diminish.

 

**Marketing**

 

Wedevelop customer awareness through our marketing and promotion efforts andreferrals from satisfied customers. Through surveys we conduct through ourmarketing department and with sales agents, we gather demographic and marketinformation to help us gauge the feasibility of new developments. We use thesesurveys to target groups of customers who share common characteristics or havecommon needs and offer packages of services, including housing models andfinancing sources, tailored to these groups.

 

Weconduct advertising and promotional campaigns principally through print media,including billboards, fliers, and brochures designed specifically for thetarget market, as well as local radio and television. Moreover, we complementthese campaigns with additional advertising efforts, including booths atshopping centers and other high traffic areas, to promote open houses and otherevents. In some locations, we work with local employers and other groups tooffer our homes to their employees or members and rely on positiveword-of-mouth from satisfied customers for a large percentage of our sales. Wealso employ specially-trained salespeople to market our middle-income homes.

 

**Sales**

 

Ingeneral, we make sales either at sales offices or model homes. Using data wegather through our marketing efforts, we open sales offices in areas where weidentify demand. As of December 31, 2007, we operated 71 sales offices,one in each of the developments we have established. Similarly, once we havepurchased land and planned a development in regions we have identified asunderserved, we build and furnish model homes to display to prospectivecustomers. We have sales offices in each of our branches where trainedcorporate sales representatives are available to provide customers withrelevant information about our products, including financing, technicaldevelopment characteristics, and information about our competitors 

 

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and their products.We provide the same information through trained corporate sales representativesat model homes. During 2005 we changed our method of compensating our salesagents to an exclusively performance-based commission method, typically 1.8% ofthe total home price.

 

Weprovide our customers with assistance through our sales departments from themoment they contact us, during the process of obtaining financing, and throughthe steps of establishing title to their new home. We have specialized salesareas in each of our offices that advise customers on financing options,collecting necessary documentation, and applying for a loan. We also help todesign down payment plans tailored to each customer’s economic situation. Oncehouses are sold and delivered, our specialized teams are available to respondto technical questions or problems during the two-year warranty periodfollowing the delivery.

 

**CustomerFinancing**

 

Weassist qualified homebuyers in obtaining mortgage financing by participating inall the stages of applying for and securing mortgage loans from housing funds,commercial banks, and sofoles.

 

Forsales of affordable entry-level homes, the process of obtaining customerfinancing generally occurs as follows:

 

·                  a potential homebuyerenters into an agreement by signing a purchase application and furnishes thenecessary documentation to us;

 

·                  we review thedocumentation to determine whether all the requirements of the relevantmortgage provider have been met;

 

·                  we create anelectronic credit file for each homebuyer and submit it to the relevantmortgage provider for approval;

 

·                  we supervise andadminister each client file via our database through all the phases of itsprocessing and arrange for signing the required documentation once approval hasbeen obtained;

 

·                  the homebuyer makesany required down payment;

 

·                  once the home hasbeen completed, the homebuyer signs the deed of transfer of title and themortgage agreement; and

 

·                  we deliver the hometo the homebuyer and register the title.

 

Forsales of middle-income homes, the process of obtaining customer financingoccurs as above, except that we collect a down payment of between 10% to 25% ofa home’s total sale price immediately following the homebuyer’s execution ofthe purchase application, and the homebuyer signs the deed of transfer of titleand the mortgage agreement when the home is at least 95% complete.

 

Inall cases, the procedures and requirements for obtaining mortgage financing aredetermined by the mortgage provider.

 

Wehave not experienced and do not expect to experience losses resulting from rejectionsby homebuyers of their purchase applications because we generally have beenable to locate other buyers immediately in these cases.

 

Thepurchase price of the homes we sell is denominated in pesos and is subject toan upward adjustment for the effects of inflation. In cases where the price ofa home is subject to adjustment and increases due to inflation, any differenceis payable by the homebuyer.

 

**Design**

 

Mostof the designs that we use in our construction we develop internally. Ourarchitects and engineers are trained to design structures to maximizeefficiency and minimize production costs. Our standardized modular designs,which focus on quality and size of construction, allow us to build our homesquickly and efficiently. By allowing our customers to upgrade finishing detailson a custom basis after homes are delivered, we experience savings that allowus to build larger homes than our competitors.

 

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

 

**Construction**

 

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

 

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

 

During 2007, the Companyacquired cutting-edge construction technology based on aluminium molds; thisnew technology will significantly improve the efficiency of the constructionprocess. Among the advantages are the shorter construction time; better qualityand reduced reprocessing; re-use of the same mold for several prototypes ofhomes, with an estimated life of 2,000 usages per mold; versatility, because itpermits construction ranging from simple floors to apartment buildings usingthe same system; labor savings; compatibility among international suppliers;eco-friendliness because, unlike traditional construction methods, moldconstruction does not utilize timber; and durability, due to the use of concrete.As of December 31, 2007 we had used this technology in the construction of5,458 homes.

 

**Materials and Suppliers**

 

We maintain strict controlover our building materials through a sophisticated electronic barcodeidentification system that tracks deliveries and monitors all uses of supplies.In general, we reduce costs by negotiating supply arrangements at the corporatelevel for the basic materials used in the construction of our homes, includingconcrete, concrete block, steel, bricks, windows, doors, roof tiles, andplumbing fixtures. We take advantage of economies of scale in contracting formaterials and services in every situation and seek to establish excellentworking relationships with our suppliers. In order to better manage our workingcapital, we also arrange lines of credit for many of our suppliers through afactoring program sponsored by Nacional Financiera, S.N.C., or NAFINSA, aMexican government-owned development bank, as well as certain additionalfinancial institutions. We guarantee a portion of the financing provided tosome of our suppliers for materials we buy from them during construction andrepay these lenders 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. deC.V., Lamina 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., KS Tubería, S.A. de C.V., Prefabricados ySistemas, S.A. de C.V., Industrial Bloquera Mexicana, S.A. de C.V., SanitariosAzulejos y Recubrimientos, S.A. de C.V., Mexicana de Laminación, S.A. de C.V.,Coacero, S.A. de C.V., Aceros el Arbol, S.A. de C.V., Grupo Forestal el Nayar,S.A. de C.V., Materiales para Construcción 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 de México, S.A. de C.V., Termoplásticosdel Centro, S.A. de C.V. and Logística Distribución 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.

 

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**Labor**

 

As of December 31, 2007we had a total of approximately 15,127 employees, all of whom were employed inMexico. Our total employees for the years ended 2006 and 2005 were 11,948 and7,337, respectively. Approximately 4,602 of our employees as of December 31,2007 were administrative and managerial personnel.

 

We hire local labor forces forspecific housing developments in each region that we operate in addition toexperienced in-house personnel for supervisory and highly skilled work. We havean efficient information technology system that controls payroll costs. Oursystems, using barcoded 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 atendance control system that captures information fedvia our system through workers’ identification cards.

 

We have implemented programsthroughout Homex to assist our employees in obtaining elementary andmiddle-school equivalency degrees. We believe that these programs enhance ourability to attract and retain high quality employees. In 2004, 2005 and 2007 wewere named as one of the top 50 “Great Places to Work” in Mexico by the GreatPlace to Work Institute, which is based in the United States.

 

As of December 31, 2007,approximately 99% of our construction employees were members of a nationallabor union of construction workers. The economic terms of our collectivebargaining agreements are negotiated on an annual basis. All other terms andconditions of these agreements are negotiated every other year. We believe thatwe have an excellent working relationship with our workforce. We have notexperienced a labor strike or any significant labor-related delay to date.

 

**Customer Services andWarranties**

 

The Company holds insurancethat covers defects, hidden or visible, during construction and which alsocovers the warranty period provided by the Company to homebuyers.  Asmentioned in Note 25 to the financial statements, we provide a two-yearwarranty to all of our customers.   This warranty could apply todamages derived either from our operations or from defects in materialssupplied by third parties (such as electrical installations,  plumbing,gas, waterproofing, etc.) or other circumstances outside our control.

 

Formanufacturing defects, we do not recognize a warranty accrual in ourconsolidated financial statements since we obtain a security bond from ourcontractors to cover the claims related to their work.   We withholda guarantee deposit from them, which is reimbursed to our contractors once thewarranty for manufacturing defects period expires.  We believe that at December 31,2007 we had no unrecorded losses with respect to these warranties.

 

**Community Services**

 

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.

 

**International Investments**

 

InMarch 2008, the Company set up a subsidiary in India, Daksh Builders andDevelopers Private Limited, through which it intends to develop land for theconstruction of entry-level and middle-income housing.  Daksh Builders and Developers Private Limitedis party to a development agreement to develop land in the state of Jammu andKashmir.  It has advanced US$1.5 millionto date under the development agreement and is committed to invest a further US$8.5million by August 2008, pursuant to Indian foreign investment law.

 

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**Risk Management**

 

The Company is exposed both togeneral entrepreneurial risks and to industry-specific risks. Key areas ofexposure are capacity and utilization risks, strategy-related risks, politicalrisks, operational risks, procurement risks, wage policy risks, IT risks andfinancial and treasury management risks. The Company’s risk management strategypermits the exploitation of business opportunities that present themselves aslong as a risk-return ratio in line with market conditions can be realized andthe associated risks are an appropriate and sustainable component valuecreation.

 

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

 

The Risk Management Committeeensures, on behalf of the Executive Board, that risks are identified andassessed continuously across functions and processes. It is responsible for thesystem’s constant further refinement and for verifying its effectiveness. Itreports regularly to the Executive Board. The Committee further develops thebasic principles of risk policy and oversees their compliance. It alsocommunicates the Company’s risk policy, defines the documentation requirementsand initiates any necessary reviews of specific aspects of the risk managementsystem by the internal audit department.

 

All major potential risks tothe 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 isdesigned to ensure that the timely detection, limitation and elimination ofthese risk systems are regularly reviewed and reinforced.

 

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

 

**Regulation**

 

***General***

 

Our operations are subject toMexican federal, state and local regulation as a corporation doing business inMexico. Some of the most relevant statutes, regulations and agencies thatgovern our operations as a housing development company include the following:

 

·                  the Mexican General HumanSettlements Law (*Ley General 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*)of each state where we operate, which regulates state urban development.

 

·                  the Mexican Federal HousingLaw (*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 BuildingRegulations (*Reglamentos de Construcción*) andurban development 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.

 

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·                  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 SocietyOrganizational Law (*Ley Organica de laSociedad Hipotecaria Federal*), which encourages the development ofthe primary and secondary home mortgage markets by authorizing SHF to granthome mortgage loans pursuant to the Federal Mortgage Society General FinancingConditions (*Condiciones Generales de Financiamiento de SociedadHipotecaria Federal*), which regulate the general terms and conditionson which these loans may be granted.

 

·                  the Mexican Federal ConsumerProtection 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.

 

***Environmental***

 

Our operations are subject to the MexicanGeneral Environmental Protection Law**(*Ley General del Equilibrio Ecológico y la Protección al Ambiente*),the Mexican General Waste Prevention and Management Law (*Ley Generalpara la Prevención y Gestión Integral de los Residuos*), and therelated regulations. The Mexican Ministry of the Environment and NaturalResources (*Secretara del Medio Ambiente y Recursos Naturales*)and the Mexican Federal Environmental Protection Agency (*ProcuraduríaFederal de Protección al Ambiente*) are the federal governmentauthorities responsible for enforcing environmental regulations in Mexico,including environmental impact studies, which are required for obtainingland-use permits, investigations and audits, as well as to provide guidelinesand procedures regarding the generation, handling, disposal and treatment ofhazardous and non-hazardous waste.

 

We are committed to conductingour business operations in a manner that minimizes their environmental impact.Our business processes include procedures that are intended to ensurecompliance with the Mexican General Environmental Protection Law, the MexicanGeneral Waste Prevention and Management Law, and the related regulations. Inaccordance with these laws, we build our homes with metal instead of woodenbeams and treat waste water. We plant trees on the land of homes we sell andprovide seedlings on land that we donate to our communities. Our internal teamsconduct environmental studies for each project and produce environmental reportsthat are intended to identify environmental issues and assist in projectplanning in order to minimize adverse environmental effects, such as limitingthe felling of trees during the process of urbanizing rural land for use in ourdevelopments. Our costs include the cost of complying with applicableenvironmental regulations. To date, the cost of complying and monitoringcompliance with environmental regulations applicable to us has been immaterial.

 

**SignificantSubsidiaries**

 

We are a holding company andconduct our operations through subsidiaries. The table below sets forth ourprincipal subsidiaries as of December 31, 2007.

 

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|                                                                             | ** ** | **Jurisdiction   of ** | ** ** | **Ownership   percentage** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------|
| **Name of Company**                                               | ** ** | **Incorporation**                | ** ** | **2007**                        | ** ** | **2006**   | ** ** | **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 |
| Edificaciones Beta, S. de R.L. de C.V. (2)                                  |       | Mexico                           |       | 100                             | %          | 100        | % | Construction and design of housing |
| Edificaciones Beta del Noroeste, S. de R.L. de C.V.  (2)                    |       | Mexico                           |       | 100                             | %          | 100        | % | Construction and design of housing |
| Edificaciones Beta del Norte, S. de R.L.De C.V. (2)                         |       | Mexico                           |       | 100                             | %          | 100        | % | Construction and design of housing |
| Hogares del Noroeste, S.A. de C.V. (3)                                      |       | Mexico                           |       | 50                              | %          | 50         | % | Promotion, design, construction and sale of  entry-level and middle-income housing |
| Homex Amuéblate, S.A. de C.V. (4)                                      |       | Mexico                           |       | 100                             | %          | —     |   | Sale of housing-related products |
| Homex Global, S.A. de C.V. (4)                                              |       | Mexico                           |       | 100                             | %          | —     |   | Holding company for foreign investments |
| Opción Homex, S.A. de C.V. (5)                                         |       | Mexico                           |       | 100                             | %          | —     |   | Sale, lease and acquisition of properties |
| Sofhomex, S.A. de C.V. S.F.O.M. E.R. (5)                                    |       | Mexico                           |       | 100                             | %          | —     |   | Financial services |
| Nacional Financiera, S.N.C. Fid. del Fideicomiso  Homex 80584               |       | Mexico                           |       | 100                             | %          | —     |   | Employee stock option plan administration |

 

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| (1)    |   | Casas  Beta del Centro, S. de R.L. de C.V. owns 100% of the outstanding stock of  Comercializadora Cántaros, S.A. de C.V. and Super Abastos Centrales y  Comerciales, S.A. de C.V., and 50% of the outstanding stock of Promotora  Residencial Huehuetoca, S.A. de C.V. (Huehuetoca), which are engaged in the  promotion, design, construction and sale of entry-level housing. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)    |   | To  more efficiently manage its operations, the Company decided to reduce the  number of its subsidiaries: therefore, as of December 31, 2007, these  subsidiaries have been liquidated.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)    |   | Hogares  del Noroeste, S. A. de C.V., a 50%-owned and controlled subsidiary, is  engaged in the promotion, design, construction and sale of entry-level and  middle-income housing.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)    |   | These  companies were incorporated in 2007; however, their operations have not been  significant.                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (5)    |   | These  companies were incorporated in 2007; however, they had no operations.                                                                                                                                                                                                                                                                                                          |

 

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

 

Not applicable.

 

**ITEM5.   Operating and Financial Review and Prospects.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion should be read in conjunction with our auditedconsolidated financial statements and their accompanying notes includedelsewhere herein. Our consolidated financial statements and other financialinformation included in this annual report, unless otherwise specified, arerestated in constant pesos as of December 31, 2007. Our consolidatedfinancial statements have been prepared in accordance with Mexican FinancialReporting Standards (MFRS), which differ in certain respects from U.S. GAAP asdescribed in Notes 27, 28 and 29 to our audited consolidated financialstatements.

 

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

 

***Goodwill and Intangible Assets***

 

We are required to apply thepurchase method of accounting for all business combinations, which requires therecognition of certain acquired intangible assets separate from goodwill.Goodwill and other intangibles determined to have an indefinite life are nolonger to be amortized but are to be tested for impairment at least annually.In our allocation of the purchase price of the acquisition of ControladoraCasas Beta, S.A. de C.V., we identified and allocated a value to intangibleassets totaling Ps.488 million (Ps.455.3 million at historic cost) related tothe Beta trademark and Ps.140.4 million (Ps.126.8 million at historic cost)related to the value of the backlog which represents the houses underconstruction as of the date of the Beta acquisition. As of December 31,2007, the net book value of the Beta trademark was Ps.227.6 million. Thebacklog has been completely amortized as of December 31, 2007. Thevaluation of these intangible assets required us to use our judgment. We alsorecorded goodwill related to the acquisition of Controladora Casas Beta, S.A.de C.V. of Ps.731.8 million. The annual impairment testing requirements requireus to use our judgment and could require us to write down the carrying value ofour goodwill and other intangible assets in future periods.

 

***Revenue and Cost Recognition***

 

Pursuant to MFRS, we use thepercentage-of-completion method of accounting for revenues and costs, whichdiffers in certain significant respects from accounting principles generallyaccepted in the United States, referred to as U.S. GAAP.  Under MFRS, applying thepercentage-of-completion method, we measure the progress towards completion interms of actual costs incurred versus estimated expenditures for each stage ofa development.  Also, under thepercentage-of-completion method of accounting, revenues for work completed arerecognized prior to receipt of actual cash proceeds.  We receive consideration from the sale of ahome at closing when title to the home is transferred to the homebuyer.  We include revenues in excess of billings asaccounts receivable on our balance sheet, and any cash proceeds we receive asadvance payments prior to completion of the actual work related to thepayments, including customer down payments, are included in current liabilitiesas advances from customers.  See Note 3to our consolidated financial statements.

 

The percentage-of-completionmethod of accounting requires us to determine on a monthly basis thepercentage-of-completion of each stage of a development based on actualexpenditures incurred to date versus estimated expenditures.  To the extent that the actual costs of adevelopment stage differ from the estimated 

 

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costs incurred, our recognized revenues couldchange.  In addition, to the extent thatestimated revenues derived from home sales per development stage differ fromrevenues derived from home deliveries per development stage, our recognizedrevenues could change.

 

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

 

·                  the homebuyer hassubmitted all required documents in order to obtain financing from the mortgagelender;

 

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

 

·                  the homebuyer hassigned a purchase application for the processing and granting of a loan to buya property to be used as housing; and

 

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

 

The variations in the Company’s gross profit andoperating profit arise due to the stated differences related to cost andrevenues recognition between MFRS and U.S. GAAP.  In 2007, revenues under MFRS were Ps.16,222million while revenues under U.S. GAAP were Ps.13,850 million.  In 2006, revenues under MFRS were Ps.13,439million while revenues under U.S. GAAP were Ps.13,224  million.    Gross profit margin percentageshave historically been a few percentage points higher under MFRS as compared toUS GAAP primarily as a result of interest capitalized to inventory under USGAAP rules that was then subsequently charged to cost of sales resultingin lower US GAAP gross profit margin percentages.    Before 2007, similar interest was notcapitalized for MFRS accounting purposes.  Interest capitalization rules have changed under MFRS during2007,  although they are still notidentical to US GAAP.   The Company anticipatesthat prospectively this trend might result in more comparable gross marginpercentages between the two accounting standards as interest amounts areultimately reflected in MFRS cost of sales as well.  See Notes 27 and 28 to our auditedconsolidated financial statements fora further discussion of differences between MFRS and US GAAP as they relate toour consolidated financial statements.

 

***Income Taxes***

 

We recognize deferred taxassets and liabilities based on the differences between the financial statements,carrying amounts and the tax bases of assets and liabilities. We regularlyreview our deferred tax assets for recoverability and, if necessary, establisha valuation allowance based on historical taxable income, projected futuretaxable income and the expected timing of the reversals of existing temporarydifferences. If these estimates and related assumptions change in the future,we may be required to record a valuation allowance against deferred tax assetsresulting in additional income tax expense. See Notes 3 and 23 to ourconsolidated financial statements.

 

***Issues Related to theHomebuilding Industry Crisis in the U.S.***

 

Adverse economic conditions inthe U.S. mortgage banking sector are currently affecting the homebuildingindustry in the U.S. Recently, these negative conditions have impacted thefinancial positions of a majority of U.S. homebuilders. Our domestic mortgagesystem, as explained herein, differs from that of the U.S. Accordingly, incomparison to the U.S. homebuilders, our financial position is not similarlyaffected; nevertheless, we assess periodically any impairment indicators forour assets and the sufficiency of our provisions. No negative impact has arisenas a result of the crisis currently affecting the U.S. homebuilding industry.

 

**OPERATING RESULTS**

 

The following table sets forthselected data for the periods indicated, restated in constant pesos as of December 31,2007 and also expressed as a percentage of our total revenues:

 

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| ** **                           | ** ** | **2007**                                                 | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|------------|------------|
| ** **                           | ** ** | **(in thousands of constant pesos)** | ** ** |
| **MFRS:**                            |       |                                                     |       |      |       |       |       |
| Revenues                             |       | Ps.                                                      | 16,222,524 |      | Ps.        | 13,439,519 |       | Ps. | 9,216,043 |   |
| Costs                                |       | 11,041,456                                               |       | 9,191,005 |       | 6,418,567  |       |
| Gross profit                         |       | 5,181,068                                                |       | 4,248,514 |       | 2,797,476  |       |
| Selling and administrative expenses  |       | 1,798,429                                                |       | 1,359,147 |       | 913,165    |       |
| Income from operations               |       | 3,382,639                                                |       | 2,889,367 |       | 1,884,311  |       |
| Other income                         |       | 209,223                                                  |       | 11,004    |       | 14,956     |       |
| Net comprehensive financing cost (1) |       | 278,904                                                  |       | 790,969   |       | 494,005    |       |
| Income tax expense                   |       | 951,280                                                  |       | 669,843   |       | 458,902    |       |
| Net income                           |       | Ps.                                                      | 2,361,678  |      | Ps.        | 1,439,559  |       | Ps. | 946,360 |   |
|                                      |            |                                                          |            |           |            |            |            |  |  |  |  |  |  |

 
| ** **                          | ** ** | **(as a percentage of sales)** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|
| **MFRS:**                           | ** ** | ** **                                         |       |   |   |   |   |
| Revenues                            |       | 100                                                | %          | 100 | % | 100 | % |
| Costs                               |       | 68.0                                               | %          | 68.4 | % | 69.6 | % |
| Gross profit                        |       | 31.9                                               | %          | 31.6 | % | 30.4 | % |
| Selling and administrative expenses |       | 11.0                                               | %          | 10.1 | % | 9.9 | % |
| Income from operations              |       | 20.8                                               | %          | 21.5 | % | 20.4 | % |
| Other income                        |       | 1.2                                                | %          | 0.0 | % | 0.2 | % |
| Net comprehensive financing cost    |       | 1.7                                                | %          | 5.9 | % | 5.4 | % |
| Income tax expense                  |       | 5.8                                                | %          | 4.9 | % | 4.9 | % |
| Net income                          |       | 14.6                                               | %          | 10.7 | % | 10.3 | % |

 

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(1)          Represents interest income,interest expense, monetary position gains and losses, and foreign exchangegains and losses.

 

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

 

***Revenues***

 

Total revenues increased by 20.7% to Ps.16,222.5 million in2007 from Ps.13,439.5 million in 2006, primarily driven by a 16.9% increase inthe number of homes sold and 3.1% higher average prices.  Affordable entry-level represented 77.3% oftotal revenues in 2007 compared to 78.4% in 2006, and middle-income represented22.6% of total revenues in 2007 compared to 21.5% in 2006. We sold 46,690affordable entry-level homes in 2007, compared to 39,940 affordable entry-levelhomes in 2006, and sold 4,982 middle-income homes in 2007, compared to 4,192 homesin 2006. In 2007, Homex reported other revenues (included in revenues above) ofPs.153.6 million compared to Ps.194.6 million in 2006. This decline was mainlydriven by increased internal use of existing production capacity of ourprefabricated construction materials such as block and concrete, which resultedin a reduction of third party sales of block and concrete.

 

***Gross Profit***

 

Homex generated a gross profit margin of 31.9% in 2007, anincrease of 0.3 basis points compared to 31.6% in 2006. The higher margin wasmainly driven by the implementation and progressive use of aluminum molds insome of the Company’s projects. Gross profit increased by 22.0% to Ps.5,181.1million in 2007 from Ps.4,248.5 million in 2006.

 

***Selling, Generaland Administrative Expenses (SG&A)***

 

Selling, general and administrative expenses increased by32.3% to Ps.1,798.4 million in 2007 compared to Ps.1,359.1 million in 2006. Theamortization of the “Casas Beta” brand in 2007 resulted in a non-cash impact onSG&A of Ps. 92.9 million, compared to Ps.94.5 million in 2006. As apercentage of total revenues, and excluding the amortization effect of the “CasasBeta” brand, selling, general and administrative expenses increased to 10.5% in2007 from 9.4% in 2006. The yearly increase was principally the result of ourexpansion programs.

 

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***Income fromOperations***

 

In2007, income from operations increased by 17.1% to Ps.3,382.6 million comparedto Ps.2,889.4 million in 2006. Including the non-cash items, income fromoperations as a percentage of revenues was 20.8% in 2007 compared to 21.5% in2006, as a result of the increase in 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.

 

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 monetary liabilityposition.

 

***Income Tax Expense***

 

Income tax expense increased by 42.0% fromPs.669.8 million in 2006 to Ps.951.3 million in 2007, due principally toincreased revenues and income before taxes. The 29% effective income tax ratein 2007 decreased 2% from the 31% effective income tax rate in 2006.

 

Theincome tax effective rate decreased from 31% in 2006 to 29% in 2007 as a resultof the reduction of mandatory income tax rates from 29% in 2006 to 28% in 2007as well as the benefits associated with VAT recoveries. See Note 23 to ourconsolidated financial 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% to Ps.2,233.1 million in 2007from Ps.1,391.3 million in 2006 as a result of the factors described above.

 

***Results of Operations for the YearEnded December 31, 2006 Compared to the Year Ended December 31, 2005***

 

***Revenues***

 

Total revenues increased by 45.8% to Ps.13,439.5million in 2006 from Ps. 9,216.0 million in 2005, primarily due to a 39.7%increase in the number of homes sold and an increase of 4.4% in the averageprice for all homes. Affordable entry-level homes represented 78.4% of totalrevenues in 2006 compared to 78.0% in 

 

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2005, and middle-income homes represented 21.5% of total revenues in2006 compared to 21.9% in 2005. We sold 4,192 middle-income homes in 2006compared to 3,391 middle-income homes in 2005, and sold 39,940 affordableentry-level homes in 2006 as compared to 28,203 affordable entry-level homes in2005. In 2006, Homex reported other revenues (included in revenues above) ofPs.194.6 million compared to Ps.262.5 million in 2005. This decline was mainlydriven by an extraordinary sale of ready-mix concrete and concrete block in thethird quarter of 2005 to a third party.

 

***Gross Profit***

 

Cost of sales increased by 43.2% in 2006 toPs.9,191.0 million from Ps.6,418.6 million in 2005, due primarily to theincorporation of Beta into the Company’s operations as well as the increasedvolume, as described above. Gross profit increased by 51.9% to Ps.4,248.5million in 2006 from Ps.2,797.5 million in 2005. Our gross profit marginimproved to 31.6% in 2006 from 30.4% in 2005, due primarily to theincorporation of Beta into the Company’s operations as well as the increasedvolume.

 

***Selling, General and AdministrativeExpenses***

 

Selling, general and administrative expensesincreased by 48.8% to Ps.1,359.1 million in 2006 from Ps.913.2 million in2005. This increase was due principally to increased sales, as well as theamortization of a portion of the value of the “Casas Beta” brand equivalent to12 months during 2006, resulting in a non-cash impact on SG&A ofapproximately Ps.94.5 million. As a percentage of sales, selling, general andadministrative expenses increased to 10.1% in 2006 from 9.9% in 2005. Thisincrease in selling, general and administrative expenses as a percentage ofsales was attributable to a 45.8% increase in sales as well as the amortizationof the value of the Beta brand.

 

***Net Comprehensive Financing Cost***

 

Net comprehensive financing cost (comprised ofinterest income, interest expense, monetary position gains and losses, andforeign exchange gains and losses) increased by 60.1% to Ps.790.9 million in2006 from Ps.494.0 million in 2005. Net comprehensive financing cost as apercentage of sales increased to 5.9% in 2006 from 5.4% in 2005.

 

Net interest expense increased by 45.2% to Ps.565.8million in 2006 from Ps.389.6 million in 2005. This increase was primarily dueto the interest on the Senior Guaranteed Notes due 2015. Interest incomeincreased by 72.7% to Ps.108.8 million in 2006 from Ps.63.0 million in 2005 dueto higher cash balances throughout the year.

 

We had a foreign exchange loss of Ps.148.4 millionin 2006 as a result of a higher debt level exposure in U.S. dollar-denominateddebt impacted by the peso appreciation of approximately 1.89% against the U.S.dollar during 2006, compared to a foreign exchange loss of Ps.70.7 million in2005.

 

Monetary position loss increased fromPs.33.8 million in 2005 to Ps.76.8 million in 2006 as a result of adecrease in our net monetary liability position.

 

***Income Tax Expense and EmployeeStatutory Profit-Sharing Expense***

 

Income tax expense increased by 46.0% from Ps.458.9million in 2005 to Ps.669.8 million in 2006, due principally to increasedrevenues and income before taxes. The 31.2% effective income tax rate in 2006remained relatively stable, from 32.4% in 2005. The decrease in the income taxeffective rate between 2006 and 2005 is a result of the reduction of mandatoryincome tax rates from 30% in 2005 to 29% in 2006. Employee statutory profit-sharing expenseincreased from Ps.10.4 million in 2005 to Ps.36.7 million in 2006 as aresult of the increase in revenue and income before taxes. The amount relatedto employee statutory profit-sharing expense was reclassified to other expenses(income).

 

***Majority Net Income***

 

Majority net income increased by 45.9% to Ps.1,391.3million in 2006 from Ps.953.6 million in 2005 as a result of the factorsdescribed above.

 

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**Government Policy andAvailable 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 1994 economiccrisis, government policy sought to counterbalance the shortage of availablefinancing 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*), whichmade it possible to sell these formerly restricted properties, also increasedthe potential supply of land available for development. During this period thegovernment authorized sofoles, which underwrite mortgages with funds andguarantees provided by government agencies, private investment, national,foreign or development bank loans, or through the Mexican capital markets.Furthermore, the government encouraged industry growth and private sectorlending by supporting consolidation in the housing development industry.

 

Between 1997 and 1998, homesales 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. Following the crisis,former President Fox’s administration’s goal was to provide 750,000 newmortgages per year by 2006 pursuant to its national housing plan. Theadministration set forth four objectives to achieve this growth:

 

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

 

·                  increase deregulation of thehousing industry;

 

·                  encourage consolidation withinthe industry; and

 

·                  increase financingopportunities available 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.

 

The actions taken by PresidentCalderón’s administration to accelerate the housing and mortgage supply inMexico has resulted in the emergence of a very active housing industry supportedby solid private and public institutions. The developer-built market hascontinued to expand due to higher levels of available mortgage financing,especially through Mexican Housing Funds such as INFONAVIT, SHF and FOVISSSTE.According to CONAVI, from 2000 to 2007 mortgage providers in Mexico granted3,880,194 mortgages, a 116.4% growth from 331,880 in 2000 to 718,255 in 2007.Between 2003 and 2007, CONAPO estimates that the housing stock increased by2.0 million homes.

 

President Calderón has indicatedthat he will continue to support and promote the housing industry on three mainlines: urban development, very affordable housing and home improvement. Hisadministration’s goal is for the Mexican Housing Funds to provide six millionmortages by 2012.

 

Changes in the availability ofmortgage financing from government agencies could adversely affect us. See “Item3. Key Information—Risk Factors—Risk Factors Related to Our Business—Decreasesin the Amount of Mortgage Financing Provided by Mexican Housing Funds on WhichWe Depend, or Disbursement Delays, Could Result in a Decrease in Our Sales andRevenues.”

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

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

 

As of December 31, 2007, we had Ps.2,206.8 million of cash and cashequivalents and Ps.3,795.6 million of outstanding indebtedness for moneyborrowed (none of which was construction financing provided by sofoles fordevelopments under construction), as compared to Ps.2,381.7 million of cash andcash equivalents and Ps.3,705.1 million of outstanding indebtedness as of December 31,2006.

 

Although we do not commence construction of any development until theavailability of mortgage financing for qualified homebuyers is determined, wedo acquire land and perform licensing, permit-securing, and certaininfrastructure development activities prior to receiving confirmation of theavailability of mortgage financing. Historically, we have financed ourdevelopment and construction activities through internally generated funds,commercial paper programs, and bridge loans.

 

Our primary sources of liquidity are:

 

·                  cash flow from operations;

 

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

 

·                  commercial banks and otherfinancial institutions; and

 

·                  down payments from homebuyers.

 

We believe that our working capital will be sufficient during the next12 months to meet our liquidity requirements.

 

The table below sets forthinformation regarding our outstanding debt as of December 31, 2007:

 

**DebtOutstanding as of December 31, 2007**

 
| **Homex Debt**                                                                                                                                                                                      | ** ** | **Aggregate Lender  Principal Amount** | ** **      | **Interest  Rate** | ** ** | **Maturity**       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|-----------------|--------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **(in thousands of  pesos)**           | ** **      | ** **         | ** ** | ** **         | ** ** |
| Senior Guaranteed Notes (1)                                                                                                                                                                              |       | Ps.                                              |  2,729,625 |               |       |               |       |   |
| Bond issuance (senior guaranteed notes) with  Credit Suisse First Boston and Merrill Lynch, guaranteed by Picsa, Decano and  other subsidiary companies.“Principal  - Only Swap” for the Bond. |       | 79,098                                           |            | 7.50               | %          | Sept. 28, 2015     |       |
| HSBC Mexico, S.A.                                                                                                                                                                                        |       |                                             |            |               |       |               |       |
| A credit line of Ps.1,081 million granted on  July 1, 2005, with semi-annual payments beginning on March 14,  2008. The proceeds were used to purchase BETA.                                   |       | 540,500                                          |            | TIIE+1.00          | %(2)       | Sept. 14, 2010     |       |
| GE Capital                                                                                                                                                                                               |       |                                             |            |               |       |               |       |
| 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.                                                                                |       | 13,872                                           |            | 7.40               | %          | July 29, 2010 |       |
| BBVA Bancomer                                                                                                                                                                                            |       |                                             |            |               |       |               |       |
| Financial leases of machinery and equipment                                                                                                                                                              |       | 350,331                                          |            | TIIE + 0.80        | %(2)       | Jan. 02, 2013      |       |
|                                                                                                                                                                                                     |       |                                             |            |               |       |               |       |
| Other financial leases                                                                                                                                                                                   |       | 3,222                                            |            | 7.40               | %          | Sept.15,2008       |       |
|                                                                                                                                                                                                     |       |                                             |            |               |       |               |       |
| Interest payable                                                                                                                                                                                         |       | 79,038                                           |            |               |       |               |       |
|                                                                                                                                                                                                     |       |                                             |            |               |       |               |       |
| Total debt                                                                                                                                                                                               |       | Ps.                                              |  3,795,686 |               |       |               |       |   |

 

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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%. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                              |
| (2)    |   | TIIE  refers to the 28-day Mexican interbank rate (*Tasa de  Interes Interbancaria de Equilibrio*), which was 7.9250% as of  December 31, 2007.                                                                                                                                                              |

 

 

Our total indebtedness increased to Ps. 3,795.6 million as of December 31,2007 from Ps. 3,705.1 million as of December 31, 2006, mainly as a resultof the net effect of a new capital lease obligation and exchange rateadjustments in our U.S. dollar-denominated debt.

 

As of December 31, 2007, our short-term debt was Ps. 328.9 million,mainly as a result of Ps. 68.1 million of equipment lease obligations and totalscheduled principal payments of Ps. 180.2 million of an unsecured creditfacility with HSBC Mexico, S.A., or HSBC. Our long-term debt was Ps.3,466.7million, which includes the long-term portion of our equipment leaseobligations in the amount of Ps. 288.9 million, the remaining balance ofthe medium-term loan facility with HSBC of Ps.360.3 million and our SeniorGuaranteed Notes in the aggregate principal amount of Ps. 2,808.7 million,including the current outstanding mark-to-market principal-only swap (“theprincipal-only swap”). In connection with the Beta acquisition, we entered intoan unsecured credit facility with HSBC in the amount ofPs.1,081.0 million. We repaid approximately 50% of the outstanding amountunder the HSBC unsecured credit facility on September 29, 2005, reducingthe remaining outstanding balance to Ps.540.5 million as of December 31,2007.

 

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

 

We have not paid dividends sincethe inception of the Company in 1998 and we do not foresee  paying dividends in the near future.

 

**Covenants**

 

Loan covenants require theCompany and its 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, 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 debt.

 

Financial covenants, derivedfrom the Senior Guaranteed Notes and the credit line with HSBC require theCompany to maintain:

 

·                  a ratio of totalstockholders’ equity to total debt of more than 1.0 to 1.0;

 

·                  a ratio ofearnings before interest, taxes, depreciation and amortization (EBITDA) toshort-term debt (including the interest payable) of at least 3.0 to 1.0; and

 

·                  operationalrestrictions on working capital.

 

There are also restrictionsapplicable to additional debt based on EBITDA levels, such as EBITDA tointerest expense, including payment of dividends, which should not be less than2.25 to 1.

 

In the event the Company doesnot comply with any of the above provisions, there is a resulting limitation onits ability to pay dividends to its stockholders.

 

Asof December 31, 2007 and 2006, the Company was in compliance with thefinancial covenants of its debt agreements.

 

The financial covenants of theleases from BBVA Bancomer require the Company and its subsidiaries to maintain:

 

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·                  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; and

 

·                  a relation ofoperational income to net comprehensive financing cost at a minimum level of2.0.

 

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

 

**TREND INFORMATION**

 

Other than as disclosedelsewhere in this annual report including in “Item 3. Key Information—RiskFactors” and “Item 4. Information on the Company—Business Overview—The MexicanHousing Market,” we are not aware of any trends, uncertainties, demands,commitments or events which are reasonably likely to have a material effect onour net sales or revenues, income from continuing operations, profitability,liquidity or capital resources, or that would cause reported financialinformation to not necessarily be indicative of our future operating results orfinancial condition. Also, as explained in further detail in Item 15, wecorrected during 2007 all the material weakenesses presented in our annualreport for the year 2006. In 2007, we have assessed the effectiveness of ourinternal control; this assessment identified a“material weakness” as further explained in Item 15.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

We have no off-balance sheetarrangements as of December 31, 2007.

 

**CONTRACTUAL OBLIGATIONS**

 

The following table sets forth information regarding our contractualobligations as of December 31, 2007:

 
| ** **                       | ** ** | **Payment Due by Period**                 | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                                | ** ** | **Less than  1 Year** | ** ** | **1-3 Year** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| ** **                       | ** ** | **(in thousands of constant pesos)** | ** ** |
| Long-term debt obligations       |       | Ps.                                                      | 3,363,095  |   | Ps. | 185,211 |   | Ps. | 369,162 |   | Ps. | — |   | Ps. | 2,808,723 |   |
| Capital (finance) lease          |       | 353,553                                                  |       | 64,696 |   | 220,431 |   | 68,426 |   | — |   |
| Total debt                       |       | 3,716,648                                                |       | 249,907 |   | 589,593 |   | 68,426 |   | 2,808,723 |   |
| Estimated interest (1)           |       | 2,435,594                                                |       | 362,559 |   | 961,115 |   | 594,136 |   | 517,784 |   |
| Operating lease obligations (2)  |       | 247,907                                                  |       | 51,703 |   | 148,158 |   | 48,046 |   | — |   |
| Land suppliers                   |       | 3,747,707                                                |       | 2,754,906 |   | 992,801 |   | — |   | — |   |
| Total                            |       | Ps.                                                      | 10,147,856 |   | Ps. | 3,419,075 |   | Ps. | 2,691,667 |   | Ps. | 710,608 |   | Ps. | 3,326,507 |   |
|                                  |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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, 2007. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                               | (2)    | Operating  leases are calculated in the nominal bases or future cash flows at the rate  as of December 31, 2007.                                      |
|                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                               |   | Contractual  obligations increased by 6% from Ps.9,594,752 as of December 31, 2006  to Ps.10,147,857 as of December 31,                     |
| 2007.  This change was mainly due to the purchase of land reserves at the end of  2007, our new capitalized lease financing several prototypes of aluminum  forms and their spare parts and operating leases financing different kinds of  equipment related to our concrete and block production. |

 

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**New Accounting Pronouncements**

 

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

 

The most relevant standardsthat came into force in 2007 are described below:

 

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

 

Mexican FRS B-3 establishes the guidelines for classifyingincome, costs and expenses as either ordinary or non-ordinary and modifiescertain Mexican FRS. The primary sections of the statement of income have beenredefined to embody the concepts of “ordinary items” and the classification ofincome. Also, the caption “Initial Accumulated Effect of Accounting Changes”has been eliminated from such statement, as established in Mexican FRS B-1, *Accounting Changes and Error Corrections*.

 

Mexican FRS B-3 also allows entities to present costsand expenses in the statement of operations, based on their function or natureor a combination of both. Mexican FRS B-3 does not require the presentation ofoperating income in the statement of operations, but still allows for it whenoperating income is deemed to be an important indicator for evaluating aparticular entity’s performance. When an entity does decide to include the “OperatingIncome” caption, Mexican FRS B-3 requires the disclosure of the itemscomprising such caption and a justification for its inclusion in the statementof income.

 

The Company decided to includethe caption “Income from Operations” in the consolidated statement of incomesince management considers that these are significant indicators, conforming tothe disposition included in the recently issued Financial Reporting StandardOrientation No. 1, *Presentation or disclosureof the operating income or loss,* which establishes the general rules forthe presentation 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.

 

Theapplication of MFRS B-13 had no effect on the Company’s financial position orresults of operations.

 

**MFRS C-13, *Related Parties***

 

This Mexican FRS broadens the concept of related parties to includeimmediate family members of key management personnel or directors, as well asfunds derived from labor obligation plans. Mexican FRS C-13 also requires thefollowing disclosures: i) the relationship between the controlling company andits subsidiaries, irrespective of whether transactions were carried out betweenthem in the period; ii) the name of the direct controlling company and, whendifferent from such, the name of the principal controlling company of theeconomic entity to which the entity belongs; and iii) compensation granted tothe entity’s key management personnel or directors (in the case of publiccompanies). This standard allows entities to disclose, only when there areenough elements to sustain such an assertion, that the transactions carried outwith related parties are on terms similar to market conditions.

 

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

 

**MFRS D-6, *Capitalization of the ComprehensiveFinancing Cost***

 

Mexican FRS D-6 establishes that entities must capitalize comprehensivefinancing cost (CFC), which had been optional, under Mexican AccountingBulletin C-6, *Property, Plant and Equipment*.

 

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Capitalized CFC is defined as the amount attributableto qualifying assets that could have been avoided if its acquisition had nottaken place, which, in the case of Mexican peso-denominated financing, includesits interest and the net monetary position, and in the case of foreign currency-denominatedfinancing, also includes any exchange gain or loss. Qualifying assets aredefined as those assets acquired by an entity requiring a prolonged period oftime to get them ready for their intended use, that are to be sold or leasedthat require a prolonged period to be acquired or readied for sale or lease,including inventories that require a period of time to take possession or to preparefor sale. The capitalization of the comprehensive result of financing startsand continues while investments for its acquisition are being made, theactivities required for conditioning the asset for sale or use are underway andinterest is being accrued.

 

Mexican FRS D-6 establishes that the amount ofcapitalized CFC will be determined based on the loans that were specificallyused to acquire the qualifying assets, or if such identification cannot bemade, by applying the weighted average capitalization rate for financing to theweighted average number of investments in qualifying assets made during theacquisition period. Financing with imputed interest cost may be capitalizedagainst the cost of acquired assets, since the financing is recognized at itspresent value.

 

The adoption of MFRS D-6 for the year ended December 31,2007 represented a decrease in CFC of Ps.179,304, although  Ps. 119,286 was ultimately charged to cost ofsales as the underlying projects were sold. This standard is appliedprospectively, so 2007 is not comparable to either 2006 or 2005.

 

**The Interpretation 4 of MFRS, *Presentation of EmployeeProfit-Sharing in the Statement of Income***

 

The Interpretation of MFRS 4 concludes, based on theanalysis of MFRS B-3, D-3 and D-4, that employee profit-sharing shall bepresented as an ordinary expense*.*

 

**Interpretation 8 of MFRS, *Effects of the Flat-RateBusiness Tax*****(FRBT)**

 

In December 2007, the *ConsejoMexicano para la Investigación y desarrollo de Normas de la InformaciónFinanciera, A.C.* (Mexican Financial Information Standards ResearchDevelopment Board, or “CINIF”) issued the Mexican FRS Interpretation 8, whichis effective for years beginning on or after October 1, 2007. Suchstandard was created as a result of the need to clarify whether the new flatrate business tax (FRBT) should be treated as a tax on profits and to establishthe guidelines for its accounting treatment.

 

Mexican FRS Interpretation 8 establishes that the FRBTis a tax on income; therefore, its effects should be recognized in conformitywith the provisions of Mexican Accounting Bulletin D-4, *Accounting for Income Tax, Asset Tax and EmployeeProfit*-*Sharing*, and,as of January 1, 2008, in conformity with Mexican FRS D-4, *Taxes**onProfits*. Based on the conclusions of this Interpretation, an entitymust first prepare financial projections to determine whether its futuretaxable base would result in a FRBT payable or regular income tax payable.Based on the results of these projections, taxpayers will be able to identifythe expected behavior of FRBT and regular income tax.

 

Entities that have determined that they willessentially pay FRBT in future years must recognize the effects of deferredFRBT in their financial statements dated between October 1 and December 31,2007. This deferred tax must correspond to the temporary differences and FRBTcredits existing in 2007 for which payment or recovery of FRBT is expected asof or after 2008. Therefore, those entities that have determined that they willessentially pay FRBT in the future must also eliminate the deferred income taxasset or liability recognized at such date. These adjustments give rise to anexpense or income that must be recognized in the 2007 statement of income aspart of the caption “Taxes on income” or in stockholders’ equity when itrelates to other comprehensive income (loss) items.

 

The deferred tax rate is the rate enacted andestablished in the tax provisions at the date of the financial statements,which is expected to be in force at the time the deferred FRBT assets andliabilities will be realized (16.5% in 2008, 17% in 2009 and 17.5% in 2010 andsubsequent years).

 

Deferred FRBT for the period must be recognized as adeferred tax expense or income in the statement of income of the period as partof the “Tax on profits” caption, or in stockholders’ equity for those amountsassociated with comprehensive income items, and as a non-current asset orlong-term liability in the balance sheet. In the notes to the financialstatements, the Company must disclose an analysis of the taxes on incomepresented in the statement of income, showing the amounts of current anddeferred FRBT expense. The entity must also mention the deferred FRBT relatedto other comprehensive items.

 

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Based on the FRBT Law, an entity must determine theamount of asset tax generated through 2007 that it will be able to recover asof 2008. This amount must be recognized in the 2007 financial statements as atax account receivable and any amount of asset tax considered unrecoverablemust be recognized as an expense in the 2007 statement of income as part of the“Taxes on income” caption. Starting in 2008, the balance of recoverable taxesmust be reviewed on each financial statement closing date and written down whenthere is evidence that some amounts may not be recoverable.

 

The effects of adopting this new accountingstandard are described in Note 23 to our consolidated financial statements.

 

**The mostimportant new pronouncements that came into force in 2008 are as follows:**

 

**Mexican FRS B-2, *Statementof Cash Flows***

 

In November 2007, Mexican FRS B-2 was issued bythe CINIF to replace Mexican accounting Bulletin B-12, *Statement of Changes in Financial Position*.This standard establishes that the statement of changes in financial positionwill be substituted by a statement of cash flows as part of the basic financialstatements. The main differences between both statements lie in the fact thatthe statement of cash flows will show the entity’s cash receipts anddisbursements for the period, while the statement of changes in financialposition showed the changes in the entity’s financial structure rather than itscash flows. In an inflationary environment, the amounts of both financialstatements are expressed in constant Mexican pesos. However, in preparing thestatement of cash flows, the entity must first eliminate the effects ofinflation for the period and, accordingly, determine cash flows at constantMexican pesos, while in the statement of changes in financial position, theeffects of inflation for the period are not eliminated.

 

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

 

The transitory rules of Mexican FRS B-2 establishthat the application of this standard is prospective. Therefore, the financialstatements for years ended prior to 2008 presented for comparative purposesshould include a statement of changes in financial position, as established byMexican Accounting Bulletin B-12.

 

**Mexican FRS B-10, *Effectsof Inflation***

 

In July 2007, the CINIF issued Mexican FRS B-10, *Effects of Inflation*, which is applicablefor years beginning on or after January 1, 2008 and replaces Mexican AccountingBulletin B-10, *Accounting Recognition of theEffects of Inflation on Financial Information*. Mexican FRS B-10 definesthe two economic environments in Mexico that will determine whether or notentities must recognize the effects of inflation on financial information: i)inflationary, when inflation is equal to or higher than 26%; accumulated in thepreceding three fiscal years (an 8% annual average); and ii) non-inflationary,when accumulated inflation for the preceding three fiscal years is less thanthe aforementioned accumulated 26%. Based on these definitions, the effects ofinflation on financial information must be recognized only when entitiesoperate in an inflationary environment.

 

Mexican FRS B-10 also establishes the accounting rules applicablewhenever the economy changes from any type of environment to another. When theeconomy changes from an inflationary environment to a non-inflationary one, theentity must maintain in its financial statements the effects of inflationrecognized through the immediate prior year, since the amounts of prior periodsare taken as the base amounts of the financial statements for the period ofchange and subsequent periods. Whenever the economy changes from anon-inflationary environment to an inflationary one, the effects of inflationon the financial information must be recognized retrospectively, meaning thatall information for prior periods must be adjusted to recognize the accumulatedeffects of inflation of the periods in which the economic environment wasconsidered non-inflationary.

 

This standard also abolishes the use of thespecific-indexation method for the valuation of imported fixed assets and thereplacement-cost method for the valuation of inventories, thus eliminating theresult from holding non-monetary assets. Therefore, at the date this MexicanFRS comes into force, entities which have 

 

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recognizedany accumulated result from holding non-monetary assets in their stockholders’equity, under retained earnings (accumulated deficit), must identify therealized and unrealized portions of such result.

 

The realized result from holding non-monetary assetsmust be reclassified to retained earnings, while the unrealized portion must bemaintained as such within stockholders’ equity, and reclassified to results ofoperations when the asset giving rise to it is realized. Whenever it is deemedimpractical to separate the realized from the unrealized result from holdingnon-monetary assets, the full amount of this item may be reclassified toretained earnings.

 

The effect of the adoption of this standard on theCompany’s 2008 financial statements shall be the Company’s ceasing to recognizethe effects of inflation on its financial information (to the extent thatinflation stays at current levels).

 

**Mexican FRS B-15, *ForeignCurrency Translation***

 

In November 2007, the CINIF issued Mexican FRSB-15, *Foreign Currency Translation*,which is effective for years beginning on or after January 1, 2008. Thisstandard replaces the previous Mexican Accounting Bulletin B-15, *Transactions in Foreign Currency and Translation ofFinancial Statements of Foreign Operations*, as of its effectivedate.

 

Since Mexican FRS B-15 includes the concepts ofrecording currency, functional currency and reporting currency, the standardeliminates the concept of integrated foreign operations and foreign entityestablished in Mexican Accounting Bulletin B-15. The recording currency isdefined as that currency in which accounting records are kept. Functionalcurrency is the currency in which cash flows are generated and the reportingcurrency is that in which the financial statements are presented.

 

Derived from the adoption of the aforementionedconcepts, this standard also establishes new procedures for translatingtransactions with companies abroad, from the recording currency to thefunctional currency, and from the functional currency to the reportingcurrency.

 

Under FRS B-15, the first step in the translation offoreign operations is to determine the functional currency, which is usuallythe currency of the primary economic environment in which the foreign operationis carried out. However, the functional currency may in some cases differ fromthe local currency or recording currency, which occurs when these currencies donot represent the currency in which cash flows of foreign operations areexpressed.

 

If the functional currency differs from the recordingcurrency, the financial statements must be translated into their functionalcurrency, as follows: i) monetary assets and liabilities by applying theexchange rates at the balance sheet date; ii) non-monetary assets andliabilities, as well as stockholders’ equity accounts, at the historicalexchange rate; and iii) revenues, costs and expenses at the historical exchangerate, except for the effects of non-monetary assets and liabilities on resultsof operations of the period, such as depreciation and cost of sales, which mustbe translated at the historical exchange rate used in the translation of thecorresponding balance sheet item. Translation differences shall be carrieddirectly to the income statement.

 

Once the financial statements have been expressed inthe functional currency, they must be translated into the reporting currency byapplying: i) the exchange rates at the balance sheet date to all asset,liability and stockholders’ equity accounts and ii) the historical exchangerate to revenues, costs and expenses. Any difference resulting from thetranslation or the consolidation process or from applying the equity methodmust be recognized as a cumulative translation adjustment as part of comprehensiveincome in stockholders’ equity.

 

This procedure is applicable to operations carried outin a non-inflationary environment. For foreign operations carried out in aninflationary environment, Mexican FRS B-15 requires that the effects ofinflation on financial information be recognized prior to translation and inconformity with Mexican Accounting Bulletin B-10, using the price index of thecountry in which the operations are carried out. Once the effects of inflationon financial information have been recognized in the recording currency, i)asset, liability and stockholders’ equity accounts must be translated using theprevailing exchange rate at the balance sheet date; ii) income statementaccounts must be translated at the exchange rate at the balance sheet date; andiii) the difference resulting from the translation or the consolidation processor from applying the equity method must be recognized as a cumulativetranslation adjustment as part of comprehensive income in stockholders’ equity.

 

Mexican FRS B-15 establishes that the preparation ofcomparative financial statements must take into account the economicenvironment of the reporting entity, since if the entity operates in anon-inflationary economic environment, the financial statements from prioryears included for comparative purposes shall be 

 

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presentedwith no charge to the translation made at the issuance date. However, if thereporting entity operates in an inflationary economic environment, thefinancial statements included for comparative purposes must be expressed inMexican pesos with purchasing power at the latest balance sheet date.

 

At the date of the financial statements, management isevaluating what effect the observance of this accounting pronouncement willhave on the Company’s results of operations and financial position.

 

**Mexican FRS D-3, *EmployeeBenefits***

 

On January 1, 2008, the new Mexican FRS D-3, *Employee Benefits*, issued by the CINIF,went into effect and replaced the old Mexican Accounting Bulletin D-3, *Labor Obligations*. The most significantchanges contained in Mexican FRS D-3 are as follows: i) shorter periods for theamortization of unamortized items, with the option to credit or chargeactuarial gains or losses directly to results of operations, as they accrue;ii) elimination of the recognition of an additional liability and resultingrecognition of an intangible asset and comprehensive income item; 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 Mexican FRSD-4; and iv) current-year and deferred employee profit-sharing expense is to bepresented as an ordinary expense in the income statement rather than as part oftaxes on profits.

 

The adoption of this standard in 2008 will requirethat both the additional liability and the related intangible asset andcomprehensive income item be eliminated and that the unamortized items have aneffect on results of operations in a period not exceeding five years. Theinitial effect of the recognition of deferred employee profit-sharing must becharged or credited to retained earnings with no effect on results ofoperations for the year ending December 31, 2008.

 

At the date of the financial statements, management isevaluating what effect the observance of this accounting pronouncement willhave on the Company’s results of operations and financial position.

 

**Mexican FRS D-4, *Taxes on Profits***

 

In July 2007, the CINIF issued Mexican FRS D-4, *Taxes on Profits*, which is applicable foryears beginning on or after January 1, 2008 and replaces Mexican AccountingBulletin D-4, *Accounting for Income Tax,Asset Tax and Employee Profit-Sharing*. The most significant changesincluded in this standard with respect to Mexican Accounting Bulletin D-4 areas follows: i) the concept of permanent differences is eliminated, since theasset and liability method requires the recognition of deferred taxes on alldifferences in balance sheet accounts for financial and tax reporting purposes,regardless of whether they are permanent or temporary; ii) since current-yearand deferred employee profit-sharing is considered as an ordinary expense, itis excluded from this standard and is now addressed under Mexican FRS D-3; iii)asset tax is required to be recognized as a tax credit and, consequently, as adeferred income tax asset only in those cases in which there is certainty as toits future realization; and iv) the cumulative effect of adopting Mexican AccountingBulletin D-4 is to be reclassified to retained earnings, unless it isidentified with comprehensive items in stockholders’ equity not yet taken toincome.

 

Under this standard, the accumulated effect of deferredincome tax, derived from the adoption of Mexican Accounting Bulletin D-4, will betemporarily reclassified to retained earnings, except for the portioncorresponding to comprehensive income items, which will be reclassified toresults of operations when the item giving rise to them is taken to income.

 

At the date of the financial statements, management isevaluating what effect the observance of this accounting pronouncement willhave on the Company’s results of operations and financial position.

 

**U.S. GAAP**

 

**Accounting for uncertainty in income taxes:**

 

The Company adopted the provisions of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48)as of January 1, 2007. The adoption of FIN 48 did not have an impact onthe Company’s financial statements and did not result in a cumulativeadjustment to retained earnings at adoption.

 

We establish reserves to remove some or all of the taxbenefit of any of our tax positions at the time we determine that it becomesuncertain based upon one of the following conditions: (1) the tax positionis not “more likely than not” to be sustained, (2) the tax position is “morelikely than not” to be sustained, but for a lesser amount, or (3) the taxposition is “more likely than not” to be sustained, but not in the financialperiod in which the tax position was originally taken.

 

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For purposes of evaluating whether or not a taxposition is uncertain, (1) we presume the tax position will be examined bythe relevant taxing authority that has full knowledge of all relevantinformation, (2) the technical merits of a tax position are derived fromauthorities such as legislation and statutes, legislative intent, regulations,rulings and case law and their applicability to the facts and circumstances ofthe tax position, and (3) each tax position is evaluated withoutconsideration of the possibility of offset or aggregation with other taxpositions taken.

 

A number of years may elapse before a particular uncertaintax position is audited and finally resolved or when a tax assessment israised. The number of years subject to tax assessments varies depending on thetax jurisdiction and is generally five years for the countries in which theCompany principally operates. The tax benefit that has been previously reservedbecause of a failure to meet the “more likely than not” recognition thresholdwould be recognized in our income tax expense in the first period when theuncertainty disappears under any one of the following conditions: (1) thetax position is “more likely than not” to be sustained, (2) the taxposition, amount, and/or timing is ultimately settled through negotiation orlitigation, or (3) the statute of limitations for the relevant taxingauthority to examine and challenge the tax position has expired.

 

**EITF 06-3**

 

In June 2006, the EITF ratified the consensus onEITF Issue No. 06-3 (EITF 06-03), How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That is, Gross versus Net Presentation). EITF 06-03 concluded thatthe presentation of taxes assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and a customer,such as sales, use, value-added and certain excise taxes is an accountingpolicy decision that should be disclosed in a company’s financial statements.In addition, companies that record such taxes on a gross basis should disclosethe amounts of those taxes in interim and annual financial statements for eachperiod for which an income statement is presented if those amounts aresignificant. EITF 06-03 is effective for interim and annual reporting periodsbeginning after December 15, 2006. The Company continued with its accountingpolicy of net presentation; therefore, the adoption of EITF 06-03 did not haveany impact on its financial condition or results of operations.

 

A summary of the most important new pronouncements inU.S. GAAP that will come into force in 2008 or after and may apply to theCompany is as follows:

 

**Fair value measurement (FASB Statement 157):**

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurement.” SFAS No. 157 defines fair value, establishes aframework for the measurement of fair value, and enhances disclosures aboutfair value measurements. The statement does not require any new fair valuemeasures.

 

The statement is effective for fair value measuresalready required or permitted by other standards for fiscal years beginningafter November 15, 2007. The Company is required to adopt SFAS No. 157beginning January 1, 2008. SFAS No. 157 is required to be appliedprospectively, except for certain financial instruments. Any transitionadjustment will be recognized as an adjustment to opening retained earnings inthe year of adoption. The Company is currently evaluating the impact ofadopting this standard on its consolidated results of operations and financialposition.

 

**Business Combinations (FASB Statement No. 141(R))**

 

On December 4, 2007, the Financial AccountingStandards Board (FASB) issued Statement No. 141(R), Business Combinations(Statement 141(R)). This new standard significantly changes the financialaccounting and reporting of business combination transactions.

 

Current practice under Statement 141 involvesaccumulating costs of acquiring a target entity and allocating those costs toindividual assets acquired and liabilities assumed.

 

In step acquisitions and partial acquisitions, thisprocess generally results in recognizing the acquiree’s assets and liabilitiesas a mixture of values at the acquisition date (or dates) and, to the extent ofinterest in the acquiree not held by the acquirer, historical carrying values(i.e., accounting bases established before the acquirer made itsacquisition(s)). Those historical carrying values are attributed to thenon-controlling interests (previously referred to as non-controlling interests)in the acquiree.

 

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Under Statement 141(R) a business combination istreated as a transaction in which an entity (the acquirer) takes control ofanother entity (the target), and the fair value of the underlying exchangetransaction is used to establish a new accounting basis of the acquired entity.

 

Furthermore, because obtaining control leaves theacquirer responsible and accountable for all of the acquiree’s assets,liabilities, and operations, the acquirer should recognize and measure the fairvalue of the acquiree as a whole, and the assets acquired and liabilitiesassumed at their full fair values as of the date control is obtained,regardless of the percentage ownership in the acquiree or how the acquisitionwas achieved (e.g., a step acquisition, a single purchase resulting in control,or a change in control without a purchase of equity interests).

 

The most significant changes to business combinationaccounting pursuant to Statement 141(R) include recognizing, with certainexceptions, 100% of the fair values of assets acquired, liabilities assumed, andnon-controlling interests in acquisitions of less than a 100% controllinginterest when the acquisition constitutes a change in control of the acquiredentity; measuring acquirer shares in consideration for a business combinationat fair value on the acquisition date; recognizing contingent considerationarrangements at their acquisition-date fair values, with subsequent changes infair value generally reflected in earnings; with certain exceptions,recognizing preacquisition loss and gain contingencies at theiracquisition-date fair values; capitalizing in-process research and development(IPR&D) assets acquired; expensing, as incurred, acquisition-relatedtransaction costs; capitalizing acquisition-related restructuring costs only ifthe criteria in Statement 146 are met as of the acquisition date; andrecognizing changes that result from a business combination transaction in anacquirer’s existing income tax valuation allowances and tax uncertaintyaccruals as adjustments to income tax expense.

 

Statement 141(R) is required to be adoptedconcurrently with Statement 160 and is effective for business combinationtransactions for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.Early adoption is prohibited.

 

The Company is currently evaluating the effect ofadopting this new standard.

 

**Accounting for Non-controlling Interests (FASB Statement No. 160)**

 

On December 4, 2007, the FASB issued Statement No. 160,Non-controlling Interests in Consolidated Financial Statements, an amendment ofARB No. 51 (Statement 160). This new standard did not change significantlythe financial accounting and reporting of non-controlling (or minority)interests in consolidated financial statements.

 

Statement 160 defines a non-controlling interest as: “Theportion of the equity (residual interests) in a subsidiary attributable to theowners of the subsidiary other than the parent and the parent’s associates.”

 

In current U.S. GAAP, equity interests not held by thecontrolling shareholders are generally referred to as non-controllinginterests.

 

In a significant change from current U.S. GAAPpractice, Statement 160 requires that non-controlling interests in subsidiariesbe reported as a component of equity in the consolidated statement of financialposition. This contrasts with the prevailing practice of reportingnon-controlling interests as a “mezzanine” item between liabilities andstockholder’s equity. Statement 160 is based on an “economic entity” concept ofconsolidated financial statements.

 

In acknowledgement of the difference betweennon-controlling interests in consolidated subsidiaries and controllinginterests in a consolidated group, Statement 160 requires the presentation ofnon-controlling interests and controlling interests as separate components ofequity in the statement of financial position along with comprehensivedisclosures about attributes and transactions pertaining to non-controllinginterests.

 

Statement 160 requires that earnings attributed to thenon-controlling interests be reported as part of consolidated earnings and notas a separate component of income or expense, and disclosure of the attributionof consolidated earnings to the controlling and non-controlling interests onthe face of the consolidated income statement.

 

Statement 160 also amends FASB No. 128, Earningsper Share, to specify that earnings per share data in consolidated financialstatements that include one or more partially-owned subsidiaries is calculatedusing only the amount of earnings attributable to the controlling interests.

 

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Changes in a parent’s controlling ownership interestthat do not result in a loss of control of the subsidiary will now be treatedas transactions among shareholders in the consolidated entity. Thesetransactions include decreases or increases in a parent’s controlling ownershipinterest in any subsidiary-issued security that is classified in accordancewith GAAP as equity in the consolidated statement of financial position (e.g.,common stock, preferred stock, etc.).

 

Under SFAS 160, when there is a decrease in ownershipinterest in a subsidiary, the carrying amount of the non-controlling interestshould be increased to reflect the change in the non-controlling interest’sownership in the subsidiary’s net assets. Any difference between considerationreceived and the adjustment made to the carrying amount of the non-controllinginterest should be recognized directly in equity attributable to thecontrolling interest (i.e., as an adjustment to paid-in capital).

 

When an increase in ownership interest in a subsidiaryoccurs, the carrying amount of the non-controlling interest is adjusted toreflect the non-controlling interest’s reduced ownership interest in thesubsidiary’s net assets.

 

Any difference between consideration paid by theparent to the non-controlling interest holders and the adjustment to thecarrying amount of the non-controlling ownership interests in the subsidiary isrecognized directly in equity attributable to the controlling interest (i.e.,paid-in capital).

 

Statement 160 is effective for the first annualreporting period beginning on or after December 15, 2008, and earlierapplication is prohibited. Statement 160 is required to be adoptedprospectively, except for the following provisions, which are required to beadopted retrospectively:

 

·                  Reclassify non-controlling interests from the “mezzanine”to equity, separate from the parent’s shareholders’ equity in the consolidatedstatement of financial position.

 

·                  Recast consolidated net income (loss) toinclude net income (loss) attributable to both the controlling andnon-controlling interests.

 

The Company is currently evaluating the effect ofadopting this new standard.

 

**The Fair Value Option for Financial Assets and FinancialLiabilities, Including an amendment of FASB Statement No. 115 (FASBStatement No. 159)**

 

In February 2007, the FASB issued FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (the “Statement”or “Statement 159”). Statement 159 allows entities to voluntarily choose, atspecified election dates, to measure many financial assets and financialliabilities (as well as certain nonfinancial instruments that are similar tofinancial instruments) at fair value (the “fair value option,” or “FVO”). Theelection is made on an instrument-by-instrument basis and is irrevocable. Ifthe fair value option is elected for an instrument, the Statement specifiesthat all subsequent changes in fair value for that instrument shall be reportedin earnings (or another performance indicator for entities such asnot-for-profit organizations that do not report earnings).

 

The fair value option will mitigate some of thevolatility in reported earnings that results from the use of different measurementattributes to account for financial assets and financial liabilities. Byelecting the fair value option, an entity can achieve consistent accounting forrelated assets and liabilities without having to apply complex hedge accountingprovisions.

 

Statement 159 requires extensive disclosures whoseprimary objective is to facilitate comparison among entities that choosedifferent measurement attributes for similar assets and liabilities, as well ascomparison of similar assets and liabilities for which an individual entityselects different measurement attributes.

 

The Statement is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007 (January 1,2008 for the Company).

 

The effect of initial adoption will be accounted foras a cumulative-effect adjustment through beginning retained earnings.

 

For items existing at the effective date for which thefair value option is elected, the following disclosures should be provided:

 

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·                  A schedule thatpresents the pretax portion of the cumulative effect adjustment for items onthat line.

·                  The fair value atthe effective date for items for which the FVO is elected.

·                  The carryingamount of items immediately before electing the FVO.

·                  The net effect onthe entity’s deferred tax assets and liabilities of electing the FVO.

 

The Company is currently evaluating the effect ofadopting this new standard.

 

## **ITEM 6.**    Directors, SeniorManagement and Employees.

## ** **

**DIRECTORS AND 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 this annualreport, 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  McKissack                      |       | 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                 |

 

**EustaquioTomás de Nicolás Gutiérrez** is chairman of our board ofdirectors. Before co-founding our predecessor in 1989, Mr. deNicolás founded and managed DENIVE, a clothing manufacturing company. Mr. deNicolás has been a Board Member of the Mexican Stock Exchange since 2005, andhas served as regional chairman and regional vice chairman of the MexicanChamber of Industrial Housing Promoters and Development, or CANADEVI (*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 Nicolás oversees our main operations, focusing on landacquisition and developing new geographical markets.

 

**Gerardo deNicolás Gutiérrez**is the Company’s ChiefExecutive Officer. Mr. de Nicolás served as Chief Strategic Officer andhead of the Executive Committee from October 1, 2006 to June 5, 2007.Mr. de Nicolás 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 construction manager supervisor. He holds anundergraduate degree in industrial engineering from Universidad Panamericana inMexico City and an MBA from Instituto Tecnológico y de Estudios Superiores deMonterrey in Guadalajara.

 

**José Ignaciode Nicolás Gutiérrez** is the Minister of Economic Development forthe State Government of Sinaloa and 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 co-founded Homex and served as our CEO from 1989 to 1997. Mr. deNicolás is a member of the regional advisory board of financial institutionssuch as Fianzas Monterrey, a contract and fidelity bonds company, and NAFIN, aMexican government- owned development bank. He has recently been appointedmember of the Board of Directors of Afore Coppel, a retirement fundadministrator. Mr. de Nicolás also founded and was chairman of thenon-profit Organization for Social Assistance in the State of Sinaloa. Mr. deNicolás received a B.S. in Finance and Administration from UniversidadPanamericana, in Mexico City.

 

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**Luis AlbertoHarvey McKissack**is co-founding partner andsenior managing director of ZN Mexico Funds and co-founder of Nexxus. He hasapproximately 20 years of experience in investment banking and private equity.Before founding Nexxus, Mr. Harvey held positions at Grupo BursátilMexicano, Fonlyser, Operadora de Bolsa, and Servicios Industriales Peñoles,S.A. de C.V. His experience includes several private and public equitytransactions and also the initial public offerings of several major Mexicancorporations on the BMV and the international capital markets. Mr. Harveyis a member of the board of directors of Nexxus Capital, Industrias Innopack,S.A. de C.V. (“Innopack”), Aerobal, S.A. de C.V. (“Aerobal”),Sports World, Genomma and Grupo Mantenimientos de Giros ComercialesInternational, S.A. de C.V. (“Grupo Mágico”), and is amember of the investment committees of Nexxus I, Nexxus II and Nexxus III. Mr. Harveyreceived a B.S. in economics from Instituto Tecnológico Autónomo de Mexico(ITAM) and an MBA with a concentration in finance from the University of Texasat Austin.

 

**Matthew M. Zell** is Managing Director of EGI.Previously, he served as President of Prometheus Technologies, Inc., aninformation technology consulting firm. Mr. Zell is a member of the Boardof Directors of Anixter Inc., a global distributor of wire, cable andcommunications connectivity products as well as the government segment.

 

**Z. JamieBehar**is Managing Director, Real Estate & AlternativeInvestments, for General Motors Investment Management Corporation, or GMIMCo.She manages GMIMCo clients’ real estate investment portfolios, includingprivate market and publicly-traded security investments, as well as theiralternative investment portfolios, totalling $10.5 billion. Ms. Behar is amember of the board of directors of Sunstone Hotel Investors, Inc., apublicly listed hotel company operating in the United States, and the PensionReal Estate Association (PREA), and also serves on the advisory boards ofseveral domestic and international private real estate investment entities.

 

**WilfridoCastillo Sánchez-Mejorada**is CFO of Quálitas Cía. de Seguros, S.A.B deC.V., or Quálitas, a Mexican insurance company. Previously heserved as CEO of Castillo Miranda, Contadores Públicos, a public accountingfirm, and has held senior positions in several brokerage firms. Mr. Castillois a member of the board of directors of Quálitas, Unión de Esfuerzo para elCampo and Industrias Innopack, S.A. de C.V., where he also serves as chairmanof the audit committee.

 

**EdwardLowenthal**is president of AckermanManagement LLC, an investment management and advisory company with particularfocus on real estate 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. He also founded and wastrustee 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., a real estate marketinformation and analytics provider, Omega Healthcare Investors, Inc., ahealthcare real estate investment trust and American Campus Communities, apublicly traded Real Estate Investment Trust which focuses solely on studenthousing in the United States.

 

**Rafael MatuteLabrador** is Executive Vice-President and Chief FinancialOfficer of Wal-Mart de Mexico. He has been a member of the board of directorsand the executive committee of the board of directors of Wal-Mart de Mexicosince 1998, and since 2007 a member of the board of directors for BancoWal-Mart de Mexico. He has also been a member of the Consultative Boards ofBanorte, Banamex/Citibank, and Nacional Financiera. He has an MBA from the Instituto de Estudios Superioresde la Empresa (IESE) in Barcelona, Spain. He has attendedupper management courses at the IMD in Switzerland and the Chicago GraduateSchool of Business.

 

Eustaquio Tomás de Nicolás Gutiérrez, Gerardode Nicolás Gutiérrez, and José Ignacio de Nicolás Gutiérrez are brothers.

 

**Secretary**

 

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

 

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**Audit Committee**

 

Our audit committee consistsof Wilfrido Castillo Sánchez-Mejorada (Chairman), Z. Jamie Behar, Matthew Zelland Edward Lowenthal. The members of the audit committee are independent inaccordance with the Sarbanes-Oxley Act requirements. Our board of directors hasdetermined that Mr. Castillo has the attributes of an “audit committeefinancial expert” as defined by the SEC and that each member of the auditcommittee satisfies the financial literacy requirements of the New York StockExchange. Among other duties and responsibilities, the committee recommendsthat independent experts be retained to render fairness opinions in connectionwith related party transactions and tender offers, where it deems appropriate;reviews the critical accounting policies adopted by us and advises the board ofdirectors on changes to such policies; assists the board of directors withplanning and conducting internal audits; and prepares a yearly activity reportfor submission to the board of directors. The committee is also responsible forthe appointment, retention, and oversight of any accounting firm engaged forthe purpose of preparing or issuing an audit report or performing other auditreview or attestation services, as well as for the establishment of proceduresfor the receipt, retention, and treatment of complaints received with respectto accounting, internal controls, or auditing matters and the confidential,anonymous submission by employees with regard to these complaints.

 

**Executive Committee**

 

Our executive committeeconsists of Gerardo de Nicolás Gutiérrez, Eustaquio Tomás de Nicolás Gutiérrez,Luis Alberto Harvey McKissack, Rafael Matute Labrador and Edward Lowenthal.Among other duties and responsibilities, the committee acts on general planningand financial matters not reserved exclusively for action by the board ofdirectors, including appointing and removing members of management, and any ofour employees; entering into credit agreements on our behalf; and conveningshareholders’ meetings. In September 2006 Mr. Gerardo de Nicolás wasappointed as head of the Executive Committee.

 

**Corporate Governance andCompensation Committee**

 

Our corporate governance andcompensation committee consists of Luis Alberto Harvey McKissack, 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 non-CEOcompensation, incentive-compensation plans and equity-based plans.

 

**DisclosureCommittee**

 

Our disclosure committee as approved by the Board of Directors is comprisedof executives within management.  Thiscommittee is chaired by the Executive Director of Investor Relations and is comprisedof the Chief Executive Officer, the Chief Financial Officer, the Manager ofFinancial Reporting, the Chief Administrative Officer and the GeneralCounsel.  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, the committee acts to ensurethat the relevant information issued by the Company is accurate in allfinancial, economic and operative aspects.

 

**EthicsCommittee**

 

Our ethics committee, as approved by the Board of Directors is comprisedof executives within management.  Thiscommittee is comprised of the Chief Executive Officer, the Executive Directorof Human Resources and Corporate Responsibility, the General Counsel, theTraining Director, the Director of Administrative Support and an external legalcounsel.  Among other functions, thecommittee acts to ensure that the 

 

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Company complies with its code of ethics and determines the sanctions ifcertain actions are considered to be not in compliance therewith.

 

**Corporate Governance**

 

As a foreign private issuerwith shares listed on the NYSE, we are subject to different corporategovernance requirements than a U.S. company under the NYSE listing standards.Pursuant to Rule 303.A11 of the NYSE – listed company manual, we arerequired to provide a summary of the significant ways in which our corporategovernance practices differ from those required for U.S. companies under theNYSE listing standard.

 

It is our intention, however,to follow NYSE corporate governance standards to the extent we deem appropriategiven the different regulatory framework to which we are subject in Mexico andin the United States and the different business environment in which weoperate. Compliance with these higher standards of governance is not mandatoryfor us; however, we believe we are in substantial compliance with the majorityof these requirements, thereby demonstrating our commitment to high standardsof governance.

 

We are a Mexican corporationwith shares listed on the *Bolsa Mexicana deValores*, or Mexican Stock Exchange. Our corporate governancepractices are governed by our bylaws, the New Mexican Securities Market Law,and the general dispositions issued by the CNBV and the Mexican Stock Exchange.Although compliance is not mandatory, we also substantially comply with theMexican Code of Best Corporate Practices (*Códigode Mejores Prácticas Corporativas*), as amended in 2006.

 

The table below sets forth adescription of the significant differences between corporate governancepractices required for U.S. companies under the NYSE listing standards and ourregulations:

 
| **NYSE Rules**                                                                                                                                             | ** ** | **Mexican Rules**                                                                                                                                                                                                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                |
| Listed  companies must have a majority of independent directors.                                                                                                |       | While  not required under Mexican law, a majority of our directors are independent  as defined under NYSE standards.                                                                                                                                                                                                                                      |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Listed  companies must have a nominating/corporate governance committee composed  entirely of independent directors.                                            |       | Pursuant  to Mexican law, we have a nominating/corporate governance committee composed  entirely of independent directors.                                                                                                                                                                                                                                |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Listed  companies must have a compensation committee composed entirely of independent  directors.                                                               |       | Under  Mexican law, we are not required to have a compensation committee. However,  we have a compensation committee composed entirely of independent directors.  Our compensation committee does not issue a compensation report as  contemplated by the NYSE standards, as we operate in Mexico where this  practice is neither required nor customary. |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Listed  companies must have an audit committee with a minimum of three members who  are independent directors.                                                  |       | Under  Mexican law, we are required to have an audit committee with independent  members within the meaning of the NYSE standards with a charter that complies  with applicable Mexican statutes, and substantially complies with the NYSE  standards applicable to domestic companies where appropriate for us.                                          |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Audit  committees are required to prepare an audit committee report as required by  the SEC to be included in the listed company’s annual proxy statement. |       | As  a foreign private issuer, we are not required by the SEC to prepare and file  proxy statements. In this regard, we are subject to Mexican securities law  requirements. We have chosen to follow Mexican law and practice in this  regard.                                                                                                            |
|                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                      |
| Non-management  directors must meet at executive sessions without management.                                                                                   |       | Our  non-management directors meet at executive sessions. This is not required by  either Mexican law or the Mexican Code of Best Corporate Practices.                                                                                                                                                                                                    |

 

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| Listed  companies must adopt and disclose a code of business conduct and ethics for  directors, officers and employees, and promptly disclose any waivers of the  code for directors or executive officers. |   | Companies  listed on the Mexican Stock Exchange are not required to adopt a code of  ethics. However, we have adopted a code of ethics. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

 

**Senior Management**

 

As of the date of this annualreport, our senior management is as follows:

 
| **Name**                                            | ** ** | **Born** | ** ** | **Position**                                                                        |
|-----------------------------------------------------|------------|----------|------------|-------------------------------------------------------------------------------------|
| Eustaquio Tomás de Nicolás Gutiérrez |       | 1961     |       | Chairman                                                                            |
| Gerardo de Nicolás Gutiérrez              |       | 1968     |       | Chief Executive Officer                                                             |
| Alan Castellanos Carmona                            |       | 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                                          |
| Gerardo Prieto Treviño                         |       | 1967     |       | Vice President—Tourism Division                                                |

 

**EustaquioTomás de Nicolás Gutiérrez** is chairman of our board ofdirectors. Before co-founding our predecessor company in 1989, Mr. deNicolás founded and managed DENIVE, a clothing manufacturing company. Mr. deNicolás is a Board Member of the Mexican Stock Exchange since 2005 and hasserved as regional chairman and regional vice chairman of the MexicanFederation of Industrial Housing Promoters, or Provivac *(FederacionNacional de Promotores Industriales de la Vivienda)*, and as a memberof the regional advisory board of financial institutions such as BBVA Bancomerand HSBC (formerly *BITAL*).Currently, Mr. de Nicolás oversees our main operations, focusing on landacquisition and developing new geographical markets.

 

**Gerardo deNicolás Gutiérrez** is the Company’s Chief Executive Officer. Mr. deNicolás served as Chief Strategic Officer and head of the Executive Committeefrom October 1, 2006 to June 5, 2007. Mr. de Nicolás also servedas the CEO of the Company from 1997 to September 2006. Prior to hisappointment as CEO, Mr. de Nicolás served as regional manager, systemsmanager, and construction manager. He holds an undergraduate degree inindustrial engineering from Universidad Panamericana in Mexico City and an MBAfrom Instituto Tecnologico y de Estudios Superiores de Monterrey inGuadalajara.

 

**AlanCastellanos Carmona**joined the Company as Vice President of Finance andPlanning and Chief Financial Officer in February 2007 from NAFIN, where heserved as Deputy General Director of Business Development. Mr. Castellanoshas an undergraduate degree in business administration from UniversidadIberoamericana and an MBA from Instituto Panamericano de Alta Dirección deEmpresas (IPADE).

 

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

 

**Mónica Lafaire Cruz** is the Vice President ofHuman Resources and Social Responsibility. Ms. Lafaire has served asdirector of Homex’s regional offices and manager of the trust Homex –Nafin.  She was also responsible forimplementing the supply chain program with NAFIN. Besides her work at 

 

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Homex,she teaches finance, philosophy and business management at the PanamericanUniversity. Ms. Lafaire has a degree in economics from the University ofMonterrey, and a master’s degree in business administration from La SalleUniveristy.

 

**Rubén IzábalGonzález**has served as Vice President—Construction since 1997.Prior to joining Homex, Mr. Izabal served at different constructioncompanies, including Gomez y Gonzales Constructores, 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 oversees our construction operations, with afocus on the homebuilding process. Mr. Izabal earned an undergraduatedegree in architecture from Instituto Tecnologico y de Estudios Superiores delOccidente in Guadalajara, Jalisco.

 

**AlbertoMenchaca Valenzuela** has served as Vice President—Affordable Entry-Leveland Chief Operations Officer since January 2007. Prior to thisappointment, Mr. Menchaca served as Vice President—Operations from 2000 to2006 and as finance manager from 1996 to 2000. His prior experience includeswork at Banco Mexicano, InverMexico and Banca Confia. Currently, Mr. Menchacaoversees our affordable entry-level division with a focus on home deliveriesand branch management. Mr. Menchaca earned an undergraduate degree inagricultural engineering from Universidad Autonoma Agraria Antonio Narro inSaltillo, Coahuila.

 

**Julian deNicolás Gutiérrez** has served as Vice President—Middle-Income Divisionsince January 2007. Prior to becoming Vice President—Middle-IncomeDivision, he served as Regional Director for the western zone from 2005 to 2007and started the operations of the Company in the city of Guadalajara in 2002.Currently, Mr. de Nicolás oversees our middle-income division, with afocus on home deliveries and branch management. Mr. de Nicolás holds anundergraduate degree in marketing from Instituto Tecnologico y de EstudiosSuperiores de Monterrey in Monterrey, and an associate degree from InstitutoPanamericano de Alta Direccion de Empresas (IPADE).

 

**Daniel LealDíaz-Conti** has served as Vice President—Sales and Marketingsince January 2007. Mr. Leal joined Homex from Hipotecaria Nacional,where he served as Deputy General Director of Sales and Marketing. Mr. Lealwas also President of the mortgage chapter of the Mexican Association of Banksuntil February 2007. Mr. Leal has an undergraduate degree ineconomics from Universidad Veracruzana.

 

**Alberto Urquiza Quiroz**servesas Vice President—International Division. Mr. Urquizaalso served as a director of NAFIN (Nacional Financiera), a Mexican developmentbank for five years, where he held several positions including GovernmentBanking VP, Business Development VP and Mexico City Metropolitan Area VP. Priorthereto Mr. Alberto worked in Bancomer, one of the biggest banks inMexico, for more than 15 years as Government Banking VP, Corporate Banking VPand Finance Engineer. He also owns a software company. He holds anundergraduate degree in business administration from Universidad Iberoamericanain Mexico City, an MBA from IPADE Business School and a postgraduate in Financefrom Instituto Tecnologico Autonomo de Mexico (ITAM).

 

**Gerardo Prieto Treviño**has served as VicePresident—Tourism Division since April 2007. Mr. Prieto joined Homexfrom Grupo Questro, where he served as Sales and Marketing Director. He wasalso Sales Director at Fonatur from 2000 to 2004. Mr. Prieto has anundergraduate degree in Business Administration from ITAM.

 

**Compensation of Directors andSenior Management**

 

Each member of the board ofdirectors 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.

 

For 2007, the aggregate amount of compensation net of taxes paid to alldirectors, alternate directors and committee members was approximatelyUS$655,638, which includes US$269,125 of variable compensation for directorspaid during the first quarter of 2007.****For2007, the aggregate amount of compensation paid to all executive officers wasapproximately US$13,222,300.

 

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

 

Since late 2007, we offer a stock option plan as anincentive to key executives of the Company. The shares for the stock optionplan for executives (999,200 shares) were repurchased by the Company, and areheld in a trust especially created for this purpose. 979,200 stock options weregranted to the key executives at an exercise price of greater than the marketvalue at the grant date of Ps.98.08.

 

The executives have the rightto exercise one-third of their total options granted per year. The right toexercise the option expires after three years from the grant date or, in somecases, after 180 days from the departure of the executive from the Company.

 

The average remaining life of the options is 2.1 yearsas of December 31, 2007.****The fair valueof the stock options granted was Ps.18.42 per stock option.

 

The total amount accrued to provide retirementbenefits as of December 31, 2007 is Ps.20,848.

 

**EMPLOYEES**

 

As of December 31, 2007,we had a total of approximately 15,127 employees. All of these employees wereemployed in Mexico. Our total employees for 2006, 2005 and 2004 were 11,948,7,337 and 7,911, respectively. Of our total employees as of December 31,2007, approximately 30% were white-collar and 70% were blue-collar.

 

**Share Ownership**

 

The following table sets forththe 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 |       | 39,005,393                                    |       | 11.6                                                    | %          |
| Gerardo de Nicolás Gutiérrez              |       | 37,055,124                                    |       | 11.0                                                    | %          |
| Jose Ignacio de Nicolás Gutiérrez         |       | 17,719,679                                    |       | 5.3                                                     | %          |
| Julian de Nicolás Gutiérrez               |       | 29,254,045                                    |       | 8.7                                                     | %          |
| Alan Castellanos Carmona                            |       | *                                             |       | *                                                       |       |
| Ramon Lafarga Batiz                                 |       | *                                             |       | *                                                       |       |
| Mónica Lafaire Cruz                            |       | *                                             |       | *                                                       |       |
| Daniel Leal Díaz-Conti                         |       | *                                             |       | *                                                       |       |
| Ruben Izabal González                          |       | *                                             |       | *                                                       |       |
| Alberto Menchaca Valenzuela                         |       | *                                             |       | *                                                       |       |
| Alberto Urquiza Quiroz                              |       | *                                             |       | *                                                       |       |
| Gerardo Prieto Treviño                         |       | *                                             |       | *                                                       |       |
| Luis Alberto Harvey McKissack                       |       | *                                             |       | *                                                       |       |
| Matthew M. Zell                                     |       | *                                             |       | *                                                       |       |
| Z. Jamie Behar                                      |       | *                                             |       | *                                                       |       |
| Wilfrido Castillo Sanchez-Mejorada                  |       | *                                             |       | *                                                       |       |
| Edward Lowenthal                                    |       | *                                             |       | *                                                       |       |
| Rafael Matute Labrador                              |       | *                                             |       | *                                                       |       |

 

----

*                                        Beneficially owns less thanone percent of the outstanding shares of our capital stock.

 

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**ITEM 7.****      ****MajorShareholders and Related Party Transactions.**

 

**MAJOR SHAREHOLDERS**

 

As of December 31, 2007,there were 334,870,350 common shares issued and outstanding, with 69,888,924shares held in the United States in the form of American Depositary Shares bysix record holders. The remaining shares were held in Mexico. Because certainof the shares are held by nominees, the number of record holders may not berepresentative of the number of beneficial holders.

 

On January 24, 2006, theCompany 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 InternationalProperties, LLC, a shareholder of the Company, sold approximately 8.6 millioncommon shares through the Mexican Stock Exchange. These shares represented 20%of its ownership in the Company. The public float of the Company was increasedto 56.61% of the total equity of Homex.

 

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

 

On February 5, 2008, the de Nicolás familyacquired 17,142,857 common shares of Homex from EIP in aprivate transaction. On April 25, 2008, pursuant to theinvestment policies of EIP’s investment fund, EIP sold the rest of itsapproximately 11 million common shares of Homex in a private transaction.

 

The de Nicolás family now holds 40.0% of Homex’scapital. The public float remains above 59%.

 

The table below sets forthinformation concerning the percentage of our capital stock owned by any personknown 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, 2008. The Company’s major shareholders do not have differentor preferential voting rights with respect to the shares they own.

 
| ** **                            | ** ** | **As of June 26, 2008** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| **Identity of Shareholder** | ** ** | **Number of Shares**              | ** ** | **% of Share Capital** | ** ** |
| de Nicolás family(1)(2)          |       | 134,195,858                                 |       | 40.0 | % |
| Total(3)                              |       | 335,869,550                                 |       | 100.0 | % |

 

----

| (1)    |   | Following the acquisition of Beta.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (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, Jose Ignacio de Nicolás Gutiérrez, Gerardo de  Nicolás Gutiérrez, Julian 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, Jose  Ignacio de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Julian de Nicolás  Gutiérrez and Juan Carlos Torres Cisneros. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3)    |   | Includes public shareholders that in the  aggregate hold 59.9% of our share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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**RELATED PARTY TRANSACTIONS**

 

We have engaged, and in thefuture may engage, in transactions with our shareholders and companies affiliatedwith our shareholders. We believe that the transactions in which we haveengaged with these parties have been made on terms that are no less favorableto us than those that could be obtained from unrelated third parties. Wecurrently 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 and, in certain cases,after an independent fairness opinion, as required by the Mexican SecuritiesMarket Law and other applicable laws.

 

The Company was party to an administrative serviceagreement 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, Ps.88,232 and Ps.51,973 in 2007, 2006 and 2005, respectively. As of April 1,2007, these companies entered into a liquidation process and the employees weretransferred to subsidiaries of the Company.

 

**Financing from Related Parties**

 

***Hipotecaria Crédito y Casa, S.A. de C.V.***

 

Eustaquio de NicolásGutiérrez, our Chairman, and Jose Ignacio de Nicolás Gutiérrez, brother ofEustaquio de Nicolás Gutiérrez, collectively owned a 29.4% ownership interestin Hipotecaria Credito y Casa, S.A. de C.V, or Credito y Casa, the principalbusiness of which is providing mortgage financing and bridge loan financing.Eustaquio de Nicolás Gutiérrez and Jose Ignacio de Nicolás Gutiérrez are bothmembers of the de Nicolás family, which collectively owns 40.0% of our sharecapital. In the past, Credito y Casa has provided bridge loan financing to usand mortgages under SHF-sponsored programs to our customers. During 2005, 2006and 2007, Credito y Casa provided mortgages with respect to some of the homessold by us.

 

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

 

We estimate that in 2007 and2006 0.1% of the mortgages obtained by our homebuyers were provided byHipotecaria Credito y Casa, S.A. de C.V.

 

As of December 31, 2005there were no amounts outstanding in loans or financing from Credito y Casa.

 

***CréditoInmobiliario, S.A. de C.V.***

 

EIP acquired a 24.64% interestin this sofol on December 1, 2003. Also on December 1, 2003, CreditoInmobiliario, S.A. de C.V., or Credito Inmobiliario, acquired the entirety ofthe loan portfolio of Terras Hipotecaria, S.A. de C.V., or Terras Hipotecaria.Prior to this acquisition, Terras Hipotecaria provided construction financingto us via bridge loans and mortgage financing to our customers viaSHF-sponsored programs.

 

On December 9, 2005, EIPsold its 24.64% interest in Credito Inmobiliario to a private investor.

 

**Financing to Related Parties**

 

No related party transactionswere reported in 2007 and 2006.

 

Some accounts payable to usby Dynámica de Desarrollos Sustentables, S.A. de C.V. (a joint venture createdin 1997 and dissolved in 2002) in consideration for services provided pursuantto the joint venture remained outstanding, but were paid in full by March 31,2005.

 

**Land Purchases from RelatedParties**

 

No related party transactionswere reported in 2007 and 2006.

 

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On June 15, 2005, PICSAsold to Mexico Retail Properties Fund, S. de R.L. de C.V., a wholly ownedsubsidiary of MRP-EIP Retail Holding GP, which is itself a subsidiary of EIP,7,928.88 m(2) of commercial land located in Santa Fe, Culiacan Sinaloa,for Ps. 5,906,262 (US$555,622).

 

**ITEM 8.****      ****FinancialInformation.**

 

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

 

**LEGAL PROCEEDINGS**

 

As of the date of this annualreport, we are involved in certain legal proceedings incidental to the normaloperation of our business. We do not believe that liabilities resulting fromthese proceedings are likely to have a material adverse effect on our financialcondition, cash flow, or results of operations.

 

In July 2007, the Company entered into anagreement with Empreendimentos ImobiliáriosLimitada (“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 Incorporações e ConstruçõesImobiliárias Limitada. As of December 31,2007 no contribution had been made under the agreement. Following disagreementswith E.O.M., the Company exercised its right to withdraw from theagreement.  Although E.O.M. has sued theCompany for specific performance of the agreement, the Company believes thatany potential liability under the agreement would not be likely to have amaterial effect on its financial condition or results of operations.

 

**ITEM 9.****      ****TheOffer and Listing.**

 

Our common shares have beentraded on the Mexican Stock Exchange (*BolsaMexicana de Valores, S.A. de C.V.*) since June 29, 2004. The ADSs, each representing sixcommon shares, have been trading on the New York Stock Exchange since June 29, 2004.On December 31, 2007, there were 334,870,350 outstanding commonshares (of which 69,888,924****wererepresented by 11,648,154****ADSsheld by six holders of record in the United States).

 

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.

 

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| ** **         | ** ** | **Mexican Stock Exchange** | ** ** | **NYSE**                                                                          | ** ** |
|--------------------|------------|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **High**                             | ** ** | **Low**                                                                           | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **         | ** ** | **(Ps. per share)**        | ** ** | **(U.S. $ per ADS)  (one ADS=  six common shares)** | ** ** |
| **2004**           |       |                                 |       |                                                                              |       |   |   |   |   |
| 3rd Quarter   |       | 40.05                                |       | 30.99                                                                             |       | 21.18 |   | 16.35 |   |
| 4th Quarter   |       | 44.51                                |       | 35.25                                                                             |       | 23.65 |   | 18.11 |   |
|               |       |                                 |       |                                                                              |       |   |   |   |   |
| **2005**           |       |                                 |       |                                                                              |       |   |   |   |   |
| 1st Quarter   |       | 62.66                                |       | 43.54                                                                             |       | 33.62 |   | 22.89 |   |
| 2nd Quarter   |       | 49.20                                |       | 39.86                                                                             |       | 27.60 |   | 21.70 |   |
| 3rd Quarter   |       | 56.34                                |       | 48.68                                                                             |       | 31.97 |   | 26.98 |   |
| 4th Quarter   |       | 58.77                                |       | 49.18                                                                             |       | 32.80 |   | 27.21 |   |
|               |       |                                 |       |                                                                              |       |   |   |   |   |
| **2006**           |       |                                 |       |                                                                              |       |   |   |   |   |
| 1st Quarter   |       | 66.85                                |       | 54.80                                                                             |       | 38.21 |   | 30.68 |   |
| 2nd Quarter   |       | 71.26                                |       | 51.90                                                                             |       | 38.98 |   | 27.11 |   |
| 3rd Quarter   |       | 70.97                                |       | 56.37                                                                             |       | 39.45 |   | 30.85 |   |
| 4th Quarter   |       | 108.16                               |       | 68.23                                                                             |       | 59.90 |   | 36.97 |   |
|               |       |                                 |       |                                                                              |       |   |   |   |   |
| **2007**           |       |                                 |       |                                                                              |       |   |   |   |   |
| 1st Quarter   |       | 117.20                               |       | 93.71                                                                             |       | 64.14 |   | 50.03 |   |
| 2nd Quarter   |       | 115.35                               |       | 104.62                                                                            |       | 63.16 |   | 57.13 |   |
| 3rd Quarter   |       | 112.02                               |       | 89.89                                                                             |       | 62.37 |   | 49.59 |   |
| 4th Quarter   |       | 105.18                               |       | 82.47                                                                             |       | 57.90 |   | 44.97 |   |
|               |       |                                 |       |                                                                              |       |   |   |   |   |
| **2008**           |       |                                 |       |                                                                              |       |   |   |   |   |
| January 2008  |       | 99.87                                |       | 84.11                                                                             |       | 55.03 |   | 45.99 |   |
| February 2008 |       | 112.90                               |       | 96.66                                                                             |       | 62.80 |   | 53.75 |   |
| March 2008    |       | 107.63                               |       | 98.00                                                                             |       | 60.48 |   | 54.00 |   |
| April 2008    |       | 114.27                               |       | 104.39                                                                            |       | 65.23 |   | 59.58 |   |
| May 2008      |       | 120.10                               |       | 106.24                                                                            |       | 69.70 |   | 59.93 |   |
| June 26, 2008 |       | 119.95                               |       | 104.38                                                                            |       | 69.85 |   | 60.48 |   |

 

On June 26, 2008, thelast reported sale price of the common shares on the Mexican Stock Exchange wasPs.104.45 per common share and the last reported sale price of the ADSs on theNew York Stock Exchange was US$60.71 per ADS.

 

**MEXICAN STOCK EXCHANGE**

 

The Mexican Stock Exchange,located in Mexico City, is the only stock exchange in Mexico. Operatingcontinuously since 1907, the Mexican Stock Exchange is organized as acorporation (*sociedad anónima de capitalvariable*). Securities are traded on the Mexican Stock Exchange eachbusiness day from 8:30 a.m. to 3:00 p.m., Mexico City time.

 

Since January 1999, alltrading 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 ofmaterial events; or

 

·                 changes in theoffer or demand, volume traded, or prevailing share price, that areinconsistent with the shares’ historical performance and cannot be explainedthrough publicly available information.

 

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The Mexican Stock Exchange mayreinstate trading in suspended shares when it deems that the material eventshave been adequately disclosed to public investors or when it deems that theissuer has adequately explained the reasons for the changes in offer anddemand, volume traded, or prevailing share price. Under current regulations,the Mexican Stock Exchange may consider the measures adopted by other stockexchanges in order to suspend and/or resume trading in an issuer’s shares in caseswhere the relevant securities are simultaneously traded on a stock exchangeoutside Mexico.

 

Settlement on the MexicanStock Exchange is effected two business days after a share transaction.Deferred settlement is not permitted without the approval of the CNBV, evenwhere mutually agreed. Most securities traded on the Mexican Stock Exchange areon deposit 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 RegistrationStandards***

 

In 1925, the Mexican BankingCommission (*Comisión Nacional Bancaria*)was established to regulate banking activity and in 1946 the Mexican SecuritiesCommission (*Comisión Nacional Bancaria y deValores*) was established to regulate stock market activity. In 1995,these two entities were merged to form the CNBV. The New Mexican SecuritiesMarket Law, which took effect in 1975, introduced important structural changesto the Mexican financial system, including the organization of brokerage firmsas corporations (*sociedades anónimas*).The New Mexican Securities Market Law sets standards for authorizing companiesto operate as brokerage firms, which authorization is granted at the discretionof the CNBV by resolution of its board of governors. In addition to settingstandards for brokerage firms, the Mexican Securities Market Law authorizes theCNBV, among other things, to regulate the public offering and trading ofsecurities and to impose sanctions for the illegal use of insider informationand other violations of the New Mexican Securities Market Law. The CNBVregulates the Mexican securities market, the Mexican Stock Exchange, andbrokerage firms through a board of governors composed of 13 members.

 

Effective June 28, 2006,the New Mexican Securities Market Law requires issuers to increase the protectionsoffered to minority shareholders and to bring corporate governance practices inline with international standards. See “Item 3. Key Information—Risk Factors —Risk Factors Related to Mexico — Minority shareholders have different rightsagainst us, our directors, or our controlling shareholders in Mexico.”

 

To offer securities to thepublic 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 theMexican Stock Exchange. The CNBV’s approval for registration does not imply anykind of certification or assurance related to the investment quality of thesecurities, the solvency of the issuer, or the accuracy or completeness of anyinformation delivered to the CNBV.

 

In March 2003, the CNBVissued certain general regulations applicable to issuers and other securitiesmarket participants. The general regulations, which repealed several previouslyenacted 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.

 

The general regulations state that the MexicanStock Exchange must adopt minimum requirements for issuers to list theirsecurities in Mexico. These requirements relate to matters such as operatinghistory, financial and capital structure, and distribution. The generalregulations also state that the Mexican Stock Exchange must implement minimumrequirements for issuers to maintain their listing in Mexico. Theserequirements relate to matters such as financial condition, trading minimums,and capital structure, among others. The Mexican Stock Exchange will reviewcompliance with the foregoing requirements and other requirements on an annual,semi-annual and quarterly basis. The Mexican Stock Exchange must inform theCNBV of the results of its review and this information must, in turn, bedisclosed to investors. If an issuer fails

 

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to comply with any of the foregoingrequirements, the Mexican Stock Exchange will request that the issuer propose aplan to cure the violation. If the issuer fails to propose a plan, or if theplan is not satisfactory to the Mexican Stock Exchange, or if an issuer doesnot make substantial progress with respect to the corrective measures, tradingof the relevant series of shares on the Mexican Stock Exchange will betemporarily suspended. In addition, if an issuer fails to propose a plan orceases to follow the plan once proposed, the CNBV may suspend or cancel theregistration of the shares.

 

Issuers of listed securitiesare required to file unaudited quarterly financial statements and auditedannual financial statements as well as various periodic reports with the CNBVand the Mexican Stock Exchange. Mexican issuers must file the following reportswith the CNBV:

 

·      an annual report prepared inaccordance with CNBV regulations by no later than June 30 of each year(analogous to reports filed with the SEC by U.S. issuers on Form 10-K andby foreign private issuers on Form 20-F);

 

·      quarterly reports, within20 days following the end of each of the first three quarters and40 days following the end of the fourth quarter (analogous to reportsfiled with the SEC by U.S. issuers on Form 10-Q); and

 

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

 

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

 

The CNBV’s general regulationsand the rules of the Mexican Stock Exchange require issuers of listedsecurities to file information through SEDI that relates to any act, event, orcircumstance that could influence an issuer’s share price. If listed securitiesexperience 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 securitiesbeing traded. The Mexican Stock Exchange must immediately inform the CNBV ofany such requests. In addition, the CNBV may also make any of these requestsdirectly to issuers. An issuer may defer the disclosure of material eventsunder some circumstances, as long as:

 

·      the issuer implements adequateconfidentiality measures;

 

·      the information is related toincomplete transactions;

 

·      there is no misleading publicinformation relating to the material event; and

 

·      no unusual price or volumefluctuation occurs.

 

The CNBV and the Mexican StockExchange may suspend trading in an issuer’s securities:

 

·      if the issuer does notdisclose a material event; or

 

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

 

The Mexican Stock Exchangemust immediately inform the CNBV and the general public of any such suspension.An issuer may request that the CNBV or the Mexican Stock Exchange resumetrading, assuming the issuer demonstrates that the causes triggering thesuspension have been resolved and that it is in full compliance with the periodicreporting requirements under the applicable law. If the issuer’s request hasbeen 

 

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granted, the Mexican Stock Exchange willdetermine the appropriate mechanism to resume trading. If trading in an issuer’ssecurities is suspended for more than 20 business days and the issuer isauthorized to resume trading without conducting a public offering, the issuermust disclose via SEDI a description of the causes that resulted in thesuspension and reasons why it is now authorized to resume trading beforetrading may resume.

 

Similarly, if an issuer’ssecurities are traded on both the Mexican Stock Exchange and a foreignsecurities exchange, the issuer must simultaneously file the information thatit is required to file pursuant to the laws and regulations of the foreignjurisdiction with the CNBV and the Mexican Stock Exchange.

 

Pursuant to the New MexicanSecurities Market Law:

 

·     members of the board of directors and principal officers of a listedissuer;

 

·     shareholders controlling 10% or more of a listed issuer’s outstandingshare capital, and the directors and principal officers of such shareholders;

 

·     groups having significant influence on a listed issuer; and

 

·     other insiders

 

must abstain from purchasing or sellingsecurities of the issuer within 90 days from the most recent public tenderof shares of the issuer for sale or purchase, respectively. Shareholders ofissuers listed on the Mexican Stock Exchange must notify the Mexican StockExchange of any transactions made in or outside the Mexican Stock Exchange thatresult in a transfer of 10% or more but less than 30% of an issuer’s sharecapital on the day following the respective transaction.

 

The New Mexican SecuritiesMarket Law requires any acquirer of more than 30% of an issuer’s outstandingshare capital to make a public tender offer.

 

Any intended acquisition of apublic company’s shares that results in the acquirer obtaining control of thecompany requires the potential acquirer to make a tender offer for 100% of thecompany’s outstanding share capital. These tender offers must be made at thesame price for all tendering shareholders. The board of directors must give anopinion on any tender offer within 10 days after the tender offer notice.

 

In addition, the New MexicanSecurities Market Law requires shareholders holding 10% or more of a listedissuer’s share capital to notify the CNBV of any share transfer.

 

***New Mexican Securities Market Law***

 

The Mexican legislature issueda New Mexican Securities Market Law effective June 28, 2006. Theamendments provide, among other things, that:

 

·     issuers must have a board of directors with at least five and not morethan 21 members, of which 25% must qualify as “independent directors” underMexican law;

 

·     issuers’ boards of directors must approve related party transactions andmaterial asset transactions;

 

·     issuers must appoint and maintain an audit committee and a corporategovernance committee; and

 

·     issuers must provide additional protections for minority shareholders.

 

The New Mexican SecuritiesMarket Law permits issuers to include anti-takeover defenses in their bylawsand provides for specified minority rights and protections, among other things.

 

The New Mexican SecuritiesMarket Law does not permit issuers to implement mechanisms where common sharesand limited or non-voting shares are jointly traded or offered to publicinvestors, unless the limited or non-voting shares are convertible into commonshares within a term of up to five years. In addition, the aggregate amount ofshares with limited or non-voting rights may not exceed 25% of the aggregateamount of publicly-held shares, unless approved by the CNBV.

 

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**ITEM 10.****   ****AdditionalInformation.**

 

**BYLAWS**

 

Set forth below is a briefsummary of certain significant provisions of (1) our bylaws, as amended byour shareholders in accordance with the New Mexican Securities Market Law andregulations, and (2) the Mexican Companies Law. This description does notpurport to be complete and is qualified by reference to our bylaws, which havepreviously been filed with the SEC.

 

**Organization and Register**

 

We are a corporation (*sociedad anónima bursátil de capital variable*)organized in Mexico under the *Ley General deSociedades Mercantiles*, or the Mexican Companies Law and the *Ley del Mercado de Valores*, or the NewMexican Securities Market Law. We were incorporated on March 30, 1998 andthe duration of our corporate life is indefinite. Our corporate purpose, asfully described in Article 2 of our bylaws, is to act as a holdingcompany. As such, our bylaws grant us the power to engage in variousactivities, which allow us to function as a holding company. These powersinclude, but are not limited to, the ability to (i) promote, establish,organize and administer all types of companies, mercantile or civil; (ii) acquireor dispose of stock or interests in other mercantile or civil companies, eitherby taking part in their formation or acquiring shares or interests in companiesthat are already in existence; (iii) receive from third parties and giveto the companies of which it is a shareholder or partner or to any other thirdparty, guidance or technical consulting services, including services in thefields of administration, accounting, merchandising or financing; (iv) obtain,acquire, utilize or dispose of any patent, brand or commercial name, franchiseor rights in industrial property in Mexico or abroad; (v) obtain any typeof financing or loan, with or without a specific guarantee, and grant loans tomercantile or civil companies or other persons in which the company has aninterest or with others with which it has a business relationship; (vi) grantany type of guarantee and endorsement in respect to obligations or creditinstruments, for the benefit of mercantile or civil companies or other personswith which the company has an interest or with which it maintains a businessrelationship; (vii) issue, subscribe, draw, accept and endorse all typesof credit instruments, including obligations with or without a guarantee; (viii) acquire,rent, administer, sell, mortgage, pledge, encumber or dispose of goods, inwhatever form, being movable or immovable, as well as rights over the same; (ix) executeany kind of act and formalize any kind of labor, civil, mercantile oradministrative agreement or contract permitted by Mexican legislation, withreal and corporate personalities that are either public or private, obtainingfrom these, concessions, permits and authorizations relating directly orindirectly to the company’s objectives as set forth in its bylaws, including,actively or passively contracting any type of services, consulting work,supervisory work and technical direction that would be necessary or proper forthe aforementioned goals; (x) issue treasury stock in accordance with Article 81of the New Mexican Securities Market Law; (xi) establish agencies orrepresentatives and act as broker, agent, representative, mercantile mediatoror distributor; and (xii) perform any acts necessary to accomplish theforegoing.

 

**Directors**

 

Our bylaws provide that ourboard of directors will consist of a minimum of five and a maximum of 21members, as resolved by the relevant shareholders’ meeting. At least 25% of themembers of our board of directors must be independent pursuant to Mexican law.At each shareholders’ meeting for the election of directors, holders of atleast 10% of our outstanding share capital are entitled to appoint one memberof the board of directors.

 

Pursuant to Mexican law, anydirector who has a conflict of interest with us relating to a proposedtransaction must disclose the conflict and refrain from voting on thetransaction or be liable for damages. Directors receive compensation asdetermined at the ordinary shareholders’ meetings.

 

**Authority of the Board ofDirectors**

 

The board of directors is ourlegal representative and is authorized to take any action in connection withour operations not expressly reserved to our shareholders. Pursuant to the NewMexican Securities Market Law, the board of directors must approve, among otherthings:

 

·     strategic decisions for the Company and its subsidiaries;

 

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·     any transactions outside the ordinary course of business to beundertaken with related parties;

 

·     significant asset transfers or acquisitions;

 

·     credit policies;

 

·     granting material guarantees or collateral;

 

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

 

·     any otherimportant transactions.

 

Meetings of our board ofdirectors are validly convened and held if a majority of its members arepresent. Resolutions passed at these meetings will be valid if approved by amajority of the disinterested members of the board of directors present at themeeting. If required, the chairman of the board of directors may cast atie-breaking vote.

 

**Voting Rights and Shareholders’Meetings**

 

Each common share entitles itsholder to one vote at any meeting of our shareholders.

 

Under Mexican law and ourbylaws, we may hold two types of shareholders’ meetings:  ordinary andextraordinary.

 

Ordinary shareholders’meetings are those called to discuss any issues not reserved for extraordinaryshareholders’ meetings. An annual ordinary shareholders’ meeting must be heldwithin the first four months following the end of each fiscal year to discuss,among other things:

 

·     approving or modifying the report of the board of directors includingthe audited year-end financial statements, as well as the report of the ChiefExecutive Officer (or Director General);

 

·     allocating profits, if applicable;

 

·     appointing or ratifying the appointment of members of the board ofdirectors and the secretary, and determining their compensation;

 

·     appointing the chairman of the audit committee and of the corporategovernance committee;

 

·     designating the maximum amount that may be allocated to sharerepurchases;

 

·     discussing the audit committee’s and corporate governance committee’sannual reports to the board of directors; and

 

·     approving transactions of the Company and subsidiaries representing 20%or more of the consolidated assets of the Company.

 

Extraordinary shareholders’meetings may be called to consider any of the following matters, among otherthings:

 

·     extending the corporate duration of the Company;

 

·     dissolution;

 

·     increases or reductions of our fixed share capital;

 

·     changes in the Company’s corporate purpose or nationality;

 

·     transformation or merger;

 

·     issues of preferred shares;

 

·     share redemptions;

 

·     delisting of our shares with the Mexican Securities Registry or with anystock exchange;

 

·     any amendments to our bylaws; and

 

·     any other matters for which applicable Mexican law or the bylawsspecifically require an extraordinary shareholders’ meeting.

 

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

 

Holders of 20% of ouroutstanding shares may oppose any resolution adopted at a shareholders’ meetingand file a petition for a court order to suspend the resolution temporarilywithin 15 days following the adjournment of the meeting at which theaction was taken, provided that the challenged resolution violates Mexican lawor our bylaws and the opposing shareholders neither attended the meeting norvoted in favor of the challenged resolution. In order to obtain such a court order,the opposing shareholder must deliver a bond to the court in order to securepayment of any damages that we may suffer as a result of suspending theresolution in the event that the court ultimately rules against theopposing shareholder. Shareholders representing at least 10% of the sharespresent at a shareholders’ meeting may request to postpone a vote on a specificmatter on which they consider themselves to be insufficiently informed.

 

Notices of shareholders’meetings must be published in the official gazette of Sinaloa and in onenewspaper of general circulation in the country at least 15 calendar days priorto the date of the meeting. Each notice must set forth the place, date, andtime of the meeting and the matters to be addressed and must be signed bywhomever convenes the meeting. Shareholders’ meetings will be deemed validlyheld and convened without a prior notice or publication whenever all the sharesrepresenting our capital are duly represented. All relevant informationrelating to the shareholders’ meeting must be made available to shareholdersstarting on the date the notice is published.

 

To be admitted to anyshareholders’ meeting, shareholders must be registered in our share registry orprovide evidence of their status as shareholders as provided in our bylaws(including through 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-factmay not be directors of Homex.

 

At or prior to the time of thepublication of any notice of a shareholders’ meeting, we will provide copies ofthe notice to the depositary for distribution to the ADS holders. ADS holdersare entitled to instruct the depositary as to the exercise of voting rightspertaining to the common shares.

 

**Quorum**

 

Ordinary shareholders’meetings are legally convened pursuant to a first notice when a majority of ourshare capital is present or duly represented. Any number of shares present orduly represented at an ordinary meeting of shareholders convened pursuant to asecond or subsequent notice constitutes a quorum. Resolutions at ordinaryshareholders’ meetings are valid when approved by a majority of the sharespresent at the meeting.

 

Extraordinary shareholders’meetings are regarded as legally convened pursuant to a first notice when atleast 75% of the shares of our share capital are present or duly represented. Amajority of shares must be present or duly represented at an extraordinaryshareholders’ meeting called pursuant to a second or subsequent notice to beconsidered legally convened. Resolutions at extraordinary shareholders’meetings are valid when approved by one-half of our share capital.

 

**Registration and Transfer**

 

We have registered our commonshares with the Mexican Securities Registry maintained by the CNBV, as requiredunder the New Mexican Securities Market Law and regulations issued by the CNBV.If we wish to cancel our registration, or if it is cancelled by the CNBV, ourshareholders who are deemed to have “control” at that time will be required tomake a public offer to purchase all outstanding shares, prior to thecancellation.

 

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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 sharecapital may be reduced or increased by a resolution of an extraordinaryshareholders’ meeting, subject to the provisions of our bylaws, the MexicanGeneral 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 sharecapital increase, our shareholders will have a pre-emptive right to subscribeand pay for new stock issued as a result of the increase in proportion to theirshareholder interest at that time, except if the new stock is issued for apublic offering. This pre-emptive right must be exercised by subscribing andpaying for the relevant shares within the time period set forth in theresolution authorizing the increase, which will be no less than 15 calendardays following the date of publication of the corresponding notice to ourshareholders in the official gazette of Sinaloa and in one newspaper of generalcirculation in Culiacán, Sinaloa.

 

**Share Repurchases**

 

Pursuant to the New MexicanSecurities Market Law and our bylaws, we may repurchase our shares on theMexican Stock Exchange at the prevailing market price. Repurchased sharescannot be represented at any shareholders’ meeting. We are not required tocreate a special reserve for the repurchase of shares and we do not need theapproval of our board of directors to effect share repurchases. However, we arerequired to obtain shareholder approval as described below. In addition, ourboard of directors must appoint an individual or group of individualsresponsible for effecting share repurchases. These repurchases must be madesubject to the provisions of the New Mexican Securities Market Law, and carriedout, reported, and disclosed in the manner established by the CNBV.

 

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

 

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

 

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

 

·      the average trading price on the Mexican StockExchange 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 reflected in ourlatest quarterly report filed with the CNBV and the Mexican Stock Exchange.

 

In order to make therepurchase, we  must form a trust and contribute to it the amount requiredto secure payment of the purchase price offered pursuant to the tender offer toall of our shareholders that did not 

 

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sell their shares pursuant to the tender offer. The trust must be inforce for a period of at least six months from the date of delisting.

 

No later than 10 business daysfollowing the commencement of an offering, our board of directors must issue anopinion on the offering price reflecting the opinion of our audit committeeand  disclosing any potential conflictsof interest that any of the board members may have. The board’s resolutionmay be accompanied by a 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 MexicanSecurities Market Law, shareholders are entitled to the redemption of theirvariable common shares, pro rata, by resolution of the shareholders’ meeting.

 

**Liquidation**

 

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

 

**Appraisal Rights and OtherMinority Protections**

 

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

 

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

 

·      holders of at least 5% of our outstanding sharecapital to bring an action for civil liabilities against our directors andmembers of our senior management, provided that any recovery is for our benefitand not the benefit of the plaintiffs;

 

·      holders of at least 10% of our shares who are entitledto vote (including in a limited or restricted manner) to request that ashareholders’ meeting be called in certain limited situations;

 

·      holders of at least 10% of our shares who are entitledto vote (including in a limited or restricted manner) at any shareholders’meeting to request that resolutions with respect to any matter on which theywere not sufficiently informed to be postponed;

 

·      holders of at least 10% of our outstanding sharecapital to appoint one member of our board of directors; and

 

·      holders of at least 20% of our outstanding sharecapital to contest and suspend any shareholder resolution, subject to certainrequirements under Mexican law.

 

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

 

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

 

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Notwithstanding the foregoing,it is anticipated to be more difficult for our minority shareholders to enforcerights against us or our directors or principal shareholders than it is forshareholders of a U.S. issuer.

 

**Information to Shareholders**

 

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

 

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

 

·      an opinion on the Chief Executive Officer’s report onthe principal accounting and information policies and criteria followed in thepreparation of the financial information;

 

·      a statement of the financial condition of the companyat the end of the fiscal year;

 

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

 

·      the notes which are required to complete or clarifythe above-mentioned information.

 

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

 

**Restrictions AffectingNon-Mexican Shareholders**

 

Foreign investment in capitalstock of Mexican corporations is regulated by the 1993 Foreign Investment Lawand by the 1998 Foreign Investment Regulations to the extent they are notinconsistent with the Foreign Investment Law. The Ministry of Economy and theNational Foreign Investment Commission *(Comision Nacionalreguladora de la Inversion Extranjera)* are responsible for theadministration of the Foreign Investment Law and the Foreign InvestmentRegulations.

 

Our bylaws do not restrict theparticipation of non-Mexican investors in our capital stock. However, approvalof the 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 that non-Mexican shareholders agree to be considered Mexicancitizens with respect to:

 

·      shares held by them;

 

·      property rights;

 

·      concessions;

 

·      participations or interests we own; and

 

·      rights and obligations derived from any agreements wehave with the Mexican government.

 

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

 

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

 

You should be aware that theMexican General Business Corporations Law and the New Mexican Securities MarketLaw, which apply to us, differ in material respects from laws generallyapplicable to U.S. corporations and their shareholders. In order to highlightthese differences, set forth below is a summary of 

 

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provisions applicable to us (including modifications adopted pursuant toour bylaws) which differ in material respects from provisions of the corporatelaw of the State of Delaware.

 

*Duties of Directors*

 

Under the New MexicanSecurities Market Law, directors now have fiduciary duties of care and loyaltyspecified therein. The duties of directors of public companies are moreextensive than the duties of directors of private companies. Actions againstdirectors may be initiated by holders of at least 5% of our outstanding sharecapital, although any damages recovered from directors are awarded solely tothe company.

 

Under the New MexicanSecurities Market Law, the business and affairs of a corporation are managed byor under the direction of its board of directors. In exercising their powers,directors are charged with a fiduciary duty of care to protect the interests ofthe corporation and a fiduciary duty of loyalty to act in the best interests ofits shareholders.

 

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

 

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

 

Under the New MexicanSecurities Market Law, directors are exempted from liability for theirdecisions when they act in good faith and in compliance with all legal and bylawrequirements, and based on information provided by management, having selectedthe best alternative, according to their best judgment and after consideringthe foreseeable negative effects. Mexican courts have not yet interpreted thesenew standards of conduct for directors.

 

*Interested Directors*

 

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

 

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

 

·      the material facts with respect to such interesteddirector’s relationship or interests are disclosed or are known to the board ofdirectors, and the board of directors in good faith authorizes the transactionby the affirmative vote of a majority of the disinterested directors;

 

·      the material facts are disclosed or are known to theshareholders entitled to vote on the transaction, and the transaction isspecifically approved in good faith by vote of the majority of shares entitledto vote thereon; or

 

·      the transaction is fair to the corporation as of thetime it is authorized, approved or ratified. Under Delaware law, an interesteddirector could be held liable for a transaction in which the director derivedan improper personal benefit.

 

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*Dividends*

 

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

 

Under Delaware law, subject toany restrictions contained in the company’s certificate of incorporation, acompany may pay dividends out of surplus or, if there is no surplus, out of netprofits for the fiscal year in which the dividend is declared and for thepreceding fiscal year. Delaware law also provides that dividends may not bepaid out of net profits at any time when capital is less than the capitalrepresented by the outstanding stock of all classes having a preference uponthe distribution of assets.

 

*Mergers, Consolidations, and Similar Arrangements*

 

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

 

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

 

*Anti-Takeover Provisions*

 

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

 

·      adoption of such provisions isnot opposed by holders of 5% or more of our share capital;

 

·      no shareholder is excludedfrom the benefits that may derive from such provisions;

 

·      takeovers cannot  beabsolutely banned and any required approval from the company’s board ofdirectors must be subject to established criteria and a deadline not to exceedthree months; and

 

·      takeover procedures conform tocompulsory tender offering rules.

 

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

 

·      prior to the date of the transaction in which theshareholder became an interested shareholder, the board of directors of thecorporation approves either the business combination or the transaction thatresulted in the shareholder becoming an interested shareholder;

 

·      upon consummation of the transaction that resulted inthe shareholder becoming an interested shareholder, the interested shareholderowns at least 85% of the voting stock of the corporation, excluding shares heldby directors, officers, and employee stock plans; or

 

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·                  at or after the date of the transaction inwhich the shareholder became an interested shareholder, the businesscombination is approved by the board of directors and authorized at ashareholders’ meeting by at least 662/3% of the voting stock which is not owned by the interested shareholder.

 

*Transactions with SignificantShareholders*

 

UnderMexican law, a company’s board of directors must approve any potentialtransaction to be undertaken with any shareholders of the company or othercompanies affiliated with shareholders of the company. The board of directorsmust take the recommendation of the corporate governance committee intoconsideration in granting its approval and may also require an independentfairness opinion. In addition, pursuant to Mexican law, any shareholder whovotes on a transaction in which the shareholder has a conflict of interest maybe liable for damages if the transaction would not have been approved withoutthe shareholder’s vote.

 

As aMexican company, we may enter into business transactions with our significantshareholders, including asset sales, in which the significant shareholderreceives a greater financial benefit than other shareholders with priorapproval from our board of directors. Prior approval from our shareholders isnot required for this kind of transaction.

 

Nosimilar provision relating to transactions with significant shareholders existsunder Delaware law.

 

*Shareholders’ Suits*

 

Asmentioned above, holders of at least 5% of our outstanding share capital maybring derivative actions for civil liabilities against our directors, membersof the audit committee, and the corporate governance committee. However, thegrounds for shareholder derivative actions under Mexican law are limited, whicheffectively bars most of these suits in Mexico. In addition, subject to certainrequirements, holders of at least 20% of a company’s outstanding share capitalmay contest and suspend any shareholder resolution that violates Mexican law orour bylaws. Class-action lawsuits are not permitted under Mexican law.

 

Class-actionsand derivative actions are generally available to shareholders under Delawarelaw for, among other things, breach of fiduciary duty, corporate waste andactions not taken in accordance with applicable law. In these kinds of actions,the court generally has discretion to permit the winning party to recoverattorneys’ fees incurred in connection with the action.

 

*Indemnification of Directorsand Officers*

 

UnderMexican law, a company may indemnify directors or members of any committee ofthe board of directors, for actions taken within the scope of their duties,against expenses (including attorneys’ fees), judgments, fines and settlementamounts, reasonably incurred in defense of an action, suit or proceeding, exceptfor breach of the duty of loyalty or unlawful acts.

 

UnderDelaware law, a corporation may indemnify a director or officer of thecorporation against expenses (including attorneys’ fees), judgments, fines andamounts paid in settlement actually and reasonably incurred in defense of anaction, suit or proceeding by reason of a director’s or officer’s position if:

 

·                  the director orofficer acted in good faith and in a manner the director or officer reasonablybelieved to be in or not opposed to the best interests of the corporation; and

 

·                  with respect to anycriminal action or proceeding, the director or officer had no reasonable causeto believe his or her conduct was unlawful.

 

*Inspection of CorporateRecords*

 

UnderMexican law, at the time that a notice of shareholders’ meeting is published,shareholders are entitled to all information related to the matters to bediscussed at the meeting.

 

Delawarelaw permits any shareholder to inspect or obtain copies of a corporation’sshareholder list and its other books and records for any purpose reasonablyrelated to a person’s interest as a shareholder.

 

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*Shareholder Proposals*

 

UnderMexican law and our bylaws, holders of at least 10% of our outstanding sharecapital are entitled to appoint one member of our board of directors.

 

Delawarelaw does not include a provision restricting the manner in which nominationsfor directors may be made by shareholders or the manner in which business maybe brought before a meeting.

 

*Calling of SpecialShareholders’ Meetings*

 

UnderMexican law and our bylaws, a shareholders’ meeting may be called by the boardof directors, the chairman of the board of directors or of the audit committeeor the corporate governance committee. Any shareholder or group of shareholderswith voting rights representing at least 10% of our share capital may requestin writing that the board of directors call a shareholders’ meeting to discussthe matters indicated in the written request. If the board of directors failsto call a meeting within 15 calendar days following the date of the writtenrequest, the shareholder or group of shareholders may request that a competentcourt call the meeting. A single shareholder may call a shareholders’ meetingif no meeting has been held for two consecutive years or if matters to be dealtwith at an ordinary shareholders’ meeting have not been considered.

 

Delawarelaw permits the board of directors or any person who is authorized under acorporation’s certificate of incorporation or bylaws to call a special meetingof shareholders.

 

*Cumulative Voting*

 

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

 

UnderDelaware law, cumulative voting for the election of directors is permitted onlyif expressly authorized in the certificate of incorporation.

 

*Approval of Corporate Mattersby Written Consent*

 

Mexicanlaw permits shareholders to take action by unanimous written consent of theholders of all shares entitled to vote. These resolutions have the same legaleffect as those adopted in a general or special shareholders’ meeting. Theboard of directors may also approve matters by unanimous written consent.

 

Delawarelaw permits shareholders to take action by written consent of holders of outstandingshares having more than the minimum number of votes necessary to take theaction at a shareholders’ meeting at which all voting shares were present andvoted.

 

*Amendment of Certificate ofIncorporation*

 

UnderMexican law, it is not possible to amend a company’s certificate ofincorporation (*acta constitutiva*).However, the provisions that govern a Mexican company are contained in itsbylaws, which may be amended as described below.

 

UnderDelaware law, amending a company’s certificate of incorporation, which isequivalent to a memorandum of association, must be made by a resolution of theboard of directors setting forth the amendment, declaring its advisability, andeither calling a special meeting of the shareholders entitled to vote or directingthat the amendment proposed be considered at the next annual meeting of theshareholders. Delaware law requires that, unless a different percentage isprovided for in the certificate of incorporation, a majority of the outstandingshares entitled to vote thereon is required to approve the amendment of thecertificate of incorporation at the shareholders’ meeting. If the amendmentwould alter the number of authorized shares or otherwise adversely affect therights or preference of any class of a company’s stock, Delaware law providesthat the holders of the outstanding shares of such affected class should beentitled to vote as a class upon the proposed amendment, regardless of whethersuch holders are entitled to vote by the certificate of incorporation. However,the number of authorized shares of any class may be increased or decreased, tothe extent not falling below the number of shares then outstanding, by theaffirmative vote of the holders of a majority of the stock entitled to vote, ifso provided in the company’s certificate of incorporation or any amendment thatcreated such class or was adopted prior to the issuance of such class or thatwas authorized by the affirmative vote of the holders of a majority of suchclass of stock.

 

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*Amendment of Bylaws*

 

UnderMexican law, amending a company’s bylaws requires shareholder approval at anextraordinary shareholders’ meeting. Mexican law requires that at least 75% ofthe shares representing a company’s outstanding share capital  be present at the meeting upon the first call(unless the bylaws require a higher threshold) and that the resolutions beapproved by shares representing one-half of the company’s outstanding capitalshare.

 

UnderDelaware law, holders of a majority of the voting rights of a corporation and,if so provided in the certificate of incorporation, the directors of thecorporation, have the power to adopt, amend and repeal the bylaws of acorporation.

 

*Staggered Board of Directors*

 

Mexicanlaw does not permit companies to have a staggered board of directors.

 

Delawarelaw permits corporations to have a staggered board of directors.

 

**MATERIAL CONTRACTS**

 

**Acquisitionof****Controladora Casas Beta, S.A. deC.V.**

 

On April 21,2005, we signed an agreement to acquire 100% of the capital stock ofControladora Casas Beta, S.A. de C.V. (“Beta”), the seventh-largest homebuilderin Mexico, in a transaction valued at Ps.2,245 million (Ps.2,043 million atnominal value). The acquisition included the cash purchase of 53% of the sharesof Beta for Ps. 1.12 billion  (Ps.1,066million at nominal value) and the purchase of the remaining 47% of the sharesof Beta in exchange for 22,013,060 shares in the Company with a value ofPs.1,033 million  (Ps.977 million at nominalvalue). Beta was then merged into us. Beta shareholders owned approximately6.6% of Homex after the merger and sold their position in January 2006through a non-dilutive secondary offer. We financed the cash portion of thepurchase price principally with Senior Guaranted Notes and a loan from HSBCMexico, S.A.

 

**Acquisition of  Super Abastos Centrales y Comerciales, S.A.de C.V.**

 

In February 2005, Casas Beta del Centro,S. de R.L. de C.V. (“Beta del Centro”), a subsidiary of the Company, acquired50% of the outstanding shares of Super Abastos Centrales y Comerciales, S.A. deC.V. (“SACC”) in order to participate in a program of entry-level housingconstruction in Mexico City. The excess cost of the acquired assets over theirbook value and the liabilities assumed totaled Ps.13,054, which was identifiedand recorded in the inventory of the development project. Under the agreementssigned with SACC shareholders, Beta del Centro now has a controlling interestin SACC as of the acquisition date and consolidates SACC in its financialresults.

 

On September 12, 2005, Beta del Centro acquiredthe remaining 50% of SACC’s outstanding shares for Ps.151,144. The excess costof the shares acquired from minority owners totaled Ps.79,438, which wasrecorded as a capital distribution since this was a transaction between commonshareholders.

 

Forfurther discussion of our material contracts, see “Item 7. MajorShareholders and Related Party Transactions.”

 

**EXCHANGE CONTROLS**

 

Mexicanlaw does not restrict our ability to remit dividends and interest payments, ifany, to non-Mexican holders of our securities. Payments of dividends to equityholders, to the extent made, generally will not be subject to Mexicanwithholding tax. Mexico has had a free market for foreign exchange since 1991,and the government has allowed the peso to float freely against the U.S. dollarsince December 1994.

 

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**TAXATION**

 

Thefollowing summary contains a description of:

 

·                  the materialanticipated Mexican federal income tax consequences of the purchase, ownershipand disposition of the ADSs or common shares by non-resident holders, orholders that

 

·                  are not residents ofMexico for tax purposes; and

 

·                  will not hold the ADSsor common shares or a beneficial interest therein in connection with theconduct of a trade or business through a permanent establishment, for taxpurposes, in Mexico; and

 

·                  the materialanticipated U.S. federal income tax consequences of the purchase, ownership,and disposition of the ADSs or common shares by non-resident holders that areU.S. holders, or holders that

 

·                  are citizens orresidents of the United States;

 

·                  are corporationsorganized under the laws of the United States or any state thereof or theDistrict of Columbia; or

 

·                  that otherwise willbe subject to U.S. federal income tax on a net income basis in respect of theADSs or common shares.

 

Forpurposes of Mexican taxation:

 

·                  individuals areresidents of Mexico if they have established their principal place of residencein Mexico or, if they have established their principal place of residenceoutside Mexico, if their core of vital interests (*centro de intereses vitales*) is located in Mexico. Anindividual’s core of vital interests will be deemed to be located in Mexico if,among other things,

 

·                  at least 50% of theindividual’s aggregate annual income derives from Mexican sources, or

 

·                  the individual’sprincipal center of professional activities is located in Mexico;

 

·                  individuals areresidents of Mexico if they are state employees, regardless of the location ofthe individual’s core of vital interests; and

 

·                  legal entities areresidents of Mexico if they were established under Mexican law or if theymaintain their principal place of business or their place of effectivemanagement in Mexico.

 

Ifnon-residents of Mexico are deemed to have a permanent establishment in Mexicofor tax purposes, all income attributable to the permanent establishment willbe subject to Mexican taxes, in accordance with applicable Mexican tax law.

 

Ingeneral, for U.S. federal income tax purposes, holders of ADSs will be treatedas the beneficial owners of the common shares represented by those ADSs.

 

Thefollowing summary does not purport to be a comprehensive description of all ofthe tax considerations that may be relevant to a decision to purchase the ADSsor common shares. In particular, the summary of U.S. federal income taxconsequences only addresses U.S. holders that will hold the ADSs or commonshares as capital assets and does not address the tax treatment of U.S. holdersthat own or are treated as owning 10% or more of our outstanding voting shares.Further, this summary does not discuss all aspects of U.S. federal incometaxation that may be relevant to a particular investor or applicable to certaincategories of U.S. holders such as banks, dealers, traders who elect tomark-to-market, tax-exempt entities, insurance companies, regulated investmentcompanies, real estate investment trusts, dealers in securities or currencies,expatriates, persons who hold the ADSs as part of a hedge, straddle, syntheticsecurity, conversion or integrated transaction, U.S. holders who have afunctional currency other than the U.S. dollar, or U.S. holders liable for thealternative minimum tax.  Potential U.S. holders should realize that thetax consequences for persons described in the preceding sentence may differmaterially from those applicable to other U.S. holders. Finally, the summarydoes not address any U.S. or Mexican state or local tax considerations that maybe relevant to non-resident holders and to U.S. holders.

 

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Thediscussion of U.S. federal income tax considerations below assumes that we arenot a passive foreign investment company, or PFIC. Based on our audited financialstatements and relevant market and shareholder data, we believe that we werenot treated as a PFIC for U.S. federal income tax purposes with respect to our2006 taxable year.  Furthermore, based on our audited financial statementsand our current expectations regarding the value and nature of our assets, thesources and nature of our income and relevant market and shareholder data, wedo not anticipate being a PFIC for our 2007 taxable year.  However, thisdetermination is made annually and it is possible that our status could change.

 

Thissummary is based upon the federal income tax laws of the U.S. and Mexico as ineffect on the date of this annual report and the provisions of the income taxtreaty between the U.S. and Mexico and the protocol thereto (the “Tax Treaty”),all of which are subject to change, possibly with retroactive effect. However,this summary does not address all aspects of the federal income tax laws of theU.S. and Mexico. Prospective investors in the ADSs or common shares shouldconsult their own tax advisors as to the U.S., Mexican, or other taxconsequences of the purchase, ownership, and disposition of the ADSs or commonshares, including, in particular, the effect of any foreign, state or local taxlaws and their entitlement to the benefits, if any, afforded by the Tax Treaty.

 

**Taxationof Dividends**

 

*Mexican Tax Considerations*

 

Underthe provisions of the Mexican Income Tax Code (*Leydel Impuesto Sobre la Renta*), dividends paid to non-resident holderswith respect to the common shares or the ADSs will not be subject to Mexicanwithholding tax.

 

Dividendspaid from distributable earnings that have not been subject to corporate incometax are subject to a corporate-level dividend tax at a rate of 42.86% for theyear ended December 31, 2005 and 38.89% thereafter. 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 TaxConsiderations*

 

Thegross amount of any dividend distributions paid with respect to the commonshares represented by the ADSs, to the extent paid out of our current oraccumulated earnings and profits, as determined for U.S. federal income taxpurposes, generally will be includible in the gross income of a U.S. holder asordinary income on the date on which the distributions are received by thedepositary and will not be eligible for the dividends received deductionallowed to certain corporations under the U.S. Internal Revenue Code of 1986,as amended (the “Code”). To the extent that a distribution exceeds our currentand accumulated earnings and profits, it will be treated as a non-taxablereturn of basis to the extent thereof, and thereafter as capital gain from thesale of ADSs or common shares.

 

Distributions,which will be made in pesos, will be includible in the income of a U.S. holderin a U.S. dollar amount calculated by reference to the exchange rate in effecton the date they are received by the depositary, whether or not they areconverted into U.S. dollars. U.S. holders should consult their own tax advisorsregarding the treatment of foreign currency gain or loss, if any, on any pesosreceived that are converted into U.S. dollars on a date subsequent to receipt.Dividend income generally will constitute foreign source “passive income” or,in the case of certain U.S. holders for taxable years beginning before January 1,2007, “financial services income,” and for taxable years beginning after December 31,2006, “general” category income (depending on whether the U.S. holder ispredominantly engaged in the active conduct of a banking, insurance, financingor similar business) for U.S. foreign tax credit purposes.

 

Inthe event that Mexican taxes are withheld from dividend distributions, any suchwithheld taxes would be treated as part of the gross amount of the dividendincludible in income for a U.S. holder for U.S. federal income tax purposes (tothe extent of current or accumulated earnings and profits). U.S. holders may beentitled to credit such taxes against their U.S. federal income tax liabilityor, for those U.S. holders who so elect, to deduct such Mexican taxes incomputing taxable income.  The calculation of foreign tax credits and, 

 

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in the case of U.S. holders that elect todeduct foreign taxes, the availability of deductions, are subject to generallyapplicable limitations under U.S. federal income tax regulations and involvethe application of rules that depend on U.S. holders’ particularcircumstances.  U.S. holders should consult their own tax advisorsregarding the potential availability of foreign tax credits and deductions.

 

Distributionsof additional common shares to holders of ADSs with respect to their ADSs thatare made as part of a pro rata distribution to all our shareholders generallywill not be subject to U.S. federal income tax.

 

Currentlythe maximum rate of tax imposed on certain dividends received by U.S.shareholders that are individuals is 15%, provided that certain holding period requirementsare met. This reduced rate applies to dividends received between January 1,2003 and December 31, 2010 from “qualified foreign corporations.” Webelieve we are a “qualified foreign corporation” with respect to our ADSsbecause our ADSs are listed on the New York Stock Exchange. Therefore, webelieve that dividends paid on our ADSs will constitute “qualified dividendincome” and therefore qualify for the reduced rate. It is possible, however,that we will not continue to be considered a “qualified foreign corporation”and that our dividends will not continue to be eligible for this rate.Notwithstanding the previous rule, the term “qualified dividend income” willnot 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) dividendsto the 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.

 

**Taxationof Dispositions of Shares or ADSs**

 

*Mexican Tax Considerations*

 

Gainon the sale or other disposition of ADSs by a non-resident holder willgenerally not be subject to Mexican tax. Deposits and withdrawals of commonshares in exchange for ADSs will not give rise to Mexican tax or transferduties.

 

Gainon the sale of the common shares by a non-resident holder will not be subjectto any Mexican tax if the transaction is carried out through the Mexican StockExchange or other stock exchange or securities markets approved by the MexicanMinistry of Finance and Public Credit. Gain on sales or other dispositions ofthe common shares made in other circumstances generally would be subject toMexican tax at a rate of 25% based on the total amount of the transaction or,subject to certain requirements applicable to the seller, at a rate of 30% forthe year ended December 31, 2005, 29% for 2006 and 28% thereafter 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.

 

Fortender offers conducted on the Mexican Stock Exchange or other approved stockexchanges or securities markets, non-resident holders who held the commonshares as of the date they were initially registered with the CNBV may applythe above exemption to the extent that:

 

·                  five uninterruptedyears have elapsed since the initial public offering of the common shares;

 

·                  our shares have apublic float of at least 35% on the authorized stock exchanges or markets onwhich they were initially listed;

 

·                  the offer is for allshares representing our share capital and at the same price for allshareholders; and

 

·                  all shareholders arepermitted to accept more competitive offers than those received prior to orduring the tender offer period, without penalty.

 

Underthe Tax Treaty, a holder that is eligible to claim the benefits of the TaxTreaty will be exempt from Mexican tax on gains realized on a sale or otherdisposition of the common shares, in a transaction that is not carried outthrough the Mexican Stock Exchange or such other approved securities markets,so long as the 

 

76

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holder did not own, directly or indirectly, 25%or more of our share capital (including ADSs) during the twelve-month periodpreceding the sale or other disposition.

 

*U.S. Federal Income TaxConsiderations*

 

Uponthe sale or other disposition of the ADSs or common shares, a U.S. holdergenerally will recognize gain or loss in an amount equal to the differencebetween the amount realized on the sale or other disposition and such U.S.holder’s tax basis in the ADSs or common shares. Gain or loss recognized by aU.S. holder on such sale or other disposition generally will be long-termcapital gain or loss if, at the time of the sale or other disposition, the ADSsor common shares have been held for more than one year. Currently, the topindividual tax rate on adjusted net capital gains for sales and exchanges ofcapital assets on or after May 6, 2003 and before January 1, 2011 is15%. The deduction of a capital loss is subject to limitations for U.S. federalincome tax purposes. Gain or loss generally will be treated as U.S. source gainor loss and a U.S. holder may be unable to credit any Mexican taxes imposed onthese gains unless it has certain other income from foreign sources. Depositsand withdrawals of common shares by U.S. holders in exchange for ADSs will notresult in the realization of gain or loss for U.S. federal income tax purposes.

 

**OtherMexican Taxes**

 

Thereare no Mexican inheritance, gift, succession or value-added taxes applicable tothe purchase, ownership or disposition of the ADSs or common shares bynon-resident holders. However, gratuitous transfers of the ADSs or commonshares may result in a Mexican federal tax obligation for the recipient in certaincircumstances.

 

Thereare no Mexican stamp, issue, registration or similar taxes or duties payable bynon-resident holders of the ADSs or common shares.

 

**U.S.Backup Withholding Tax and Information Reporting Requirements**

 

AU.S. holder may, under certain circumstances, be subject to “backup withholding”with respect to some payments to the U.S. holder, such as dividends or theproceeds of a sale or other disposition of the ADSs, unless the holder:

 

·                  is a corporation orcomes within certain exempt categories, and demonstrates this fact when sorequired; or

 

·                  provides a correcttaxpayer identification number, certifies that it is not subject to backupwithholding and otherwise complies with applicable requirements of the backupwithholding rules.

 

Anyamount withheld under these rules will be creditable against the U.S.holder’s federal income tax liability.

 

**DOCUMENTS ON DISPLAY**

 

Weare subject to the information requirements of the Exchange Act and, inaccordance therewith, we are required to file reports and other informationwith the SEC. These materials, including this Form 20-F and the exhibitsthereto, may be inspected and copied at the SEC’s Public Reference Room at450 Fifth Street, NW, Washington, D.C. 20549.

 

**ITEM 11.****      ****Quantitative and QualitativeDisclosures about Market Risk.**

 

**InterestRate Risk**

 

Inconnection with our business activities, we have issued and hold financialinstruments that currently expose us to market risks related to changes ininterest rates. Interest rate risk exists principally with respect to ourindebtedness that bears interest at floating rates. At December 31, 2007,we had outstanding indebtedness of Ps.3,795.6 million, the majority of whichbore interest at fixed interest rates. The interest rate on our variable ratedebt is determined primarily by reference to the 28-day Mexican Interbank Rate,or TIIE 

 

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*(Tasa de Interés Interbancariade Equilibrio).*  TIIE increases would, consequently, increase ourinterest payments.

 

Thefollowing table sets forth principal cash flows by scheduled maturity, averageinterest rates, and estimated fair market value of our debt obligation as of December 31,2007. Fair value is estimated using discounted cash flow analyses, based on theCompany’s current incremental borrowing rates for similar types of borrowingarrangements.

 
| ** **              | ** ** | **Expected Maturity Dates as of December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | **2008**                                                                     | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011** | ** ** | **2012** | ** ** | **After  2013** | ** ** | **Total** | ** ** | **Fair Value  Dec. 31, ’07** | ** ** |
| ** **              | ** ** | **(Millions of Dollars Equivalent)**                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Long-term debt**      |       |                                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Fixed rate *            |       | —                                                                       |       | —     |       | —     |       | — |   | — |   | 195 |   | 195 |   | 222 |   |
| Average interest rate** |       | 10.6                                                                         | %          | 10.6       | %          | 10.6       | %          | 10.4 | % | 10.4 | % | 10.4 | % |   |   |   |   |
| Variable rate (Ps.)     |       | 38                                                                           |       | 32         |       | 26         |       | 5 |   | 0 |   | 0 |   | 101 |   | 101 |   |
| Average interest rate   |       | 8.8                                                                          | %          | 8.7        | %          | 8.5        | %          | 8.4 | % | 6.4 | % | 0.0 | % |   |   |   |   |

 

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*  Our outstanding US$250 million Senior Guaranteed Notes includes theprincipal-only swap effect, whereby at maturity date we pay pesos at acontractual fixed exchange rate of  Ps.10.83 per dollar and receive U.S.dollars equivalent to the notional amount of US$250 million.

 

** Includes asix-month weighted fixed rate of 2.92% of our principal-only swap.

 

Ahypothetical, instantaneous, and unfavorable change of 100 basis points in theaverage interest rate applicable to floating-rate liabilities held at December 31,2007 would have increased our interest expense in 2007 by approximatelyPs.2.9 million, over a twelve-month period.

 

Togetherwith the issuance of the US$250 million long-term U.S. dollar-denominatedSenior Guaranteed Notes due 2015, Homex entered into a principal-only swap inan attempt to hedge and cover the economic and cash flow principal U.S. dollarexposure bearing a six-month weighted fixed rate of 2.92% exposed to U.S.dollar currency fluctuations. The underlying notes bear interest at a rate of7.5% payable semi-annually and are exposed to U.S. dollar currencyfluctuations. The Company  accounts forthis swap at fair value in its consolidated financial statements. Because theagreement does not meet the requirements for hedge accounting, periodicmark-to-market measurement is made through the income statement.

 

Wemanage our exposure to changes in interest rates by efficiently timing constructionand delivery of our homes and payments to our suppliers, thereby allowing us toreduce our borrowing needs for working capital. Our capital expenditures arefinanced either through our own resources or leveraging their return throughoperating leases.

 

**ForeignCurrency Risk**

 

Becausesubstantially all of our revenues are and will continue to be denominated inpesos, if the value of the peso decreases against the U.S. dollar, our cost offinancing will increase. Severe depreciation of the peso may also result indisruption of the international foreign exchange markets. This may limit ourability to transfer or convert pesos into U.S. dollars and other currencies forthe purpose of making timely payments of interest and principal on oursecurities and any U.S. dollar-denominated debt that we may incur in thefuture.

 

Theexchange rates in effect at December 31, 2007, 2006 and 2005 werePs.10.9185, Ps.10.8385 and Ps.10.6255, respectively, per U.S. dollar.

 

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**ITEM 12.****      ****Description of Securitiesother than Equity Securities.**

 

Notapplicable.

 

# **PART II**

# ** **

**ITEM 13.****      ****Defaults, Dividend Arrearagesand Delinquencies.**

 

Notapplicable.

 

**ITEM 14.****      ****Material Modifications to theRights of Security Holders and Use of Proceeds.**

 

Notapplicable.

 

**ITEM 15.       Controls and Procedures.**

 

**(a) Evaluationof Disclosure Controls and Procedures**

 

Under the supervision and with theparticipation of our management, we conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, as of December 31, 2007,the end of the period covered by this report. As a result of thematerial weakness identified as discussed below under item (b), Management’s AnnualReport on Internal Control over Financial Reporting, we have concluded that theCompany’s disclosure controls and procedures as of December 31, 2007 wereineffective. However,to address the material weakness in internal control over financial reporting,the Company performed additional analysis and other post-closing procedures inan effort to reasonably assure that the consolidated financial statementsincluded in this Form 20-F for the fiscal year ended December 31,2007 have been prepared in accordance with both Mexican Financial ReportingStandards (“MFRS”) and United States Generally Accepted Accounting Principles (“USGAAP”).

 

**(b) Management’sAnnual Report on Internal Control over Financial Reporting**

 

Themanagement of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries (the “Company”)is responsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgatedunder the Securities Exchange Act of 1934, as a process designed by, or underthe supervision of, the Company’s Chief Executive Officer and Chief FinancialOfficer and effected by the Company’s Board of Directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting, and the preparation of financial statements for externalpurposes in conformity with MFRS and US GAAP and includes those policies andprocedures that:

 

·                  provide formaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

 

·                  provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in conformity with MFRS and US GAAP, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and

 

·                  provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the Company’s assets that could have a material effect onthe financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluations ofeffectiveness to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

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The Company’s management assessed the effectiveness ofthe internal control over financial reporting as of December 31, 2007.This assessment identified a “material weakness” (as defined in Rule 12b-2under The Exchange Act and Rule 1-02 of Regulation S-X) in internalcontrol over financial reporting as of December 31, 2007, which isdiscussed in the following paragraph.

 

Amaterial weakness is a deficiency, or combination of deficiencies, in internalcontrol over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the company’s annual or interim financialstatements will not be prevented or detected on a timely basis.

 

As part of the 2007consolidated financial statement audit, a material adjustment was identified byour independent registered public accounting firm with respect to our US GAAPconversion process.   Other, lessmaterial adjustments were also identified by both us and our independentregistered public accounting firm.  Theseadjustments, which were quantitatively material in the aggregate, highlightedto us a material design control deficiency with respect to our review of the USGAAP conversion process.  Specifically,existing controls, as documented, were not sufficiently detailed to specifywhich member of management would perform the overall review of the US GAAPconversion, and also the analytical review procedures that person might performas part of his or her review.  We haveassessed this design control deficiency as a “material weakness” as of December 31,2007.

 

In making this assessment, we used the criteria setforth by the Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”).   Basedon this assessment, we concluded that, as of December 31, 2007, theCompany’s internal control over financial reporting was not effective based onthose criteria.

 

Mancera,S.C. (a member practice of Ernst & Young Global), our independentregistered public accounting firm, has issued an attestation report on our internalcontrol over financial reporting.    The attestationreport is included herein.

 

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**(c) Reportof Independent Registered Accounting Firm**

 

TheBoard of Directors and Shareholders of

 

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

 

We have auditedDesarrolladora Homex, S.A.B. de C.V.’s internal control over financialreporting as of December 31, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria).  Desarrolladora Homex, S.A.B. de C.V.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.   Ourresponsibility is to express an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan 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, 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 our audit provides areasonable basis for our opinion.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation 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.

 

Amaterial weakness is a deficiency, or combination of deficiencies, in internalcontrol over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the company’s annual or interim financialstatements will not be prevented or detected on a timely basis. Management has identified in its assessmentof the effectiveness of internal control over financial reporting a materialweakness in the design of its controls over the review of the US GAAPconversion process.

 

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This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the 2007financial statements, and this report does not affect our report dated June 26,2008 on those financial statements.

 

In our opinion, because of the effect of the materialweakness described above on the achievement of the objectives of the controlcriteria, Desarrolladora Homex, S.A.B. de C.V., has not maintained effectiveinternal control over financial reporting as of December 31, 2007, basedon the COSO criteria.

 
|                       |   | Mancera, S.C.                 |
|----------------------------|--------|-------------------------------|
|                       |   |                          |
|                       |   | A Member Practice of          |
|                       |   |                          |
|                       |   | Ernst & Young Global |
|                       |   |                          |
|                       |   |                          |
|                       |   | Carlos Rochín            |
|                       |   |                          |
|                       |   |                          |
| Culiacán, México |   |                          |
| June 26, 2008         |   |                          |

 

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** **

**(d) Changesin Internal Control over Financial Reporting**

 

**Continued Remediation and Other Changes inInternal Control**

 

A.           RemediationEfforts to Address Material Weaknesses Reported in 2006

 

We have developed and implemented remediation plans toaddress material weaknesses reported in our annual report on Form20-F for fiscal year 2006, that no longer individually or in the aggregate riseto the level of a “material weakness” as of December 31, 2007. Since December 31,2006, we have taken the following actions to improve our internal control overfinancial reporting:

 

·                 The exchange of monthlyreports between the land and the accounting departments describing landacquired, land acquisitions canceled, and payments in advance to land vendors,from which reports a reconciliation of land acquisitions is properly maintainedand analyzed.

 

·                 The strengthening ofcut-off controls, including (i) improving data entry which accounts forland requiring authorization from the legal, land and finance departments inorder to register new contracts; and (ii) transferring, on a more timelybasis, contracts from branches to the head office.   This control is designed to provide a bettersegregation of titled and contract land.

 

·                 The adoption of measuresto verify that journal entries have been properly prepared along withsupporting documentation, and that these adjustments are approved byappropriate management.

 

·                 The appointment of anexperienced CFO and introduction of other financial and accounting functionsthat improved the monitoring and supervision activities within the financedepartment and related operating areas.

 

·                 The restructuring of theaccounting department, organizing responsibilities using a function and processapproach instead of a subsidiary company approach as of June 1, 2007, toachieve an effective segregation of responsibilities and functions with regardto preparation, review and authorization. This change, complemented by the change in top financial management (appointinga CFO), strengthened the control environment.  These changes have also resulted in an updated definition of roles andresponsibilities, improvements in the design and execution of controlprocesses, and improvements in communications, flow of information, and controlmonitoring.

 

·                 The adoption of atechnical training plan for personnel in the finance and accounting functionsfocused on MFRS and US GAAP.   This training will be provided byrecognized accounting institutions.

 

·                 The examination ofseveral ERP providers, and plans to make further progress towards our ERP goalsin 2008.

 

We believe that our improvements over land accountingcontrols, financial statement closing process and accounting for businesscombinations were successfully implemented and monitored throughout most of2007.   Based on the above remedialactions, we believe that the above matters no longer rise to a level of “materialweakness” at December 31, 2007.

 

B.             Planned RemediationEfforts to Address the 2007 Material Weakness Reported

 

As notedabove, during 2007 a material weakness was reported related to design controldeficiencies over our US GAAP conversion process.   We intend to perform the followingremediation during 2008 in an effort to correct this weakness:

 

·                 We will specify withmore detail the people performing top-level review of the US GAAP conversionprocess and also the analytical procedures they would typically employ inperforming this review.  We expect tofinish these design control changes before the 2008 third quarter.

 

·                 By the end of the2008 third quarter we will design and adopt a pre-closing financial statementreport process that will involve more senior employees in supervision andreview controls.

 

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·                 Though we experiencedturnover in US GAAP experts, we plan to retain new US GAAP experts before the2008 third quarter.

 

While we will make every effort to timely remedy thismaterial weakness, no assurance can be provided in this regard.

 

C.             Entity-Level Control Changes

 

Additionally,during 2007 and 2008 we have implemented the following entity-level controls inan attempt to improve the Company’s internal control over financial reporting:

 

·                 we hired a majorexternal independent registered public accounting firm to assist us and co-sourcedthe internal audit function;

 

·                 we restructured ourEthics Committee which management believes will allow it to act moreeffectively;

 

·                 we restructured ourDisclosure Committee which management believes will allow it to act moreeffectively;

 

·                 we outsourced our “Hot-Line”for receipt of complaints, in an effort to increase the independence of thatfunction;

 

·                 we adopted amanagement change process to facilitate the adoption of new procedures andcontrols; and

 

·                 we examined whetherthe adoption of an Enterprise Risk Management Integrated Framework issued byCOSO would be cost-beneficial, and aim to make substantive decisions in thisregard during 2008.

 

We plan to make further improvements to our entity-levelcontrols during 2008.

 

**ITEM 16. (Reserved)**

 

**ITEM 16A.****                                  ****FinancialExpert**

 

Ouraudit committee consists of Wilfrido Castillo Sánchez-Mejorada (Chairman), Z.Jamie Behar, Edward Lowenthal and Matthew Zell. Our board of directors hasdetermined that Mr. Castillo has the attributes of an “audit committeefinancial expert” as defined by the SEC and that each member of the auditcommittee satisfies the financial literacy requirements of the New York StockExchange. Our board of directors has also determined that Mr. Castillo isindependent, as that term is defined in the listing rules of the New YorkStock Exchange.

 

**ITEM 16B.****                                  ****Codeof Ethics**

 

Wehave adopted a code of ethics, as defined in Item 16B of Form 20-Funder the Securities Exchange Act of 1934, as amended. Our code of ethicsapplies to our Chief Executive Officer, Chief Financial Officer and personsperforming similar functions, as well as to our directors and other officersand employees. Our code of ethics is available on our web site atwww.homex.com.mx. If we amend the provisions of our code of ethics that applyto our Chief Executive Officer, Chief Financial Officer and persons performingsimilar functions, or if we grant any waiver of such provisions, we willdisclose such amendment or waiver on our web site at the same address.

 

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**ITEM 16C.****                                  ****PrincipalAccountant Fees and Services**

 

**Auditand Non-Audit Fees**

 

Forthe fiscal years ended December 31, 2007 and 2006, our auditors continuedto be Mancera, S.C., a member practice of Ernst & Young Global.

 

Thefollowing table summarizes the aggregate fees billed to us by Mancera, S.C., amember practice of Ernst & Young Global, during the fiscal years endedDecember 31, 2007 and 2006, respectively:

 
| ** **         | ** ** | **Years ended December 31,**             | ** ** |
|--------------------|------------|---------------------------------------------------------|------------|
| ** **         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **         | ** ** | **(in thousands of Mexican pesos)** | ** ** |
| Audit fees         |       | Ps.                                                     | 20,071     |   | Ps. | 13,387 |   |
| Audit-related fees |       | 1,325                                                   |       | — |   |
| Tax fees           |       | 1,609                                                   |       | — |   |
| All other fees     |       | —                                                  |       | — |   |
| Total fees         |       | Ps.                                                     | 23,005     |   | Ps. | 13,387 |   |

 

*Auditfees*. Audit fees in the above table are the aggregate fees billed byMancera, S.C. in connection with the audit of our annual financial statementsand statutory and regulatory audits. This caption also includes Sarbanes-Oxley Section 404attestation services.  Amounts presentedfor 2007 include Ps. 4,550 corresponding to additional fees from the audit of2006, which were agreed and billed after we filed the 20-F for the year ended December 31,2006.

 

*Audit-related fees.*  Audit-related fees in the above table arefees billed by Mancera, S.C. for the review of pro forma financial informationrelated to contemplated business activities. This section also includes feesrelated to financial due diligence fees paid to other Ernst & Youngaffiliated firms for international expansion activities.

 

*Tax fees*.  Tax fees in the above table include theaggregate fees billed by Mancera, S.C. for the review of reports on ourtransfer pricing study and fees paid to other Ernst & Young affiliatedfirms for international tax services.

 

**AuditCommittee Pre-Approval Policies and Procedures**

 

Wehave adopted pre-approval policies and procedures under which all audit andnon-audit services provided by our external auditors must be pre-approved bythe audit committee. Any service proposals submitted by external auditors needto be discussed and approved by the audit committee during its meetings, whichtake place at least four times a year. Once the proposed service is approved,we or our subsidiaries formalize the engagement of services. The approval ofany audit and non-audit services to be provided by our external auditors isspecified in the minutes of our audit committee. In addition, the members ofour board of directors are briefed on matters discussed in the meetings of theaudit committee.

 

**ITEM 16D.****                                  ****Exemptionsfrom the Listing Standards for Audit Committees**.

 

Notapplicable.

 

**ITEM 16E.****                                    ****Purchasesof Equity Securities by the Issuer and Affiliated Purchasers.**

 

Notapplicable.

 

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# **PART III**

# ** **

## **ITEM 17.**                                            FinancialStatements.

## ** **

Notapplicable.

 

## **ITEM 18.**                                            FinancialStatements.

## ** **

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

 

## **ITEM 19.**                                            Exhibits.

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                                                                                              |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1(1)                 |       | Our articles of  incorporation *(estatutos sociales)* as amended  through March 30, 1998, together with an English translation.*                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 1(2)                 |       | Our bylaws *(estatutos sociales)* as amended through April 26,  2006, together with an English translation. +                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(a)(1)              |       | Form of  Deposit Agreement, as amended, by and among us, JPMorgan Chase Bank as  Depositary and the Holders and Beneficial Holders from time to time of  American Depositary Shares evidenced by American Depositary Receipts issued  thereunder, including form of American Depositary Receipt.** |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(1)              |       | Indenture relating  to 7.50% Senior Guaranteed Notes, dated September 28, 2005 by and  between us, as Issuer, and the Bank of New York, as Trustee. ***                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(2)              |       | Form of First  Supplemental Indenture to the Indenture Relating to the 7.50% Senior  Guaranteed Exchange Notes, by and between us, as Issuer, and the Bank of New  York, as Trustee. ****                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(3)              |       | Form of 7.50%  Senior Guaranteed Exchange Note. ****                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 2(b)(4)              |       | Registration Rights  Agreement dated September 28, 2005 by and among us, Credit Suisse First  Boston LLC and certain financial institutions named therein. ***                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                    |
| 8                    |       | List of Principal  Subsidiaries.***                                                                                                                                                                                                                                                                     |

 
| 12(a)(1) |   | CEO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 27  2008.      |
|----------|--------|--------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                         |
| 12(a)(2) |   | CFO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 27  2008.      |
|     |   |                                                                                                         |
| 13       |   | Officer  Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of  2002, dated June 27 2008. |

 

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| *      |   | 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.         |

 

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***         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 inthe report on Form 20-F (File No. 001-32229), originally filed withthe SEC on June 29, 2006. Incorporated herein by reference.

 

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**SIGNATURE**

 

Theregistrant, Desarrolladora Homex, S.A.B. de C.V., hereby certifies that itmeets all of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 

 
|                       | DESARROLLADORA HOMEX, S.A.B.  DE C.V.            |
|----------------------------|--------------------------------------------------|
|                       |                                             |
|                       | /s/ Alan Castellanos  Carmona                    |
|                       | Name: Alan Castellanos  Carmona                  |
|                       | Title:   Chief  Financial Officer |
|                       |                                             |
| Dated: June 30,  2008 |                                             |

 

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TABLE OF CONTENTS

 
| Report of Independent  Registered Public Accounting Firm for the Consolidated Financial Statements as  of and for the years ended December 31, 2007 and 2006 | F-1 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|
| Report of Independent  Registered Public Accounting Firm for the Consolidated Financial Statements  for the year ended December 31, 2005                     | F-2 |
| Consolidated  Balance Sheets as of December 31, 2007 and 2006                                                                                                | F-3 |
| Consolidated  Statements of Income for the years ended December 31, 2007, 2006 and  2005                                                                     | F-4 |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31, 2007, 2006 and 2005                                       | F-5 |
| Consolidated  Statements of Changes in Financial Position for the years ended  December 31, 2007, 2006 and 2005                                              | F-6 |
| Notes to  Consolidated Financial Statements for the years ended December 31, 2007,  2006 and 2005                                                            | F-7 |

 

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board ofDirectors and Stockholders

DesarrolladoraHomex, S.A.B. de C.V.

 

We have audited theaccompanying consolidated balance sheets of Desarrolladora Homex, S.A.B. deC.V. and subsidiaries as of December 31, 2007 and 2006, and the relatedconsolidated statements of income, changes in stockholders’ equity and changesin financial position for the years then ended.  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 ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Desarrolladora Homex, S.A.B.de C.V. and subsidiaries at December 31, 2007 and 2006, and theconsolidated results of their operations and changes in their financialposition for the years then ended, in conformity with Mexican FinancialReporting Standards, which differ in certain respects from accountingprinciples generally accepted in the United States of America (see Notes 27, 28and 29 to the consolidated financial statements).

 

As disclosed in Note3 to the accompanying consolidated financial statements, during 2007, theCompany adopted the provisions of Mexican Financial Reporting Standard D-6 “Capitalizationof the comprehensive financing cost”.

 

We also have audited,in accordance with the standards of the Public Company Accounting OversightBoard (United States), Desarrolladora Homex, S.A.B. de C.V.’s internal controlover financial reporting as of December 31, 2007, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated June 26,2008, expressed an adverse opinion on the effectiveness of internal controlover financial reporting.

 

 
|   | Mancera, S.C.                 |
|--------|-------------------------------|
|   | A Member Practice of          |
|   | Ernst & Young Global |
|   |                          |
|   |                          |
|   | Carlos Rochín            |

 

Culiacan, MexicoJune 26, 2008

 

F-1

----

 

**Report of Independent Registered Public Accounting Firm tothe Board of Directors and Stockholders of Desarrolladora Homex, S.A.B. de C.V.and Subsidiaries**

 

We have audited theaccompanying consolidated statements of income, changes in stockholders’ equityand changes in financial position of Desarrolladora Homex, S.A.B. de C.V. andsubsidiaries (the “Company”) for the year ended December 31, 2005, allexpressed in thousands of Mexican pesos of purchasing power as of December 31,2007. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted ouraudit in accordance with auditing standards generally accepted in Mexico andwith the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company was not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theresults of operations, changes in stockholders’ equity and changes in financialposition of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries for the yearended December 31, 2005 in conformity with Mexican Financial ReportingStandards.

 

Effective January 1,2005, the Company adopted the provisions of Bulletin B-7, “Businessacquisitions”. On July 1, 2005 a subsidiary was acquired utilizing thepurchase method of accounting, under which the assets acquired and liabilitiesassumed are recorded at fair value, through the allocation of the acquisitioncost of the subsidiary, and goodwill of Ps. 731,861 thousand Mexican pesos wasrecorded.

 

Mexican FinancialReporting Standards vary in certain significant respects from accountingprinciples generally accepted in the Unites States of America. The applicationof the latter would have affected the determination of consolidated net incomefor the year ended December 31, 2005, and the determination ofconsolidated stockholders’ equity as of that date to the extent summarized inNote 28.

 

The translation ofthe financial statement amounts into U.S. dollars and the translation of thefinancial statements into English have been made solely for the convenience ofreaders in the United States of America.

 

Galaz, Yamazaki, RuizUrquiza, S.C.Member of Deloitte Touche Tohmatsu

 

C.P.C. Sergio VargasVargasMexico City, MexicoApril 21, 2006(June 26, 2008 with respect to the restatement to

 Mexican Pesos in purchasing power of December 31,2007)

 

F-2

----

 

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

 

**ConsolidatedBalance Sheets**

As of December 31, 2007 and 2006

(In thousands of Mexican pesos (Ps.) ofpurchasing power and thousands of US dollars ($) as of December 31, 2007)

 
| ** **                                               | ** ** | **2007  Convenience  translation  (Note 2a)** | ** **    | **2007**       | ** ** | **2006**       | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|---------------|----------------|------------|----------------|------------|
| **Assets**                                               |       |                                               |          |           |       |           |       |
| Current assets:                                          |       |                                               |          |           |       |           |       |
| Cash and cash equivalents (Note 4)                       | ** ** | **$**                                              | **202,119**   | ** **     | **Ps.**    | **2,206,834**  |       | Ps. | 2,381,689 |   |
| Restricted cash (Note 4)                                 | ** ** | **14,296**                                         | ** **    | **156,090**    |       | 37,597         |       |
| Trade accounts receivable, net (Note 5)                  | ** ** | **691,419**                                        | ** **    | **7,549,258**  |       | 5,541,086      |       |
| Inventories (Note 6)                                     | ** ** | **402,257**                                        | ** **    | **4,392,039**  |       | 4,212,443      |       |
| Prepaid expenses and other current assets,  net (Note 7) | ** ** | **44,910**                                         | ** **    | **490,354**    |       | 399,424        |       |
| Total current assets                                     | ** ** | **1,355,001**                                      | ** **    | **14,794,575** |       | 12,572,239     |       |
|                                                     |       |                                               |          |           |       |           |       |
| Land held for future development (Note 6)                | ** ** | **649,455**                                        | ** **    | **7,091,074**  |       | 5,180,583      |       |
| Property and equipment, net (Note 8)                     | ** ** | **105,851**                                        | ** **    | **1,155,729**  |       | 669,095        |       |
| Goodwill (Note 2c)                                       | ** ** | **67,029**                                         | ** **    | **731,861**    |       | 731,861        |       |
| Other assets (Note 9)                                    | ** ** | **38,102**                                         | ** **    | **416,017**    |       | 466,284        |       |
| Total assets                                             | ** ** | **$**                                              | **2,215,438** | ** **     | **Ps.**    | **24,189,256** |       | Ps. | 19,620,062 |   |
|                                                     |       |                                               |          |           |       |           |       |
| **Liabilities and stockholders’ equity**            | ** ** | ** **                                         | ** **    | ** **     | ** ** | ** **     | ** ** |
|                                                     |       |                                               |          |           |       |           |       |
| Current liabilities:                                     |       |                                               |          |           |       |           |       |
| Current portion of long-term debt (Note 10)              | ** ** | **$**                                              | **23,882**    | ** **     | **Ps.**    | **260,758**    |       | Ps. | 91,392 |   |
| Current portion of leases (Note 12)                      | ** ** | **6,245**                                          | ** **    | **68,187**     |       | 8,704          |       |
| Trade accounts payable (Note 14)                         | ** ** | **316,552**                                        | ** **    | **3,456,269**  |       | 2,135,138      |       |
| Land suppliers (Note 15)                                 | ** ** | **252,315**                                        | ** **    | **2,754,906**  |       | 3,501,895      |       |
| Advances from customers                                  | ** ** | **25,628**                                         | ** **    | **279,823**    |       | 302,668        |       |
| Taxes other than income taxes                            | ** ** | **7,281**                                          | ** **    | **79,494**     |       | 83,261         |       |
| Income taxes                                             | ** ** | **3,022**                                          | ** **    | **32,992**     |       | 105,825        |       |
| Employee statutory profit-sharing                        | ** ** | **3,220**                                          | ** **    | **35,163**     |       | 39,654         |       |
| Total current liabilities                                | ** ** | **638,145**                                        | ** **    | **6,967,592**  |       | 6,268,537      |       |
|                                                     |       |                                               |          |           |       |           |       |
| Long-term debt (Note 10)                                 | ** ** | **283,811**                                        | ** **    | **3,098,786**  |       | 3,377,955      |       |
| Long-term leases (Note 12)                               | ** ** | **26,456**                                         | ** **    | **288,857**    |       | —         |       |
| Swap payable (Note 11)                                   | ** ** | **7,244**                                          | ** **    | **79,098**     |       | 227,074        |       |
| Long-term land suppliers (Note 15)                       | ** ** | **90,928**                                         | ** **    | **992,801**    |       | —         |       |
| Employee retirement obligations (Note 13)                | ** ** | **7,244**                                          | ** **    | **79,097**     |       | 52,275         |       |
| Deferred income taxes (Note 23)                          | ** ** | **260,283**                                        | ** **    | **2,841,895**  |       | 2,101,717      |       |
| Total liabilities                                        | ** ** | **1,314,111**                                      | ** **    | **14,348,126** |       | 12,027,558     |       |
|                                                     |       |                                               |          |           |       |           |       |
| Stockholders’ equity (Note 16):                     |       |                                               |          |           |       |           |       |
| Common stock                                             | ** ** | **48,359**                                         | ** **    | **528,011**    |       | 528,011        |       |
| Additional paid-in capital                               | ** ** | **300,429**                                        | ** **    | **3,280,223**  |       | 3,280,223      |       |
| Shares repurchased for employee stock  option plan       | ** ** | **(9,099**                                         | **)**         | **(99,342**    | **)**      | —         |       |
| Retained earnings                                        | ** ** | **511,169**                                        | ** **    | **5,581,198**  |       | 3,348,132      |       |
| Other stockholders’ equity accounts                 | ** ** | **31,399**                                         | ** **    | **342,828**    |       | 347,405        |       |
| Majority stockholders’ equity                       | ** ** | **882,257**                                        | ** **    | **9,632,918**  |       | 7,503,771      |       |
| Minority interest in consolidated  subsidiaries          | ** ** | **19,070**                                         | ** **    | **208,212**    |       | 88,733         |       |
| Total stockholders’ equity                          | ** ** | **901,327**                                        | ** **    | **9,841,130**  |       | 7,592,504      |       |
| Total liabilities and stockholders’ equity          | ** ** | **$**                                              | **2,215,438** | ** **     | **Ps.**    | **24,189,256** |       | Ps. | 19,620,062 |   |

 

See accompanying notes to these consolidated financialstatements.

 

F-3

----

 

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

 

**ConsolidatedStatements of Income**

For the Years Ended December 31, 2007,2006 and 2005

(In thousands of Mexican pesos (Ps.) ofpurchasing power and thousands of US dollars ($) as of December 31, 2007,except earnings per share)

 
| ** **                                          | ** ** | **2007  Convenience  translation  (Note 2a)** | ** **    | **2007**       |       | **2006**       | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|---------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                          | ** ** | ** **                                         | ** **    | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** |
| Revenues (Note 3b)                                  | ** ** | **$**                                              | **1,485,783** | ** **     | **Ps.**    | **16,222,524** | ** ** | Ps.        | 13,439,519 |   | Ps. | 9,216,043 |   |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Cost of sales (Note 3b)                             | ** ** | **1,011,261**                                      | ** **    | **11,041,456** | ** ** | 9,191,005      |       | 6,418,567  |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Gross profit                                        | ** ** | **474,522**                                        | ** **    | **5,181,068**  | ** ** | 4,248,514      |       | 2,797,476  |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Operating expenses (Note 20)                        | ** ** | **164,714**                                        | ** **    | **1,798,429**  | ** ** | 1,359,147      |       | 913,165    |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Income from operations                              | ** ** | **309,808**                                        | ** **    | **3,382,639**  | ** ** | 2,889,367      |       | 1,884,311  |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Other income, net (Note 21)                         | ** ** | **19,162**                                         | ** **    | **209,223**    | ** ** | 11,004         |       | 14,956     |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Net comprehensive financing cost (Note 6):          |       |                                               |          |           | ** ** |           |       |       |       |
| Interest expense (Note 22)                          | ** ** | **31,591**                                         | ** **    | **344,928**    | ** ** | 674,579        |       | 452,509    |       |
| Interest income                                     | ** ** | **(12,841**                                        | **)**         | **(140,202**   | **)**      | (108,792       | )          | (62,954    | )          |
| Exchange (gain) loss                                | ** ** | **(11,100**                                        | **)**         | **(121,195**   | **)**      | 148,396        |       | 70,675     |       |
| Monetary position loss                              | ** ** | **17,894**                                         | ** **    | **195,373**    | ** ** | 76,786         |       | 33,775     |       |
| ** **                                          | ** ** | **25,544**                                         | ** **    | **278,904**    | ** ** | 790,969        |       | 494,005    |       |
| Income before income tax                            | ** ** | **303,426**                                        | ** **    | **3,312,958**  | ** ** | 2,109,402      |       | 1,405,262  |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Income tax (Note 23)                                | ** ** | **87,126**                                         | ** **    | **951,280**    | ** ** | 669,843        |       | 458,902    |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Consolidated net income                             | ** ** | **$**                                              | **216,300**   | ** **     | **Ps.**    | **2,361,678**  | ** ** | Ps.        | 1,439,559  |   | Ps. | 946,360 |   |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Net income of majority stockholders                 | ** ** | **$**                                              | **204,521**   | ** **     | **Ps.**    | **2,233,066**  | ** ** | Ps.        | 1,391,281  |   | Ps. | 953,611 |   |
| Net income (loss) of minority stockholders          | ** ** | **11,779**                                         | ** **    | **128,612**    | ** ** | 48,278         |       | (7,251     | )          |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Consolidated net income                             | ** ** | **$**                                              | **216,300**   | ** **     | **Ps.**    | **2,361,678**  | ** ** | Ps.        | 1,439,559  |   | Ps. | 946,360 |   |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Weighted average shares outstanding (in  thousands) | ** ** | **335,688**                                        | ** **    | **335,688**    | ** ** | 335,869        |       | 324,953    |       |
|                                                |       |                                               |          |           | ** ** |           |       |       |       |
| Basic earnings per share of majority  stockholders  | ** ** | **$**                                              | **0.61**      | ** **     | **Ps.**    | **6.65**       | ** ** | Ps.        | 4.14       |   | Ps. | 2.93 |   |

 

See accompanying notes to these consolidated financialstatements.

 

F-4

----

 

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

 

**ConsolidatedStatements of Changes in Stockholders’ Equity**

For the Years Ended December 31, 2007,2006 and 2005

(In thousands of Mexican pesos (Ps.) ofpurchasing power as of December 31, 2007)

 
| ** **                                                  | ** ** | **Common  stock** | ** **  | **Additional  paid-in  capital** | ** ** | **Shares  repurchased  for employee  stock option  plan** | ** **  | **Retained  earnings** | ** **        | **Other  stockholders’  equity  accounts** | ** ** | **Majority  stockholders’  equity** | ** **  | **Minority  interest in  consolidated  subsidiaries** | ** **  | **Total  stockholders’  equity  (Note 16)** | ** **      |
|-------------------------------------------------------------|------------|-------------------|-------------|----------------------------------|------------|---------------------------------------------------------------------|-------------|------------------------|-------------------|-------------------------------------------------|------------|------------------------------------------|-------------|------------------------------------------------------------|-------------|-------------------------------------------------------|-----------------|
| ** **                                                  | ** ** | ** **        | ** **  | ** **                       | ** ** | ** **                                                          | ** **  | ** **             | ** **        | ** **                                      | ** ** | ** **                               | ** **  | ** **                                                 | ** **  | ** **                                            | ** **      |
| Balances  as of January 1, 2005                        |       | Ps.               | 242,249     |                             | Ps.        | 2,486,568                                                           |        |                   |              | Ps.                                             | 1,082,678  |                                     | Ps.         | 346,641                                                    |        | Ps.                                                   |  4,158,136 |   | Ps. |  55,605 |   | Ps. | 4,213,741 |   |
|                                                        |       |              |        |                             |       |                                                                |        |                   |              |                                            |       |                                     |        |                                                       |        |                                                  |            |
| Issuance  of common stock                                   |       | 285,762           |        | 793,655                          |       |                                                                |        |                   |              |                                            |       | 1,079,417                                |        |                                                       |        | 1,079,417                                             |            |
| Minority  dilution                                          |       |              |        |                             |       |                                                                |        |                   |              |                                            |       |                                     |        | (7,899                                                     | )           | (7,899                                                | )               |
| Capital  distribution from acquisition of minority interest |       |              |        |                             |       |                                                                |        | (79,438                | )                 |                                            |       | (79,438                                  | )           |                                                       |        | (79,438                                               | )               |
| Comprehensive  income                                       |       |              |        |                             |       |                                                                |        | 953,611                |              | (8,862                                          | )          | 944,749                                  |        | (7,251                                                     | )           | 937,498                                               |            |
|                                                        |       |              |        |                             |       |                                                                |        |                   |              |                                            |       |                                     |        |                                                       |        |                                                  |            |
| Balances  as of December 31, 2005                      |       | 528,011           |        | 3,280,223                        |       |                                                                |        | 1,956,851              |              | 337,779                                         |       | 6,102,864                                |        | 40,455                                                     |        | 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                  | ** ** | ** **        | ** **  | ** **                       | ** ** | ** **                                                          | ** **  | ** **             | ** **        | ** **                                      | ** ** | ** **                               | ** **  | **(9,133**                                                 | **)**       | **(9,133**                                            | **)**           |
| ** **                                                  | ** ** | ** **        | ** **  | ** **                       | ** ** | ** **                                                          | ** **  | ** **             | ** **        | ** **                                      | ** ** | ** **                               | ** **  | ** **                                                 | ** **  | ** **                                            | ** **      |
| **Balances  as of December 31, 2007**                  | ** ** | **Ps.**           | **528,011** | ** **                       | **Ps.**    | ** 3,280,223**                                                 | ** **  | **Ps.**                | ** (99,342** | **)**                                           | **Ps.**    | ** 5,581,198**                      | ** **  | **Ps.**                                                    | **342,828** | ** **                                            | **Ps.**         | ** 9,632,918** | ** ** | **Ps.** | ** 208,212** | ** ** | **Ps.** | ** 9,841,130** | ** ** |

 

See accompanying notes to these consolidated financialstatements.

 

F-5

----

 

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

 

**ConsolidatedStatements of Changes in Financial Position**

For the Years Ended December 31, 2007,2006 and 2005

(In thousands of Mexican pesos (Ps.) ofpurchasing power and thousands of US dollars ($) as of December 31, 2007)

 
| ** **                                                 | ** ** | **2007  Convenience  translation** | ** **  | **2007**       | ** ** | **2006**      | ** ** | **2005**   | ** ** |
|------------------------------------------------------------|------------|------------------------------------|-------------|----------------|------------|---------------|------------|------------|------------|
| Operating activities:                                      |       |                               |        |           | ** ** |          |       |       |       |
| Consolidated net income                                    | ** ** | **$**                              | **216,300** | ** **     | **Ps.**    | **2,361,678** | ** ** | Ps.        | 1,439,559  |   | Ps. | 946,360 |   |
| Add items that did not require the use of  resources:      |       |                               |        |           | ** ** |          |       |       |       |
| Depreciation                                               | ** ** | **17,979**                         | ** **  | **196,307**    | ** ** | 130,829       |       | 66,626     |       |
| Amortization of intangibles                                | ** ** | **9,654**                          | ** **  | **105,410**    | ** ** | 114,529       |       | 174,960    |       |
| Labor obligations                                          | ** ** | **1,688**                          | ** **  | **18,416**     | ** ** | 19,347        |       | 33,690     |       |
| Deferred income taxes, net of inflation                    | ** ** | **74,956**                         | ** **  | **818,407**    | ** ** | 526,539       |       | 402,370    |       |
| ** **                                                 | ** ** | **320,577**                        | ** **  | **3,500,218**  | ** ** | 2,230,803     |       | 1,624,006  |       |
| Changes in operating assets and  liabilities:              |       |                               |        |           | ** ** |          |       |       |       |
| (Increase) decrease in:                                    |       |                               |        |           | ** ** |          |       |       |       |
| Trade accounts receivable                                  | ** ** | **(183,924**                       | **)**       | **(2,008,172** | **)**      | 151,277       |       | (699,924   | )          |
| Inventories and land held for future  development          | ** ** | **(191,426**                       | **)**       | **(2,090,087** | **)**      | (3,503,491    | )          | (2,373,537 | )          |
| Other assets                                               | ** ** | **(11,391**                        | **)**       | **(124,375**   | **)**      | 227,385       |       | (361,096   | )          |
| Increase (decrease) in:                                    |       |                               |        |           | ** ** |          |       |       |       |
| Trade accounts payable                                     | ** ** | **120,999**                        | ** **  | **1,321,131**  | ** ** | 559,288       |       | 251,504    |       |
| Land suppliers                                             | ** ** | **22,513**                         | ** **  | **245,812**    | ** ** | 1,623,150     |       | 969,822    |       |
| Taxes payable                                              | ** ** | **(14,180**                        | **)**       | **(154,829**   | **)**      | (81,775       | )          | 290,866    |       |
| Other liabilities                                          | ** ** | **(2,704**                         | **)**       | **(29,529**    | **)**      | 100,450       |       | 138,321    |       |
| Net resources generated by (used in)  operating activities | ** ** | **60,464**                         | ** **  | **660,169**    | ** ** | 1,307,087     |       | (160,038   | )          |
|                                                       |       |                               |        |           | ** ** |          |       |       |       |
| Financing activities:                                      |       |                               |        |           | ** ** |          |       |       |       |
| Proceeds from new borrowings                               | ** ** | **242,458**                        | ** **  | **2,647,276**  | ** ** | 1,650,970     |       | 4,187,890  |       |
| Payments of notes payable                                  | ** ** | **(220,611**                       | **)**       | **(2,408,739** | **)**      | (1,746,935    | )          | (1,875,415 | )          |
| Changes in fair value of financial  instruments            | ** ** | **(13,553**                        | **)**       | **(147,976**   | **)**      | 99,401        |       | —     |       |
| Debt issuance costs                                        |       |                               |        |           | ** ** | (12,994       | )          | —     |       |
| Issuance of common stock related to the  purchase of BETA  |       | —                             |        | —         | ** ** | —        |       | 1,079,417  |       |
| Share repurchase for employee stock option  plan           | ** ** | **(9,099**                         | **)**       | **(99,342**    | **)**      | —        |       | —     |       |
| Dividends paid by subsidiary company                       | ** ** | **(836**                           | **)**       | **(9,133**     | **)**      | —        |       | —     |       |
| Net resources (used in) generated by  financing activities | ** ** | **(1,641**                         | **)**       | **(17,914**    | **)**      | (9,558        | )          | 3,391,892  |       |
| Investing activities:                                      |       |                               |        |           | ** ** |          |       |       |       |
| Restricted cash                                            | ** ** | **(10,852**                        | **)**       | **(118,493**   | **)**      | (37,597       | )          | 47,909     |       |
| Investment in associates                                   | ** ** | **(1,637**                         | **)**       | **(17,869**    | **)**      | —        |       | —     |       |
| Acquisition of property and equipment, net                 | ** ** | **(62,348**                        | **)**       | **(680,748**   | **)**      | (302,392      | )          | (161,683   | )          |
| Acquisition of minority interest                           |       | —                             |        | —         | ** ** | —        |       | (87,337    | )          |
| Acquisition of BETA, net of acquired cash                  | ** ** | **—**                         | ** **  | **—**     | ** ** | —        |       | (2,199,734 | )          |
| Net resources (used in) investing  activities              | ** ** | **(74,837**                        | **)**       | **(817,110**   | **)**      | (339,989      | )          | (2,400,845 | )          |
|                                                       |       |                               |        |           | ** ** |          |       |       |       |
| Cash and cash equivalents:                                 |       |                               |        |           | ** ** |          |       |       |       |
| Net increase (decrease)                                    | ** ** | **(16,014**                        | **)**       | **(174,855**   | **)**      | 957,540       |       | 831,009    |       |
| Balance at beginning of year                               | ** ** | **218,133**                        | ** **  | **2,381,689**  | ** ** | 1,424,149     |       | 593,140    |       |
| Balance at end of year                                     | ** ** | **$**                              | **202,119** | ** **     | **Ps.**    | **2,206,834** | ** ** | Ps.        | 2,381,689  |   | Ps. | 1,424,149 |   |

 

See accompanying notes to these consolidated financialstatements.

 

F-6

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**DESARROLLADORA HOMEX, S.A.B. DE C.V. AND SUBSIDI****ARIES**

 

**Notes toConsolidated Financial Statements**

 

For the Years Ended December 31, 2007,2006 and 2005 

(In thousands of Mexican pesos (Ps.) of purchasingpower as of December 31, 2007, except as otherwise indicated)

 

**1.Nature of business**

 

Desarrolladora Homex, S.A.B. de C.V. and itssubsidiaries (the “Company”) is comprised of a group of companies engagedmainly in the promotion, design, development, construction and sale ofaffordable entry-level, middle-income and residential housing. All sales aremade in Mexico.

 

Tocarry out its activities, the Company engages in land acquisition, obtainingpermits and licenses, designing, constructing, marketing and selling homes,obtaining individual financing for its customers and developing communities tosatisfy housing needs in Mexico.

 

The Company participates in housing supply offers fromthe main housing funds in Mexico, such as the National Workers’ Housing Fund,or *Instituto Nacional del Fondo de Ahorro para laVivienda de los Trabajadores* (“INFONAVIT”) and the Social Securityand Services Institute Public-Segment Workers’ Housing Fund, or *Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales delos Trabajadores del Estado* (“FOVISSSTE”), among others, andgovernmental mortgage providers such as the Federal Mortgage Society, or *Sociedad Hipotecaria Federal* (“SHF”). Additionally, theCompany participates in the market, where mortgage financing is provided bycommercial banks and cash transactions.

 

For the years ended December 31, 2007, 2006 and2005, revenues obtained through INFONAVIT mortgage financing accounted for 75%,75% and 61%, respectively, of the Company’s total revenues, with other sourcesaccounting for 25%, 25% and 39%, respectively.

 

The Company’s operations are on a seasonal basis:normally the highest volume of sales takes place in the second half of theyear. The construction times of real estate developments vary depending on thetype of housing: entry-level, middle-income or upper-income; accordingly,construction revenues are recognized in different fiscal years, and therevenues from work completed and generation of accounts receivable fluctuatedepending on the date of the beginning of the project and that of itscompletion.

 

On April 17, 2008, the Financial Director (CFO),Alan Castellanos Carmona and the Controlling Director, Ramón Lafarga Bátiz,authorized the issuance of the Company’s consolidated Mexican FinancialReporting Standards (Mexican FRS) financial statements and notes as of December 31,2006 and 2007 and for each of the three years in the period ended December 31,2007. These consolidated financial statements have been approved by the AuditCommittee and the Board of Directors and the Company’s stockholders, at theirmeetings held on April 21, 2008 and April 26, 2008, respectively.

 

The accompanying consolidated financial statementswhich consist of those Mexican FRS consolidated financial statements and notes,as supplemented by the accompanying US GAAP disclosures presented in Notes27, 28 and 29, were authorized for issuance herein by  the CFO and the Controlling Director on June 26,2008.

 

F-7

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**2. Basis of preparation**

 

**a)Convenience translation**

 

The financial statements are stated in Mexican pesos, the currency ofthe country in which the Company is incorporated and operates. The statements’ translations ofMexican pesos into U.S. dollar amounts are included solely for the convenienceof readers in the United States of America and have been made at the rate ofPs.10.9185 per one U.S. 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 U.S. dollars at this or any otherexchange rate.

 

**b)Consolidation of financial statements**

 

The consolidated financial statements includethose of Desarrolladora Homex, S.A.B. de C.V. and its subsidiaries, whoseshareholding percentage in their capital stock is shown below:

 
| ** **                                                                 | ** ** | **Ownership  percentage** | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------|------------|------------|
| **Company**                                                                | ** ** | **2007**                  | ** ** | **2006**   | ** ** | **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 the  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 housing |
| 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 housing |
| Casas  Beta del Norte, S. de R.L. de C.V.                                  | ** ** | **100**                   | **%**      | 100        | % | Promotion, design, construction and sale of  entry-level housing |
| Casas Beta del Noroeste, S. de R.L. de C.V.                                | ** ** | **100**                   | **%**      | 100        | % | Promotion, design, construction and sale of  entry-level housing |
| Edificaciones Beta, S. de R.L. de C.V. (2)                                 | ** ** | **100**                   | **%**      | 100        | % | Construction and design of housing |
| Edificaciones Beta del Noroeste, S. de R.L. de C.V. (2)                    |       | **100**                   | **%**      | 100        | % | Construction and design of housing |
| Edificaciones Beta del Norte, S. de R.L.de C.V. (2)                        | ** ** | **100**                   | **%**      | 100        | % | Construction and design of housing |
| Hogares del Noroeste, S.A. de C.V. (3)                                     | ** ** | **50**                    | **%**      | 50         | % | Promotion, design, construction and sale of  entry-level and middle-income housing |
| Homex Amueblate, S.A. de C.V. (4)                                          | ** ** | **100**                   | **%**      | —     |   | Sale of housing-related products |
| Homex Global, S.A. de C.V. (4)                                             | ** ** | **100**                   | **%**      | —     |   | Holding company for foreign investments |
| Opción Homex, S.A. de C.V. (5)                                        | ** ** | **100**                   | **%**      | —     |   | Sale, lease and acquisition of properties |
| Sofhomex, S.A.  de C.V. S.F.O.M. E.R. (5)                                  | ** ** | **100**                   | **%**      | —     |   | Financial services |
| Nacional Financiera, S.N.C. Fid. del Fideicomiso  Homex 80584              |       | **100**                   | **%**      | —     |   | Employee stock option plan administration |

 

Significant intercompany balances and transactionshave been eliminated in these consolidated financial statements.

 

----

(1) Casas Beta delCentro, S. de R.L. de C.V. owns 100% of the outstanding stock of ComercializadoraCántaros, S.A. de C.V. and Super Abastos Centrales y Comerciales, S.A. de C.V.,and 50% of the outstanding stock of Promotora 

 

F-8

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Residencial Huehuetoca, S.A. de C.V. (Huehuetoca),which are engaged in the promotion, design, construction and sale ofentry-level housing.

 

(2) To more efficientlymanage its operations, the Company decided to reduce the number of itssubsidiaries: therefore, as of December 31, 2007, these subsidiaries havebeen liquidated.

 

(3) Hogares delNoroeste, S. A. de C.V. is a 50%-owned and controlled subsidiary ofDesarrolladora Homex, S.A.B. de C.V., which is engaged in the promotion,design, construction and sale of entry-level and middle-income housing.

 

(4) These companieswere incorporated in 2007; however, their operations have not been significant.

 

(5) These companieswere incorporated in 2007; however, they had no operations.

 

**c)****Acquisition of shares in Controladora Casas Beta,S.A. de C.V.**

 

On July 1, 2005, the Company acquired 100% of the voting stock ofControladora Casas Beta, S.A. de C.V. (“BETA”), whose primary activity is theconstruction and sale of entry-level housing, mainly in the States of BajaCalifornia, Nuevo León and the State of Mexico. The results of BETA’soperations starting July 1, 2005 have been included in the Company’sconsolidated financial statements. Among the main reasons for the acquisitionof BETA was that BETA was considered to be the seventh-largest homebuilder inMexico, in terms of the number of units sold. The acquisition of BETA isexpected to significantly improve the Company’s financial results andstrengthen its position in the market, enhancing its presence in the threepreviously mentioned states which have substantial housing markets where BETAhas major construction projects.

 

BETA was acquired for Ps.2,245 million (Ps.2,043million at nominal value), and included the cash purchase of 53% of BETA’sshares for Ps.1,125 million (Ps.1,066 million at nominal value) and the acquisitionof the remaining 47% of BETA’s shares in exchange for 22,013,060 of the Company’sshares valued at Ps.1,033 million (Ps.977 million at nominal value). Uponcompletion of the acquisition, BETA was merged with the Company.

 

The condensed balance sheet of BETA on the acquisitiondate, adjusted for the assignment of the acquisition cost to the assets andliabilities assumed, was as follows:

 
| ** **                                  | ** ** | **Balance as of  June 30, 2005** | ** **                    |
|---------------------------------------------|------------|------------------------------------------------------|-------------------------------|
| Current assets (includes cash of Ps.46,171) | ** ** | **Ps.**                                              | ** 2,321,654**           | ** ** |
| Fixed assets                                | ** ** | **341,750**                                          | ** **                    |
| Intangible asset (BETA trademark)           | ** ** | **488,086**                                          | ** **                    |
| Intangible asset (backlog)                  | ** ** | **140,402**                                          | ** **                    |
| Current liabilities                         | ** ** | **(750,401**                                         | **)**                         |
| Long-term debt                              | ** ** | **(938,021**                                         | **)**                         |
| Minority interest                           | ** ** | **(89,426**                                          | **)**                         |
| Net assets acquired                         | ** ** | **1,514,044**                                        | ** **                    |
| Cost of the acquired entity                 | ** ** | **2,245,905**                                        | ** **                    |
| Goodwill                                    | ** ** | **Ps.**                                              | **   731,861** | ** ** |

 

The intangible assets represent the value assigned tothe BETA trademark and backlog. Both intangibles were determined as part of theassessment performed by the Company to assign the purchase price of (a) theassets acquired and (b) the liabilities assumed. Backlog represents thehouses under construction at the date of the acquisition of BETA which wereexpected to be sold in a subsequent period ranging between six and ninemonths.  The trademark value wasestablished by independent appraisers and the backlog was determinedinternally.

 

The goodwill resulting from the acquisition of BETArepresents the benefit the Company expects to obtain from increasing itsposition in major housing markets in the State of Mexico and in the cities ofMonterrey and Tijuana, and expected future synergies from the merger.

 

F-9

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In the consolidated statement of income for the periodfrom July 1, 2005 to December 31, 2005, BETA contributed net revenuesof Ps.2,138,869, operating income of Ps.644,293 and net income of Ps.387,003.

 

If BETA had been acquired on January 1, 2005proforma total consolidated revenues would have been Ps. 10,587,803; proformaoperating income would have been Ps. 2,279,407; proforma net income would havebeen Ps. 1,244,843 and proforma basic earnings per share would have been Ps.3.67. As disclosed in Note 21, during 2007 the Company settled certainlitigations with the previous Beta shareholders regarding the terms of this acquisition.

 

**d) Acquisition of shares of SuperAbastos Centrales y Comerciales, S.A. de C.V.**

 

In February 2005, Casas Beta del Centro,S. de R.L. de C.V. (“Beta del Centro”), a subsidiary of the Company, acquired50% of the outstanding shares of Super Abastos Centrales y Comerciales, S.A. deC.V. (“SACC”) in order to participate in a program of entry-level housingconstruction in Mexico City. The excess cost of the acquired assets over theirbook value and the liabilities assumed totaled Ps.13,054, which was identifiedand recorded in the inventory of the development project. Under the agreementssigned with SACC shareholders, Beta del Centro now has a controlling interestin SACC as of the acquisition date and consolidates SACC in its financialresults.

 

On September 12, 2005, Beta del Centro acquiredthe remaining 50% of SACC’s outstanding shares for Ps.151,144. The excess costof the shares acquired from minority owners totaled Ps.79,438, which wasrecorded as a capital distribution since this was a transaction between commonshareholders.

 

**3.Summary of significant accounting policies**

 

The accompanying consolidated financial statementswere prepared in conformity with Mexican Financial Reporting Standards (MFRS).

 

**a) New accounting policies**

 

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

 

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

 

Mexican FRS B-3 establishesthe guidelines for classifying income, costs and expenses as either ordinary ornon-ordinary and modifies certain Mexican FRS. The primary sections of thestatement 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, as establishedin Mexican FRS B-1, *Accounting Changes andError Corrections*.

 

Mexican FRS B-3 also allowsentities to present costs and expenses in the statement of operations, based ontheir function or nature or a combination of both. Mexican FRS B-3 does not requirethe presentation of operating income in the statement of operations, but stillallows for it when operating income is deemed to be an important indicator forevaluating a particular entity’s performance. When an entity does decide toinclude the operating income caption, Mexican FRS B-3 requires the disclosureof the items comprising such caption and a justification for its inclusion inthe 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.

 

Theapplication of MFRS B-13 had no effect on the Company’s financial position orresults of operations.

 

F-10

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**MFRS C-13, *Related Parties***

 

This Mexican FRS broadensthe concept of related parties to include immediate family members of keymanagement personnel or directors, as well as funds derived from laborobligation plans. Mexican FRS C-13 also requires the following disclosures: i) therelationship between the controlling company and its subsidiaries, irrespectiveof whether transactions were carried out between them in the period; ii) thename of the direct controlling company and, when different from such, the nameof the principal controlling company of the economic entity to which the entitybelongs; and iii) compensation granted to the entity’s key management personnelor directors (in the case of public companies). This standard allows entitiesto disclose, only when there are enough elements to sustain such an assertion,that the transactions carried out with related parties are on terms similar tomarket conditions.

 

Theapplication of MFRS C-13 had no effect on the Company’s financial position orresults of operations.

 

**MFRS D-6, *Capitalizationof the Comprehensive Financing Cost***

 

Mexican FRS D-6 establishesthat entities must capitalize comprehensive financing cost (CFC), which hadbeen optional, under Mexican Accounting Bulletin C-6, *Property, Plant and Equipment*.

 

Capitalized CFC is definedas the amount attributable to qualifying assets that could have been avoided ifits acquisition had not taken place, which, in the case of Mexican peso-denominatedfinancing, includes its interest and the net monetary position, and in the caseof foreign currency-denominated financing, also includes any exchange gain orloss. Qualifying assets are defined as those assets acquired by an entityrequiring a prolonged period of time to get them ready for their intended use,that are to be sold or leased that require a prolonged period to be acquired orreadied for sale or lease, including inventories that require a period of timeto take possession or to prepare for 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.

 

Mexican FRS D-6 establishesthat the amount of capitalized CFC will be determined based on the loans thatwere specifically used to acquire the qualifying assets, or if suchidentification cannot be made, by applying the weighted average capitalizationrate for financing to the weighted average number of investments in qualifyingassets made during the acquisition period. Financing with imputed interest costmay be capitalized against the cost of acquired assets, since the financing isrecognized at its present value.

 

The adoption of MFRS D-6 for theyear ended December 31, 2007 represented a decrease in CFC of Ps.179,304,although  Ps. 119,286 was ultimatelycharged to cost of sales as the underlying projects were sold. This standard isapplied prospectively, so 2007 is not comparable to either 2006 or 2005.

 

**The Interpretation 4 of MFRS, *Presentation of Employee Profit-Sharing in the Statement of Income***

 

The Interpretation of MFRS 4concludes, based on the analysis of MFRS B-3, D-3 and D-4, that employeeprofit-sharing shall be presented as an ordinary expense*.*

 

**Interpretation 8 of MFRS, *Effects of the Flat-Rate Business Tax*****(FRBT)**

 

In December 2007, the *Consejo Mexicano para la Investigación y desarrollo de Normas de laInformación Financiera, A.C*. (Mexican Financial InformationStandards Research Development Board, or “CINIF”) issued the Mexican FRS Interpretation8, which is effective for the reporting periods beginning on or after October 1,2007. Such standard was created as a result of the need to clarify whether thenew flat rate business tax (FRBT) should be treated as a tax on profits and toestablish the guidelines for its accounting treatment.

 

Mexican FRS Interpretation 8establishes that the FRBT is a tax on income; therefore, its effects should berecognized in conformity with the provisions of Mexican Accounting BulletinD-4, *Accounting for Income Tax, Asset Taxand Employee Profit-Sharing*, and as of January 1, 2008, inconformity with Mexican FRS 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 

 

F-11

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result in a FRBT payable or regular income taxpayable. Based on the results of these projections, taxpayers will be able toidentify the expected behavior of FRBT and regular income tax.

 

Entities that havedetermined that they will essentially pay FRBT in future years must recognizethe effects of deferred FRBT in their financial statements dated between October 1and December 31, 2007. This deferred tax must correspond to the temporarydifferences and FRBT credits existing in 2007 for which payment or recovery ofFRBT is expected as of or after 2008. Therefore, those entities that havedetermined that they will essentially pay FRBT in the future must also eliminatethe deferred income tax asset or liability recognized at such date. Theseadjustments give rise to an expense or income that must be recognized in the2007 statement of income as part of the caption Taxes on Income or instockholders’ equity when it relates to other comprehensive income (loss)items.

 

The deferred tax rate is therate enacted and established in the tax provisions at the date of the financialstatements, which is expected to be in force at the time the deferred FRBTassets and liabilities will be realized (16.5% in 2008, 17% in 2009 and 17.5%in 2010 and subsequent years).

 

Deferred FRBT for the periodmust be recognized as a deferred tax expense or income in the statement ofincome of the period as part of the tax on profits caption, or in stockholders’equity for those amounts associated with comprehensive income items, and as anon-current asset or long-term liability in the balance sheet. In the notes tothe financial statements, the Company must disclose an analysis of the taxes onincome presented in the statement of income, showing the amounts of current anddeferred FRBT expense. The entity must also mention the deferred FRBT relatedto other comprehensive items.

 

Based on the FRBT Law, anentity must determine the amount of asset tax generated through 2007 that itwill be able to recover as of 2008. This amount must be recognized in the 2007financial statements as a tax account receivable and any amount of asset taxconsidered unrecoverable must be recognized as an expense in the 2007 statementof income as part of the Taxes on income caption. Starting 2008, the balance ofrecoverable taxes must be reviewed on each financial statement closing date andwritten down when there is evidence that some amounts may not be recoverable.

 

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

 

**b)****Revenueand cost recognition**

 

Revenues from the Company’s activities as a developerare recorded pursuant to the percentage-of-completion method, measured by thepercentage of actual costs incurred to total estimated costs for eachdevelopment and each project. Under this method, the estimated revenue for eachdevelopment and project is multiplied by such percentage to determine theamount of revenue to be recognized. Management periodically evaluates thefairness of estimates used to determine the percentage-of-completion. If, as aresult of such evaluation, it becomes apparent that estimated costs onuncompleted projects exceed expected revenues, a provision for estimated costsis recorded in the period in which such costs are determined. The Companybegins applying the percentage-of-completion method when the followingconditions have been met:

 

·              the homebuyer hassubmitted all required documents in order to obtain the financing from themortgage lender;

 

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

 

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

 

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

 

The cost of sales represents thecosts incurred in the development of housing revenues  by the Company during the year. These costsinclude land, direct materials, labor and all the indirect costs related to thedevelopment of the project such as indirect labor, equipment, repairs,depreciation and the capitalization of the comprehensive financing costs.

 

**c)****Recognitionof the effects of inflation**

 

The Company restates its consolidated financialstatements to Mexican peso purchasing power of the most recent balance sheetdate presented. Accordingly, theconsolidated financial statements of the prior year, which are presented forcomparative purposes, have also been restated to Mexican pesos of the samepurchasing power and, therefore, differ from those originally reported in theprior year. The factor used to restate theprior year balances was 1.037590. Recognition of the 

 

F-12

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effects of inflation resultsmainly in inflationary gains or losses on non-monetary and monetary items thatare presented in the financial statements under the following line items:

*** ***

**·***** ***Other stockholders’ equity accounts

 

This item includes the accumulated monetary positionresult through the initial restatement of the consolidated financialstatements.

 

**·***** ***Monetary position result

 

The monetary position result represents the erosion of purchasing power of monetary items caused byinflation and is calculated by applying National Consumer Price Index (“NCPI”)factors to the monthly net monetary position. Losses result from maintaining anet monetary asset position.

 

·  Stockholders’equity

 

Stockholders’ equity accounts were restated based onadjustment factors derived from the NCPI.

 

In 2008, the Company will applythe requirements of the new MFRS B-10, *Effects of Inflation*.See Note 26.

 

**d) Use of estimates**

 

In conformity with MFRS, the preparation of financialstatements requires the use of estimates and assumptions in certain areas.  Actual results could differ from theseestimates.

 

**e) Cash and cash equivalents**

 

Cash and cash equivalents consist basically of bankdeposits and highly liquid investments with maturities of less than 90 days.These investments are stated at cost plus accrued interest, which is similar totheir market value.

 

**f) Allowance for doubtful accounts**

 

The Company’s policy is to provide for doubtfulaccounts based on balances of uncollected accounts receivable, applying severalpercentages based on their aging status.

 

**g) Inventories and cost of sales**

 

Construction-in-process, construction materials, landfor development and future developments and land for inventories are recordedat acquisition cost and restated using the NCPI. Cost of sales is also restatedby applying such index.

 

Land for future developments refers to land reservesto be developed by the Company. Land for future developments is recorded atacquisition cost and is restated by applying factors derived from the NCPI.

 

The Company has land trustagreements for homebuilding development sites, where each one of the trusteesparticipates in the income generated by these developments in percentages thatvary between 9% and 14% for non-urban land and 32% for urban land. As per theagreements, the Company recognizes the land as inventory when constructionstarts (but only for the portion of land used).

 

**h)Property and equipment**

 

Property and equipment areinitially recorded at acquisition cost and restated using the NCPI.Depreciation is calculated using the straight-line method based on theremaining useful lives of the related assets, as follows:

 

F-13

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| ** **                     | ** ** | **Years** | ** ** |
|--------------------------------|------------|-----------|------------|
| Buildings                      |       | 20        |       |
| Machinery and equipment        |       | 4 and10   |       |
| Transportation equipment       |       | 4         |       |
| Air transportation equipment   |       | 10        |       |
| Office furniture and equipment |       | 10        |       |
| Computers                      |       | 4         |       |
| Communication equipment        |       | 4         |       |

 

Thevalue of property and equipment is reviewed whenever there are indications ofimpairment. See Note 3 k) for our accounting policy regarding impairment oflong-lived assets.

 

**i) Leases**

 

The Company classifies agreements to lease propertyand equipment as operating or capitalizable, in conformity with the guidelinesof Bulletin D-5, “Leases.”

 

Lease arrangements are recognized as capital leases ifthey meet at least one of the following conditions:

 

·  Under the agreement, the ownership of theleased asset is transferred to the lessee upon termination of the lease.

 

·  The agreement includes an option to purchasethe asset at a reduced price.

 

·  The term of the lease is basically the sameas the remaining useful life of the leased asset.

 

·  The present value of minimum lease paymentsis basically the same as the market value of the leased asset, net of anybenefit or scrap value.

 

When the lessor retains the risks or benefits inherentto the ownership of the leased asset, the agreements are classified asoperating leases and rent is charged to results of operations.

 

**j) Goodwill**

 

Goodwill represents the difference between thepurchase price and the fair value of the net assets acquired at the date ofpurchase in accordance with the purchase method of accounting.

 

Goodwill is recorded initially at acquisition cost andthen restated using adjustment factors derived from the NCPI.

 

Goodwill is not amortized; however, it is subject to annual impairmenttests and adjusted for any impairment losses.

 

**k) Impairment of long-livedassets in use**

 

The Company reviews the carrying amounts of long-livedassets in use annually or earlier when an impairment indicator suggests thatsuch amounts might not be recoverable, considering the greater of the presentvalue of future net cash flows using an appropriate discount rate, or the netsale price upon disposal. Impairment is recorded when the carrying amountsexceed the greater of the amounts mentioned above. The impairment indicatorsconsidered for these purposes are, among others, the operating losses ornegative cash flows in the period if they are combined with a history orprojection of losses; depreciation and amortization charged to results, whichin percentage terms in relation to revenues are substantially higher than thatof previous years; obsolescence; reduction in the demand for the productsmanufactured; competition; and other legal and economic factors.

 

F-14

----

 

**l) Otherassets**

 

Expenses related to the placement of the loanmentioned in Note 9 are recorded at cost and restated by applying NCPI factors,and will be amortized under the straight-line method over 10 years, which isthe respective term. The value assigned to the BETA trademark is restated byapplying NCPI factors, and is amortized under the straight-line method overfive years for the trademark, which is the estimated useful life.

 

**m)****Employee retirement obligations**

 

The Company’s policy is to grant seniority premiumsand termination pay, covering all its employees. The related calculations arebased on the provisions of the Mexican Federal Labor Law.

 

Seniority premiums and termination payments arerecognized periodically based on independent actuarial computations, using theprojected unit-credit method and financial assumptions net of inflation.

 

Under Mexican labor law, workers are entitled tocertain benefits at the time of their departure from the Company under certaincircumstances.

 

**n) Business acquisitions**

 

All business acquisitions are recognized and valuedinitially by the purchase method, which includes the cash delivered or its fairvalue equivalent.

 

**o) Derivative financial instruments**

 

Derivative financial instruments are used for hedgingpurposes. At December 31, 2007 and 2006, all derivative instrumentswere recognized in the balance sheet at fair value, initially represented bythe amount of consideration agreed (both assets and liabilities). Transactioncosts and cash flow received or delivered to adjust these instruments to fairvalue at the beginning of the transaction, not related to premiums on options,are amortized during the respective term. The changes in the fair value ofderivative financial instruments that do not qualify as hedging instruments arerecognized in income as an exchange loss.

 

**p) Liabilities, provisions,contingent assets and liabilities and commitments**

 

Liability provisions arerecognized whenever (i) the Company has current obligations (legal orassumed) derived from past events; (ii) the liability will probably giverise to a future cash disbursement for its settlement and (iii) theliability can be reasonably estimated.

 

Contingent liabilities arerecognized when they will probably give rise to a future cash disbursement fortheir settlement. Contingent assets, if any, are only subject to disclosure,unless they can be definitely realized. Also, commitments are only recognizedwhen they generate a loss.

 

**q) Deferred taxes**

 

The Company recognizes deferred taxes using the asset and liabilitymethod.  Under this method deferred taxesare recognized on all temporary differences between the book and tax values ofassets and liabilities, using the enacted income tax rate at the time thefinancial statements are issued, which is the enacted rate that will be ineffect at the time the temporary differences giving rise to deferred tax assetsand liabilities are expected to be recovered or settled.

 

The Company periodically evaluates the recovery ofdeferred tax assets and, if necessary, creates a valuation allowance for thoseassets that do not have a high probability of being recovered.

 

Asset tax is recognized as adeferred income tax asset, making the appropriate evaluation of its futurerecovery.

 

F-15

----

 

**r) Deferred employee statutoryprofit-sharing**

 

Deferred employee statutory profit-sharing isrecognized only on temporary differences determined in the reconciliation ofcurrent year net income and the income base determined for employeeprofit-sharing purposes, only when there is no indication that the resultingliability or asset will not be realized in the future.

 

**s) Foreign currency balances andtransactions**

 

Foreign currency transactions are recorded atthe applicable exchange rate in effect at the transaction date. Monetary assetsand liabilities denominated in foreign currency are translated into Mexicanpesos at the applicable exchange rate in effect at the balance sheet date.Exchange fluctuations are recorded as a component of net comprehensivefinancing cost (income) in the consolidated statements of income.

 

See Note 17 for the Company’s consolidated foreigncurrency position at the end of each year and the exchange rates used totranslate foreign currency-denominated balances.

 

**t) Stock option plan**

 

In November 2007, the Company implemented a planthrough which certain of its executives and company officials receive remunerationin the form of share-based payment transactions, whereby these individualsrender services as consideration for equity instruments. Given the settlementfeature contained within the plans, the awards are treated as “Liability Awards”and compensation cost is measured by reference to the fair value of the awardsat each balance sheet date. The fair value is determined using an appropriatepricing model. See Note 16(f).

 

**u) Earnings per share**

 

Earnings per share are calculated by dividing netincome of majority interest by the weighted average number of sharesoutstanding during the year. The Company does not have any dilutive securitiesbeyond the stock options disclosed in Note 16 (f). Basic and diluted earningsper share was the same for 2007 because all options shares (979,200) areanti-dilutive.

 

**v) Comprehensive income**

 

Comprehensive income is represented by net income, theeffects of labor obligations and the effect of the translation of the financialstatements of the foreign associated company.

 

**w) Statement of incomepresentation**

 

The costs and expenses reflected in the statement ofincome are presented according to their function, since this classificationallows an adequate analysis of gross profits and operating margins. The Company’soperating income is presented because it is an important indicator of itsoverall performance and results, and includes ordinary expenses, operatingcosts and expenses. Other ordinary income is therefore excluded. Thispresentation conforms with that used for purposes of the financial statementsfor the years ended December 31, 2006 and 2005.

 

**x) Reclassifications**

 

Certain captions shown in the 2006 and 2005 financialstatements as originally issued have been reclassified for uniformity ofpresentation with the 2007 financial statements as follows:

 

·                                         Through 2006,employee profit-sharing was presented after pre-tax income. In 2007, profit-sharing costs were considered an operating expense and not a tax. Theseprovisions were applied retroactively; therefore, and according to theInterpretation of MFRS 4, *Presentation of employeeprofit-sharing in the statement of income,* the amounts 

 

F-16

----

 

related to this categoryhave been reclassified in other income, net. The reclassified balances for theyears 2006 and 2005 were Ps.36,728 and Ps.10,354, respectively.

 

·              Restricted cash shownin 2006 of Ps.37,597 was reclassified from cash and cash equivalents.

 

·              The balances related to other debtors of Ps.108,645and recoverable taxes of Ps.198,805 for 2006 were reclassified and are shown inNote 7. Formerly, these amounts were classified as part of receivables. Theamount of Ps.198,805, corresponding to refundable taxes, was also reclassifiedto prepaid expenses. Formerly, this was included in accounts receivable.

 

·              Capital leases werereclassified from bank loans payable. The balance reclassified was Ps.8,704.

 

·              The balance related to cash withheld fromsub-contractors of Ps.30,640 was reclassified from accrued expenses (shown inthe taxes payable caption in 2006) to the suppliers’ account.

 

**y) Segment reporting**

 

Segment reporting is presented in accordancewith the information prepared for the internal decision-making process. Theinformation is presented according to the type of housing on sale by theCompany.

 

**4. Cash and cash equivalents**

 
| ** **            | ** ** | **2007**      | ** **          | **2006**   | ** ** |
|-----------------------|------------|---------------|---------------------|------------|------------|
| ** **            | ** ** | ** **    | ** **          | ** ** | ** ** |
| Cash                  | ** ** | **Ps.**       | ** 118,410**   |       | Ps.        |  103,153 |   |
| Temporary investments | ** ** | **2,088,424** |                | 2,278,536  |       |
| ** **            |       | **Ps.**       | ** 2,206,834** |       | Ps.        |  2,381,689 |   |

 

Cash and cash equivalents consist basically of bankdeposits and highly liquid investments. The Company has restricted cashdeposited in different escrow accounts for various operating purposes for atotal of Ps.156,090, of which Ps.54,090 relates to a contemplated business combination (see Note 24) and Ps.102,000 andPs. 37,597 relate to restricted amounts (see Note 14) corresponding to 2007 and2006, respectively.

 

F-17

----

 

**5.Trade accounts receivable**

 

| ** **                                     | ** ** | **2007**      | ** **    | **2006**   | ** ** |
|------------------------------------------------|------------|---------------|---------------|------------|------------|
| As promoter:                                   | ** ** | ** **    | ** **    | ** ** | ** ** |
| Total incurred construction costs              | ** ** | **Ps.**       | **4,370,277** | ** ** | Ps.        | 3,230,394 |   |
| Estimated gross profit on costs incurred       | ** ** | **2,075,560** | ** **    | 1,559,162  |       |
| Unbilled revenues on developments in  progress | ** ** | **6,445,837** | ** **    | 4,789,556  |       |
| Due from customers (1)(2)                      | ** ** | **1,135,473** | ** **    | 775,385    |       |
| Services and other                             | ** ** | **60,692**    | ** **    | 53,840     |       |
| ** **                                     |       | **7,642,002** | ** **    | 5,618,781  |       |
| Allowance for doubtful accounts                | ** ** | **(89,318**   | **)**         | (73,554    | )          |
| ** **                                     |       | **7,552,684** | ** **    | 5,545,227  |       |
| Trade accounts receivable, long-term           | ** ** | **(3,426**    | **)**         | (4,141     | )          |
| ** **                                     |       | **Ps.**       | **7,549,258** | ** ** | Ps.        | 5,541,086 |   |

 

Unbilledrevenues on developments in progress**representrevenues recognized on costs incurred, in accordance with thepercentage-of-completion method, which have not yet been billed.

 

TheCompany does not believe that it has a significant concentration of creditrisk. While some of its receivables are from homebuyers, the majority are fromentities in the home finance business, whose characteristics differ from otherreceivables.

 

----

(1)**                                 **These amounts include balances due from INFONAVIT, FOVISSSTE, SOFOLES (*Sociedades Financieras de Objeto Limitado*), commercial banksand homebuyers. With the exception of commercial banks, all such catagoriesexceed 10% of accounts receivable balances as of December 31, 2007 and2006.

 

(2)                                  TheCompany participates in a program referred to as “*Programa deEntrega Anticipada de Vivienda INFONAVIT*” (formerly “Programa deLiquidez Electronica”). This program provides for factoring of INFONAVITreceivables without recourse, thereby providing for more timely collection.

 

**6. Inventories**

 

| ** **                   | ** ** | **2007**       | ** **          | **2006**   | ** ** |
|------------------------------|------------|----------------|---------------------|------------|------------|
| Land:                        | ** ** | ** **     | ** **          | ** ** | ** ** |
| Titled land                  | ** ** | **Ps.**        | ** 4,535,849** |       | Ps.        |  2,275,413 |   |
| Contracted land              | ** ** | **4,782,862**  |                | 4,300,448  |       |
| Advances to land suppliers   | ** ** | **104,007**    |                | 540,888    |       |
| ** **                   |       | **9,422,718**  |                | 7,116,749  |       |
| Land for future developments | ** ** | **(7,091,074** | **)**               | (5,180,583 | )          |
| Total land                   | ** ** | **2,331,644**  |                | 1,936,166  |       |
|                         |       |           |                |       |       |
| Other inventories:           |       |           |                |       |       |
| Construction-in-process      | ** ** | **1,128,591**  |                | 1,220,370  |       |
| Construction materials       | ** ** | **629,869**    |                | 369,200    |       |
| Advances to suppliers        | ** ** | **301,935**    |                | 686,707    |       |
| Total other inventories      | ** ** | **2,060,395**  |                | 2,276,277  |       |
|                         |       |           |                |       |       |
| Total inventories            | ** ** | **Ps.**        | ** 4,392,039** |       | Ps.        |  4,212,443 |   |

 

F-18

----

 

TheCompany’s policy is to locate and acquire land each year, classifying land currentlybeing developed and land planned to be developed within the next year as partof current assets, and classifying all remaining land as non-current assets.

 

Dueto the application of MFRS D-6 during 2007, the net comprehensive financingcost related to qualified assets for the same period was Ps.179,304, of whichPs.119,286 relates to inventories sold and subsequently was applied to cost ofsales of the same period and Ps.60,018 (Ps.43,213 net of taxes) represented anincrease in net income. The average period for the amortization of thecapitalized comprehensive financing cost is 6 months. The annual capitalizationrate is 7.6%, to determine the CFC to be capitalized.

 

TheCompany utilizes certain land trust agreements in order to obtain its supply ofland for construction purposes. As of December 31, 2007 and 2006, theCompany had recognized Ps.41,199 and Ps. 93,493 related to this inventory,which are part of the “contracted” land inventory.

 

Duringthe year ended December 31, 2007, the net comprehensive financing costcapitalized in inventories was as follows:

 

| ** **                                                            | ** ** | **Year ended  December 31, 2007** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Total accrued net  comprehensive financing cost before capitalization |       | Ps.                                              | 458,208    |   |
| Comprehensive financing cost  capitalized in inventories              |       | (179,304                                         | )          |
| Comprehensive financing cost  after capitalization                    |       | Ps.                                              | 278,904    |   |

 

**7.Prepaid expenses and other current assets**

 

| ** **                        | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|-----------------------------------|------------|-------------|-------------|------------|------------|
| ** **                        | ** ** | ** **  | ** **  | ** ** | ** ** |
| Sales commissions paid in advance | ** ** | **Ps.**     | **99,137**  |       | Ps.        | 81,759 |   |
| Sundry debtors                    | ** ** | **58,030**  |        | 108,645    |       |
| Refundable taxes                  | ** ** | **322,265** |        | 198,805    |       |
| Insurance and bond contracts      | ** ** | **6,052**   |        | 8,470      |       |
| Prepaid interest                  | ** ** | **4,870**   |        | 1,745      |       |
| ** **                        |       | **Ps.**     | **490,354** |       | Ps.        | 399,424 |   |

 

F-19

----

 

**8. Property and equipment**

 

| ** **                     | ** ** | **2007**      | ** **        | **2006**   | ** ** |
|--------------------------------|------------|---------------|-------------------|------------|------------|
| ** **                     | ** ** | ** **    | ** **        | ** ** | ** ** |
| Buildings                      | ** ** | **Ps.**       | ** 251,570** |       | Ps.        | 237,682 |   |
| Machinery and equipment        | ** ** | **954,641**   |              | 440,601    |       |
| Transportation equipment       | ** ** | **89,313**    |              | 80,140     |       |
| Air transportation equipment   | ** ** | **87,571**    |              | 39,694     |       |
| Office furniture and equipment | ** ** | **63,672**    |              | 45,012     |       |
| Computers                      | ** ** | **76,482**    |              | 39,372     |       |
| Communication equipment        | ** ** | **21,460**    |              | 15,569     |       |
| ** **                     |       | **1,544,709** |              | 898,070    |       |
| Accumulated depreciation       | ** ** | **(420,871**  | **)**             | (258,632   | )          |
| ** **                     |       | **1,123,838** |              | 639,438    |       |
| Land                           | ** ** | **31,891**    |              | 29,657     |       |
|                           |       |          |              |       |       |
| ** **                     |       | **Ps.**       | **1,155,729**     |       | Ps.        | 669,095 |   |

 

The amount of assets acquired via capitalized leasesduring the year ended December 31, 2007 was Ps.350,854. At December 31,2006, the assets acquired by capital leases were not material.

 

Depreciation expense for the years ended December 31,2007, 2006 and 2005 was Ps.196,307, Ps.130,829 and Ps.66,626, respectively.

 

**9. Other assets**

 

| ** **                                              | ** ** | **2007**   | ** **        | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|-------------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** **        | ** ** | ** ** |
| Net value of the BETA trademark                         | ** ** | **Ps.**    | ** 227,635** |       | Ps.        |  330,669 |   |
| Debt issuance costs, net                                | ** ** | **69,979** |              | 82,431     |       |
| Intangible assets from employee retirement  obligations | ** ** | **30,092** |              | 22,147     |       |
| Other                                                   | ** ** | **65,802** |              | 25,858     |       |
| Investment                                              | ** ** | **19,083** |              | 1,038      |       |
| Trade accounts receivable, long-term (see  Note 5)      | ** ** | **3,426**  |              | 4,141      |       |
| ** **                                              |       | **Ps.**    | ** 416,017** |       | Ps.        |  466,284 |   |

 

Amortizationexpense for the years ended December 31, 2007, 2006 and 2005 wasPs.105,410, Ps.114,529 and Ps.174,960, respectively. The expected amortizationof the BETA trademark and debt issuance costs for the years 2008 to 2015 is asfollows:

 

| **Year**        | ** ** | **Amortization** | ** **        |
|-----------------|------------|------------------|-------------------|
| 2008            | ** ** | **Ps.**          | **98,747**        | ** ** |
| 2009            | ** ** | **98,747**       | ** **        |
| 2010            | ** ** | **56,382**       | ** **        |
| 2011            | ** ** | **8,748**        | ** **        |
| 2012            | ** ** | **8,748**        | ** **        |
| and  thereafter | ** ** | **26,242**       | ** **        |
| ** **      |       | **Ps.**          | ** 297,614** |   |

 

F-20

----

 

**10.Long-term debt**

 

Asof December 31, 2007 and 2006, the Company’s long-term debt with bankinstitutions consists of the following:

 

| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **2007**      | ** **          | **2006**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------------|-----------|------------|
| Bond issuance (senior guaranteed notes)  with Credit Suisse First Boston and Merrill Lynch, guaranteed by PICSA,  DECANO and other subsidiary companies, for US$250 million, with a fixed  annual interest rate of 7.5%, payable on September 28, 2015. Interest is  payable semi-annually.                     | ** ** | **Ps.**       | **2,729,625**       |      | Ps.        | 2,811,481 |   |
| HSBC Mexico, S.A.  A credit line of Ps.1,081 million granted on July 1, 2005, with  semi-annual payments beginning on March 14, 2008, maturing on  September 14, 2010, bearing interest at the Mexican Interbank  Equilibrium Interest Rate (TIIE) plus 1%. The proceeds were used to purchase  BETA. | ** ** | **540,500**   |                | 560,818   |       |
| GE Capital, S.A.  Line of credit granted by GE Capital to Aerohomex, S.A. de C.V. to purchase  an executive jet for US$2.3 million on July 29, 2005, maturing on  July 29, 2010, at an interest rate of 7.4%.                                                                                              | ** ** | **13,872**    |                | 19,435    |       |
| Interest payable                                                                                                                                                                                                                                                                                                     | ** ** | **75,547**    |                | 77,613    |       |
| **Total debt**                                                                                                                                                                                                                                                                                                       | ** ** | **3,359,544** |                | 3,469,347 |       |
| Less current portion                                                                                                                                                                                                                                                                                                 | ** ** | **(260,758**  | **)**               | (91,392   | )          |
| Total long-term debt                                                                                                                                                                                                                                                                                                 | ** ** | **Ps.**       | ** 3,098,786** |      | Ps.        | 3,377,955 |   |

 

**Covenants**

 

Loancovenants require the Company and its subsidiaries to meet certain obligations.These covenants 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, and restricted paymentswhere dividends cannot be paid or capital reimbursed to stockholders’ equityunless they are made between the guarantor subsidiaries. In addition, theCompany cannot pledge any of its assets or properties to guarantee anyadditional debt.

 

Financialcovenants, derived from the loans, require the Company to maintain:

 

·                              A ratio of total stockholders’ equity to totaldebt of more than 1.0 to 1.0;

 

·                              A ratio of earningsbefore interest, taxes, depreciation and amortization (EBITDA) to short-termdebt (including the interest payable) of at least 3.0 to 1.0; and

 

·                              Operationalrestrictions on working capital.

 

Thereare also restrictions applicable to additional debt based on EBITDA levels.

 

Inthe event the Company does not comply with any of the above provisions, it willbe limited in its ability to pay dividends to its stockholders.

 

Asof December 31, 2007 and 2006, the Company was in compliance with the financialcovenants of its debt agreements.

 

***Senior guaranteed notes exchange offer***

 

In January 2006,the Company completed an Exchange Offer related to all of its Senior GuaranteedNotes. The new notes have been registered pursuant to the Securities Act of1933, as amended. Otherwise, the terms of the “Old” Senior Guaranteed Notes andthe New “Senior” Guaranteed Notes are identical. During 2006, the Companyincurred Ps.12,994 in incremental direct costs associated with the ExchangeOffer. These amounts are included with other debt issuance costs (see Note 9)and will be amortized over the remaining life of the Senior Guaranteed Notes.

 

F-21

----

 

**Debtmaturities**

 

As of December 31, 2007, long-term debt matures as follows:

 

| **Year**   | ** ** | **Amount**    | ** **          |
|------------|------------|---------------|---------------------|
| 2009       | ** ** | **Ps.**       | ** 185,211**   | ** ** |
| 2010       | ** ** | **183,951**   | ** **          |
| 2015       | ** ** | **2,729,624** | ** **          |
| ** ** |       | **Ps.**       | ** 3,098,786** |   |

 

The value of the Banking Interest Rate (“TIIE”) published in the Federal Official Gazette as of December 31,2007 and 2006 was 7.9250% and 7.3675%, respectively. The exchange rate used toconvert debt denominated in US Dollars was Ps.10.9185 and Ps.10.8385,respectively.

 

**11.  Swap payable**

 

Inorder to convert the principal of the U.S. dollar bonds to Mexican pesos, in September 2005the Company entered into two “Principal-Only Swaps” with a notional value ofUS$250 million, which entitle the Company to receive this amount in 2015 inreturn for a payment in Mexican pesos at a fixed exchange rate of Ps.10.83 perUS Dollar. As part of the derivatives structure, the Company will pay interestof 2.92% a year on the total notional amount in US Dollars, in semi-annualpayments. The transaction is an economic hedge, but because it does not meetcurrent hedge accounting requirements it was classified and recorded as atrading derivative. As of December 31, 2007 and 2006, the fair value ofthis derivative was Ps.79,098 (US$7.2 million) and Ps.227,074 (US$20.2million), respectively, which represents the estimated present value of futurecash flows to be paid by the Company. This unfavorable balance does notrepresent a current cash outlay given the structure of Principal-Only Swaps.Changes in fair value are recognized in current earnings as a component ofcomprehensive financing cost within the foreign exchange (gain) loss account.

 

**12. Leases**

 

**a) Capital leases**

 

As of December 31, 2007 there are contracts ofcapital leases of machinery and equipment for a five-year period.  Theinterest rate of the contracts denominated in pesos is TIIE plus 0.8 percentilepoints.

 

| ** **                                                                                                                            | ** ** | **2007**    | ** **        | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------------|----------|------------|
|                                                                                                                                  |       |        |              |     |       |
| Financial leases provided by  Bancomer in June 2007, with maturity in January 2013 and an  interest rate at TIIE plus 0.8%. | ** ** | **Ps.**     | ** 350,331** |     | Ps.        |  — |   |
| Other                                                                                                                                 | ** ** | **3,222**   |              | 8,704    |       |
| Interest payable                                                                                                                      | ** ** | **3,491**   |              | —   |       |
|                                                                                                                                  | ** ** | ** **  |              |     |       |
| Total capital leases                                                                                                                  | ** ** | **357,044** |              | 8,704    |       |
| Current portion of long-term  capital leases                                                                                          | ** ** | **(68,187** | **)**             | (8,704   | )          |
| Total long-term capital leases                                                                                                        | ** ** | **Ps.**     | ** 288,857** |     | Ps.        |  — |   |

 

Minimum compulsory payments relating to thesecontracts as of December 31, 2007, excluding interest payable monthly, areas follows:

 

F-22

----

 

| **Year** | ** ** | **Total**  | ** **        |
|----------|------------|------------|-------------------|
| 2008     | ** ** | **Ps.**    | ** 68,187**  | ** ** |
| 2009     | ** ** | **67,307** | ** **        |
| 2010     | ** ** | **73,299** | ** **        |
| 2011     | ** ** | **79,825** | ** **        |
| 2012     | ** ** | **67,913** | ** **        |
| 2013     | ** ** | **513**    | ** **        |
| Total    | ** ** | **Ps.**    | ** 357,044** | ** ** |

 

**Covenants**

 

Thefinancial covenants of the leases require the Company and its subsidiaries tomaintain:

 

·                  A liquidity ratio ofcurrent assets to short-term liabilities no less than 1.50 to 1.0;

 

·                  A financing ratio oftotal liabilities to stockholders’ equity no greater than 1.70 to 1.0; and

 

·                  A relation ofoperational income to net comprehensive financing cost at a minimum level of2.0.

 

Asof December 31, 2007, the Company was in compliance with these financialcovenants.

 

**b) Operating leases**

 

As of December 31, 2007, the Company had enteredinto agreements for the operating lease of machinery and equipment for a periodof five to six years. The minimum compulsory payments relating to theseagreements are as follows:

 

| 2008  | ** ** | **Ps.**    | ** 51,703**  | ** ** |
|-------|------------|------------|-------------------|------------|
| 2009  | ** ** | **51,602** | ** **        |
| 2010  | ** ** | **51,466** | ** **        |
| 2011  | ** ** | **45,090** | ** **        |
| 2012  | ** ** | **30,795** | ** **        |
| 2013  | ** ** | **17,251** | ** **        |
| Total | ** ** | **Ps.**    | ** 247,907** | ** ** |

 

Operating leases expensed for the years ended December 31,2007, 2006 and 2005 amounted to Ps.33,694, Ps.16,254 and Ps.11,663,respectively.

 

**13. Employee retirement obligations**

 

The Company has a plan for covering seniority premiumswhich consists of a lump sum payment of 12 days’ wages for each year worked,calculated using the most recent salary, not to exceed twice the legal minimumwage established by law. Since 2005, the Company has recognized a liability forpersonal severance pay. The related liability and annual cost of such benefitsare calculated by an independent actuary on the basis of formulas defined inthe plans using the projected unit credit method.

 

As of December 31, 2007 and 2006 and for theyears ended 2007, 2006 and 2005, the present values of these obligations andthe rates used for the calculations are as follows:

 

F-23

----

 

| ** **                       | ** ** | **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 |   |

 

| ** **                       | ** ** | **For the year ended December 31, 2005** | ** **  |
|----------------------------------|------------|------------------------------------------------------------------------|-------------|
| ** **                       | ** ** | **Severance pay**                                                 | ** **  | **Seniority  premium** | ** ** | **Total** | ** ** |
| Integration of Net Period  Cost: |       |                                                                   |        |   |   |   |   |
| Labor cost                       |       | Ps.                                                                    |  3,381 |   | Ps. | 306 |   | Ps. | 3,687 |   |
| Financial cost                   |       | 1,377                                                                  |        | 47 |   | 1,424 |   |
| Transition liability             |       | 2,725                                                                  |        | 35 |   | 2,760 |   |
| Inflation adjustment             |       | 247                                                                    |        | 449 |   | 696 |   |
| Net period cost                  |       | Ps.                                                                    |  7,730 |   | Ps. | 837 |   | Ps. | 8,567 |   |

 

| ** **                       | ** ** | **Balances as of December 31, 2007** | ** **        |
|----------------------------------|------------|---------------------------------------------------------------|-------------------|
| ** **                       | ** ** | **Severance pay**                                        | ** **        | **Seniority  premium** | ** ** | **Total** | ** ** |
| Projected benefit obligations    | ** ** | **Ps.**                                                       | ** 112,326** | ** ** | **Ps.** | **3,851** | ** ** | **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.**                                                       | ** 43,565**  | ** ** | **Ps.** | **1,343** | ** ** | **Ps.** | ** 44,908** | ** ** |
| ** **                       | ** ** | ** **                                                    | ** **        | ** ** | ** ** | ** ** | ** ** |
| Accumulated benefit  obligations | ** ** | **Ps.**                                                       | **76,181**        | ** ** | **Ps.** | **2,916** | ** ** | **Ps.** | **79,097** | ** ** |

 

F-24

----

 

| ** **                      | ** ** | **Balances as of December 31, 2006** | ** **   |
|---------------------------------|------------|---------------------------------------------------------------|--------------|
| ** **                      | ** ** | **Severance pa****y**                                    | ** **   | **Seniori****ty  premium** | ** ** | **Total** | ** ** |
| Projected benefit obligations   |       | Ps.                                                           | 55,469       |   | Ps. |  2,685 |   | Ps. | 58,154 |   |
| Transition liability            |       | 21,243                                                        |         | 904 |   | 22,147 |   |
| Non-recognized actuarial losses |       | 18,724                                                        |         | 401 |   | 19,125 |   |
|                            |       | Ps.                                                           |  15,502 |   | Ps. |  1,380 |   | Ps. |  16,882 |   |
|                            |       |                                                          |         |   |   |   |   |
| Accumulated benefit obligations |       | Ps.                                                           | 49,590       |   | Ps. |  2,685 |   | Ps. |  52,275 |   |

 

During 2007,the Company amended its plan resulting in the admission of additional employeeparticipants who have received credit for prior service costs in the amount ofPs. 34,441 as of December 31, 2007.

 

The transition liability will be amortized in a10-year to 22-year period, which is the average labor life remaining for theemployees expected to receive the benefits.

 

The rates used in the actuarial analysis are asfollows:

** **
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discounts of labor obligations | ** ** | **5.25** | **%**      | 5.50     | %          | 5.50     | %          |
| Salary  increases              | ** ** | **1.25** | **%**      | 1.50     | %          | 1.50     | %          |
| Inflation  rates               | ** ** | **4.00** | **%**      | 3.75     | %          | 3.30     | %          |

 

As of December 31, 2007 and 2006, theadditional liability was Ps.34,189 and Ps.35,393, respectively; the intangibleasset which was included as part of other assets, as of December 31, 2007and 2006 was Ps.30,092 and Ps.22,147, respectively. The accumulated effect instockholders’ equity as of December 31, 2007 and 2006 was Ps.4,577 andPs.9,626, respectively.

 

**14. Trade accounts payable**

 

| ** **               | ** ** | **2007**    | ** **    | **2006**   | ** ** |
|--------------------------|------------|-------------|---------------|------------|------------|
| ** **               | ** ** | ** **  | ** **    | ** ** | ** ** |
| Suppliers                | ** ** | **Ps.**     | **2,711,927** |       | Ps.        | 1,614,379 |   |
| Revolving credit lines * | ** ** | **557,369** |          | 404,102    |       |
| Other creditors          | ** ** | **186,973** |          | 116,657    |       |
| Total accounts payable   | ** ** | **Ps.**     | **3,456,269** |       | Ps.        | 2,135,138 |   |

 

----

* The Company has established atrust called Fideicomiso AAA-Homex which allows its suppliers to obtainfinancing from various financial institutions, in part through a factoringprogram sponsored by Nacional Financiera, S.N.C. (“NAFIN”).  Through this program, Nafinsa provided acredit line to Fideicomiso AAA-Homex for Ps.1,000,000 with a guarantee fund of Ps.102,000 andPs.37,597, respectively (investment account), as of December 31, 2007 and2006.  Fideicomiso AAA-Homex uses thisline of credit to finance a portion of the accounts receivable of the Company’ssuppliers. As mentioned in Note 2, Fideicomiso AAA-Homex is a consolidatedsubsidiary of the Company.  As ofDecember 31, 2007 and 2006, this factoring program included approximately2,873 self-financed suppliers.

 

F-25

----

 

 

**15.Land suppliers**

 

| ** ** | ** ** | **2007** | ** **        | **2006** | ** ** |
|------------|------------|----------|-------------------|----------|------------|
| Short-term | ** ** | **Ps.**  | **2,754,906**     |     | Ps.        | 3,501,895 |   |
| Long-term  | ** ** | **Ps.**  | ** 992,801** |     | Ps.        |  — |   |

 

Landsuppliers represent the outstanding balance payable to our suppliers of landcurrently in use or estimated to be developed. Long-term land suppliersrepresent payables with maturities of over 12 months.

 

**16.****                    ****Stockholders’equity**

 

a)                                     Common stock issuedat par value (historical Pesos) as of December 31, 2007 and 2006 is asfollows:

 

| ** **              | ** ** | **Number of Shares** | ** ** | **Amount**  | ** ** |
|-------------------------|------------|--------------------------------|------------|-------------|------------|
| ** **              | ** ** | **2007**                       | ** ** | **2006**    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Fixed capital:          |       |                           |       |        |       |   |   |   |   |
|   Sole series | ** ** | **335,869,550**                |       | 335,869,550 | ** ** | **Ps.** | **  425,443** |   | Ps. |   425,443 |   |
|                         |            |                                |            |             |            |  |  |  |  |  |  |

 

b)                                     Atan extraordinary meeting held on June 30, 2005, the stockholders approved,among other resolutions, an increase in fixed capital derived from the mergerwith Controladora Casas Beta, S.A. de C.V. (see Note 2), for a total of22,013,060 common nominative single series shares at no par value, which weredelivered to stockholders of the merged company as released stock in exchangefor the shares they owned in the merged company, which were canceled followingthe merger at a ratio of 134.7807 shares of the Company for each share of themerged company.  Accordingly, capitalstock increased by Ps.258,808, at par value, with a share subscription premium ofPs.718,792 at par value, equivalent to Ps.285,762 and Ps.793,655 constantMexican pesos, respectively.

 

c)                                      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% of capital stock atpar value (historical pesos). The legal reserve may be capitalized but may notbe distributed unless the entity is dissolved. The legal reserve must bereplenished if it is reduced for any reason. The legal reserve as of December 31,2007 and 2006 amounted to Ps.105,602 and is included as part of retainedearnings.

 

d)                                    Thebalances of the stockholders’ equitytax account as of December 31, 2007 and 2006 are:

 

| ** **                  | ** ** | **2007** | ** **          | **2006** | ** ** |
|-----------------------------|------------|----------|---------------------|----------|------------|
| Contributed capital account | ** ** | **Ps.**  | ** 3,670,265** |     | Ps.        |  3,670,265 |   |
|                             |            |          |                     |          |            |  |  |

 

Earningsdistributed in excess of the balances of the Net Tax Profit Account (CUFIN)will be subject to income tax payable by the companies at the rate in force. AtDecember 31, 2007, the Company’s CUFIN balance is Ps.528,866.

 

e)                                      OnFebruary 27, 2007, the Board of Directors authorized a stock option planas an incentive to key executives of the Company (see paragraph f, below).

 

f)                                        Thestock option plan consists of 999,200 approved stock options of the Company,the shares for which are held in a trust especially created for this purpose. Atotal of 979,200 stock options were granted to the key executives. During 2007these grants were made at an exercise price of Ps.98.08, which was in excess ofthe shares’ underlying fair value at the grant date.

 

The executives have the right to exercise one-third oftheir total options granted per year. The right to exercise the option expiresafter one year from the grant date or, in some cases, after 180 days from thedeparture of the executive from the Company.

 

F-26

----

 

Thefollowing information is an analysis of stock option activity during the year:

 

| ** **                                             | ** ** | **Number of  stock options** | ** ** | **Weighted  average price of  year (in pesos)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------------------|------------|
| Shares repurchased for future  grant:                  |       | 999,200                                |       | 98.08                                                               |       |
| Granted                                                |       | 979,200                                |       | 98.08                                                               |       |
| Exercised                                              |       | —                                 |       | —                                                              |       |
| Cancelled                                              |       | —                                 |       | —                                                              |       |
| Stock options pending grant at  December 31, 2007 |       | 20,000                                 |       | 98.08                                                               |       |

 

The average fair value of all of the stock optionsgranted was Ps.18.42 per stock option as of December 31, 2007.

 

Keyassumptions used to calculate fair value are as follows:

 

 

| Expected dividend yield            |   | 0                    | %      |
|------------------------------------|--------|----------------------|--------|
| Expected stock price volatility    |   | 21.5                 | %      |
| Risk-free interest rate            |   | 8.1                  | %      |
| Expected life of options in  years |   | 2.1 years            |   |
| Model used                         |   | Black-Scholes-Merton |   |

 

Totalcompensation cost related to non-vested stock option awards not yet recognizedwas Ps.18,019 at December 31, 2007.

 

g)                                     On September 26,2007, Promotora Residencial Huehuetoca, S.A. de C.V. (Huehuetoca) declareddividends to its stockholders which included the Company and minorityshareholders. Dividends paid to minority shareholders were Ps.9,133 and havebeen reflected as a reduction of minority stockholders’ equity in theaccompanying consolidated financial statements.

 

**17. Foreign currency balances and transactions**

 

a)                 Asof December 31, 2007 and 2006, the foreign currency monetary position isas follows:

 

| ** **                       | ** ** | **2007**     | ** **           | **2006**   | ** ** |
|----------------------------------|------------|--------------|----------------------|------------|------------|
| **Thousands of U.S. dollars:**   |       |         |                 |       |       |
| Monetary assets                  | ** ** | **US$**      | **5,038**            | ** ** | US$        | 19 |   |
| Monetary liabilities             | ** ** | **(372,284** | **)**                | (310,953   | )          |
|                             |       |         | ** **           |       |       |
| Monetary liability position, net | ** ** | **US$**      | **(367,246**         | **)**      | US$        | (310,934 | ) |
|                             |       |         | ** **           |       |       |
| Equivalent in Mexican pesos      | ** ** | **Ps.**      | ** (4,009,775** | **)**      | Ps.        |  (3,370,058 | ) |
|                                  |            |              |                      |            |            |  |  |  |

 

b)                                          Non-monetaryassets of foreign origin as of December 31, 2007 are as follows:

 

| ** **                   | ** ** | **Currency**   | ** ** | **Foreign currency  balance (in thousands)** | ** ** | **Equivalent in  Mexican Pesos** | ** ** |
|------------------------------|------------|----------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| Air transportation equipment |       | U.S. dollars   |       | $                                                           | 8,020      |                                       | Ps.        |  87,571 |   |
| Investment in Egypt          |       | Egyptian Pound |       | EGP                                                         | 8,803      |                                       | Ps.        |  17,384 |   |

 

F-27

----

 

c)                                      Theexchange rates in effect at the dates of the consolidated balance sheets andissuance of the consolidated financial statements were as follows:

 

| ** **  | ** ** | **December 31,** | ** **        | **April 17,** | ** ** |
|-------------|------------|-----------------------|-------------------|---------------|------------|
| ** **  | ** ** | **2007**              | ** **        | **2006**      | ** ** | **2005** | ** ** | **2008** | ** ** |
| U.S. dollar | ** ** | **Ps.**               | ** 10.9185** |          | Ps.        |  10.8385 |   | Ps. | 10.6255 |   | Ps. |  10.4900 |   |
|             |            |                       |                   |               |            |  |  |  |  |  |  |  |  |

 

**18. Transactions and balances with related parties**

 

a)**                 **The following agreements have been entered intowith related parties:

 

The Company was party to an administrative serviceagreement with two entities (*Serviasesorías andAdministradores de la Empresa en Equipo, S.C.*), whose principalowners are officers of the Company, for which PICSA paid a 5% fee based ontotal expenses. The amounts paid under this agreement totaled Ps.55,389,Ps.88,232 and Ps.51,973 in 2007, 2006 and 2005, respectively. As of April 1,2007, these companies entered into a liquidation process and the employees weretransferred to subsidiaries of the Company.

 

b)                                    An analysis ofbalances due from/to related parties at December 31, 2007 and 2006 is asfollows:

 

| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Due from:                                          |       |     |       |     |       |
| Administradores de la Empresa en Equipo,  S.C. (1) | ** ** | **Ps.**  | **3,211**  |     | Ps.        | 652 |   |
| ** **                                         |       | **Ps.**  | **3,211**  |     | Ps.        | 652 |   |
|                                               |       |     |       |     |       |
| Due to:                                            |       |     |       |     |       |
| Serviasesorías (2)                            | ** ** | **Ps.**  | **104**    |     | Ps.        | 5,252 |   |
| ** **                                         |       | **Ps.**  | **104**    |     | Ps.        | 5,252 |   |

 

----

(1)          These balances are acomponent of the Company’s accounts receivable due from customers.

(2)          These balances are acomponent of the supplier 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 Gutiérrez, collectivelyowned a 29.4% ownership interest in Hipotecaria Credito y Casa, S.A. de C.V, orCredito y Casa, the principal business of which is providing mortgage financingand bridge loan financing.  The Companyestimates that in 2007 and 2006 0.1% of the mortgages obtained by homebuyerswere provided by Hipotecaria Credito y Casa, S.A. de C.V.

 

Eustaquio de Nicolás Gutiérrez and Jose Ignaciode Nicolás Gutiérrez are both members of the de Nicolás family, whichcollectively owns 40.0% of the Company’s share capital. In the past, Credito yCasa has provided bridge loan financing to the Company and mortgages underSHF-sponsored programs to the Company’s customers. During 2005, 2006 and 2007,Credito y Casa provided mortgages with respect to some of the homes sold by theCompany.

 

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.

 

As of December 31, 2005 there were noamounts outstanding in loans or financing from Credito y Casa.

 

F-28

----

 

***Crédito Inmobiliario, S.A. deC.V.***

 

EIP acquired a 24.64% interest in this sofol onDecember 1, 2003. Also on December 1, 2003, Credito Inmobiliario,S.A. de C.V., or Credito Inmobiliario, acquired the entirety of the loanportfolio of Terras Hipotecaria, S.A. de C.V., or Terras Hipotecaria. Prior tothis acquisition, Terras Hipotecaria provided construction financing to us viabridge loans and mortgage financing to our customers via SHF-sponsoredprograms.

 

As of December 31, 2007 and 2006, noamounts were outstanding under these lines of credit. On December 9, 2005,EIP sold its 24.64% interest in Credito Inmobiliario to a private investor.

 

d)                                    The terms andconditions among related parties are as follows:

 

The balances receivable fromrelated parties are considered recoverable. For the years ended December 31,2007 and 2006, there is no uncollectible expense for related party receivables.

 

e)                                     Compensationpaid to the Company’s key managerial personnel or relevant directors is asfollows:

 

| ** **                            | ** ** | **2007**   | ** **  | **2006** | ** ** | **2005**      | ** ** |
|---------------------------------------|------------|------------|-------------|----------|------------|---------------|------------|
|                                  |       |       |        |     |       |          |       |
| Short- and long-term direct  benefits | ** ** | **Ps.**    | **140,326** |     | Ps.        |  106,713 |       | Ps. |  65,629 |   |
| Termination benefits                  | ** ** | **40,781** |        | —   |       | —        |       |
| ** **                            |       | **Ps.**    | **181,107** |     | Ps.        |  106,713 |       | Ps. |  65,629 |   |

 

On February 27, 2007, the Board of Directors authorized a stockoption plan as an incentive to key executives of the Company. The stock optionplan consists of 999,200 approved stock options of the Company, the shares forwhich are held in a trust especially created for this purpose. A total of 979,200stock options were granted to the key executives. During 2007 these grants weremade at an exercise price of Ps.98.08 which was the excess of the shares’underlying fair value at the grant date.

 

The executives have the right to exercise one-third oftheir total options granted per year. The right to exercise the option expiresafter three years from the grant date or, in some cases, after 180 days fromthe departure of the executive from the Company.

 

No post-retirement benefits were granted in the year.

 

**19. Segment reporting**

 

Subsequentto the hiring of a new Chief Operating Decision Maker (CODM) in late 2006, theCompany began to generate separate reports by its affordable entry-level andmiddle-income operations, and therefore began reporting segment information inits 2006 financial statements.  Prior to 2006, such reports were notgenerated. The following segment reporting information is presented accordingto the information used by management for decision-making purposes. The Companysegregates the financial information by segments (affordable entry-level andmiddle-income) considering the operational and organizational structure of thebusiness (which was established by house models as explained in the nextparagraph), according to the provisions of MFRS B-5, *Segmentreporting*.

 

**Generaldescription of the products or services**

 

Mexico’sdeveloper-built housing industry is divided into three segments according tocost:  affordable entry-level, middle-income and residential. The pricesof the affordable entry-level segment range between Ps.180 and Ps.500; those ofthe middle-income segment are between Ps.500 and Ps. 1,764 and those of the residentialsegment are above Ps.1,764. The focus is to provide affordable entry-level andmiddle-income housing for our customers. Therefore, the operating segments that will be presented in detail arethe affordable entry-level and the middle-income segments, in conformity withthe guidelines of Bulletin B-5.

 

Affordableentry-level developments range in size from 500 to 20,000 homes and aredeveloped in stages typically comprising 300 homes each. During 2007, 2006 and2005, affordable entry-level homes had an average price of 

 

F-29

----

 

approximately Ps.260,Ps.243 and Ps.234, respectively. A typical affordable entry-level home consistsof a kitchen, living/dining area, one to three bedrooms, and one bathroom.

 

Middle-incomedevelopments range in size from 400 to 2,000 homes and are developed in stagestypically comprising 200 homes each. During 2007, 2006 and 2005, middle-incomehomes had an average price of approximately Ps.781, Ps.572 and Ps.551,respectively. A typical middle-income home consists of a kitchen, dining room,living room, two or three bedrooms, and two bathrooms.

 

The following table shows the operating results ofeach segment identified as of December 31, 2007, 2006 and 2005:

 

| **Year ending December  31, 2007** | ** ** | **Affordable  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** | ** ** | **Affordable  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                     |       | 192,684                     |             | 52,674            |       | 245,358          |       |
|                                                   |            |                             |                  |                   |            |                  |            |  |  |  |

 

| **Year ending December  31, 2005** | ** ** | **Affordable****entry-level** | ** **      | **Middle-income** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|-------------------------------|-----------------|-------------------|------------|------------------|------------|
|   Revenues                              |       | Ps.                           |  7,195,709 |              | Ps.        |  2,020,334  |       | Ps. |  9,216,043 |   |
| Income from operations                            |       | 1,502,884                     |            | 381,427           |       | 1,884,311        |       |
| Depreciation and amortization                     |       | 192,683                       |            | 48,903            |       | 241,586          |       |
|                                                   |            |                               |                 |                   |            |                  |            |  |  |  |

 

Theincome from operations in the tables above were calculated as the total revenuefrom each segment, less allocated total consolidated operating costs andexpenses. The allocation of total consolidated operating costs and expenses intothe segments was based on the percentage that the sales in each segmentrepresent of the total consolidated sales. Depreciation and amortizationexpense is allocated to each segment using the same basis as operating costsand expenses.

 

TheCompany does not segregate its total assets byoperating segment.

 

**20. Operating expenses**

 

| ** **                             | ** ** | **2007**    | ** **        | **2006** | ** ** | **2005**      | ** ** |
|----------------------------------------|------------|-------------|-------------------|----------|------------|---------------|------------|
| Administrative                         | ** ** | **Ps.**     | ** 855,687** |     | Ps.        |  595,234 |       | Ps. |  396,196 |   |
| Selling                                | ** ** | **849,784** |              | 669,436  |       | 467,816       |       |
| Amortization expense of BETA trademark | ** ** | **92,958**  |              | 94,477   |       | 49,153        |       |
| ** **                             |       | **Ps.**     | **1,798,429**     |     | Ps.        | 1,359,147     |       | Ps. |  913,165 |   |

 

F-30

----

 

The table below shows the most significant operatingexpenses:

 

| ** **      | ** ** | **2007**   | ** **        | **2006** | ** ** | **2005**      | ** ** |
|-----------------|------------|------------|-------------------|----------|------------|---------------|------------|
| Salaries        | ** ** | **Ps.**    | ** 439,113** |     | Ps.        |  285,947 |       | Ps. |  154,465 |   |
| Office expenses | ** ** | **70,761** |              | 52,048   |       | 29,048        |       |
| Publicity       | ** ** | **31,997** |              | 29,949   |       | 21,377        |       |
|                 |            |            |                   |          |            |               |            |  |  |  |

 

**21. Other income, net**

 

| ** **            | ** ** | **2007**     | ** **  | **2006** | ** ** | **2005**     | ** ** |
|-----------------------|------------|--------------|-------------|----------|------------|--------------|------------|
| Recovery of taxes (1) | ** ** | **Ps.**      | **394,510** |     | Ps.        |  — |       | Ps. |  — |   |
| Profit-sharing        | ** ** | **(30,684**  | **)**       | (36,728  | )          | (10,354      | )          |
| Other income, net (2) | ** ** | **(154,603** | **)**       | 47,732   |       | 25,310       |       |
| ** **            |       | **Ps.**      | **209,223** |     | Ps.        |  11,004 |       | Ps. |  14,956 |   |

 

----

(1)                                  During2007, the Company recovered from tax authorities value-added tax related to theyears 2006, 2005 and 2004.

 

(2)                                  Includesa Ps. 65,917 expense recorded in 2007 related to the final outcome oflitigation between the Company and BETA’s founders.

 

**22. Interest expense**

 

| ** **                                           | ** ** | **2007**    | ** **        | **2006** | ** ** | **2005**      | ** ** |
|------------------------------------------------------|------------|-------------|-------------------|----------|------------|---------------|------------|
| Interest expense related to senior  guaranteed notes | ** ** | **Ps.**     | ** 141,532** |     | Ps.        |  328,573 |       | Ps. |  81,052 |   |
| Other interest expense                               | ** ** | **86,850**  |              | 246,285  |       | 304,039       |       |
| Commissions and financing costs*                     | ** ** | **116,546** |              | 99,721   |       | 67,418        |       |
| ** **                                           |       | **Ps.**     | ** 344,928** |     | Ps.        |  674,579 |       | Ps. |  452,509 |   |

 

----

*******                                       **Includesthe commissions paid by the Company to INFONAVIT and Registro Unico de Vivienda(RUV) when obtaining approval of individual financing for its customers. Thecommissions facilitate home sales and cash inflows recovery, so the Companyconsiders these commissions as part of the financing costs. The balances for2007, 2006 and 2005 were Ps.65,585, Ps.51,756 and Ps.32,495, respectively.

 

As disclosed in Note 3a., during 2007 the Companyadopted the provisions of MFRS D-6, resulting in the capitalization of aportion of its net financing cost. Because MFRS D-6 was adopted prospectively,2007 interest expense is not comparable to amounts presented for 2006 and 2005.

 

**23. Income tax, asset tax and**FlatRate Business Tax (FRBT)**

 

In accordance with Mexican taxlaw, the Company is subject to income tax (ISR) and asset tax (IMPAC). The ISRis 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) theISR rate was reduced to 30% in 2005 and was further reduced to 29% in 2006 and28% in 2007 and thereafter (the rate in 2004 was 33%); (b) for income taxpurposes, cost of sales is deducted instead of inventory purchases and relatedconversion costs; (c) taxpayershad the ability to elect, in 2005, to ratably increase taxable income over aperiod from 4 to 12 years by the tax basis of inventories as of December 31,2004 determined in conformity with the respective tax rules; when electing toamortize the tax basis of inventories into taxable income, any remaining taxbalance of inventories that had not been deducted and any unamortized tax losscarryforwards were deducted from the tax basis of the December 31, 2004inventory balance; as a consequence, cost of sales of such inventories werededucted; (d) as of 2006,employee statutory 

 

F-31

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profit-sharing paidwill be fully deductible, and (e) bank liabilities and liabilities withforeign entities are included to determine the IMPAC taxable base.

 

Until 2006, IMPAC was calculatedby applying 1.8% on the net average of the majority of restated assets lesscertain liabilities. As of 2007, the rate decreased to 1.25% and the deductionof payables was eliminated; the IMPAC is payable only to the extent that itexceeds ISR payable for the same period. Any required payment of IMPAC iscreditable against the excess of ISR over IMPAC of the following 10 years.

 

TheCompany files ISR and IMPAC tax returns on an individual entity basis and therelated tax results are combined in the accompanying consolidated financialstatements.

 

On October 1,2007, the new Flat Rate Business Tax (“FRBT”) was approved. Thistax is mandatory from January 1, 2008 and replaces the IMPAC tax laws.

 

The FRBT of the period is calculated applying the rate of 17.5% (16.5% for 2008and 17% for 2009) based on income determined by cash flows less authorizedcredits.

 

Thecredits for the FRBT are mainly composed of unamortized negative FRBT base, salaries and social security contributions, and deductions fromassets such as inventories and fixed assets, during the initial transitionperiod.

 

Thepayment of the FRBT is required only to the extent that it exceedsthe ISR for the same period.  The ISRpaid during the period will reduce the total FRBT payable for the sameperiod.

 

Whenthe deductions exceed the accumulated income (negative FRBT), no FRBT is levied. The amount of the negative FRBT multiplied by theapplicable rate results in an FRBT credit, which can beoffset against the ISR generated in the same period or against the FRBT payable, if any, within the next 10 years.

 

Basedon projected tax calculations it is estimated that in the future the Companywill be subject to the payment of the ISR only.

 

a)                                     Asof December 31, 2007, 2006 and 2005 the ISR consisted of the following:

 

| ** **                                             | ** ** | **2007**    | ** **        | **2006** | ** ** | **2005**      | ** ** |
|--------------------------------------------------------|------------|-------------|-------------------|----------|------------|---------------|------------|
| ISR:                                                   |       |        |              |     |       |          |       |
| Current                                                | ** ** | **Ps.**     | ** 132,873** |     | Ps.        |  143,304 |       | Ps. |  194,157 |   |
| Deferred                                               | ** ** | **818,407** |              | 526,539  |       | 278,614       |       |
| Effect of reduction in statutory rate on  deferred ISR | ** ** | **—**  |              | —   |       | (13,869       | )          |
| ** **                                             |       | **Ps.**     | ** 951,280** |     | Ps.        |  669,843 |       | Ps. |  458,902 |   |

 

F-32

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To determine deferred ISRas of December 31, 2007 and 2006, the Company applied the different taxrates that will be in effect beginning in 2008 and 2007, respectively, totemporary differences according to their estimated dates of reversal. Theresult derived from applying the different tax rates is shown in the income taxprovision table above and in the rate reconciliation table below under thecaption “Effect of reduction in statutory rate on deferred ISR.” In addition,in accordance with tax regulations in effect as of 2005, certain subsidiarieselected to amortize the tax inventory of Ps.415,208 at December 31, 2004into taxable income over an eight-year period beginning in 2005, based oninventory turnover. Accordingly, the initial effect of the new regulation of nolonger deducting inventory purchases was deferred.

 

b)                                    Thereconciliation of the statutory and effective ISR rates expressed as apercentage of income before the ISR is:

 

| ** **                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                             | ** ** | **%**      | ** ** | **%**    | ** ** | **%**    | ** ** |
| Statutory rate                                         | ** ** | **28**     |       | 29       |       | 30       |       |
| Add (deduct) effect of permanent  differences; mainly: |       |       |       |     |       |     |       |
| Non-deductible expenses                                | ** ** | **1**      |       | 1        |       | 1        |       |
| Difference between book and tax inflation  effects     | ** ** | **2**      |       | 3        |       | 3        |       |
| Recovered value-added tax                              | ** ** | **(2**     | **)**      | —   |       | —   |       |
| Effect of reduction in statutory rate on  deferred ISR | ** ** | **—** |       | (2       | )          | (2       | )          |
| Effective tax rate                                     | ** ** | **29**     |       | 31       |       | 32       |       |

 

c)                                     AtDecember 31, 2007 and 2006 the main items comprising the asset (liability)balance of deferred ISR are:

 
| ** **                                     | ** ** | **2007**       | ** **           | **2006**   | ** ** |
|------------------------------------------------|------------|----------------|----------------------|------------|------------|
| Deferred ISR asset:                            |       |           |                 |       |       |
| Effect of tax loss carryforwards               | ** ** | **Ps.**        | ** 765,563**    |       | Ps.        |  409,713 |   |
| Construction-in-process                        | ** ** | **771,010**    |                 | 437,624    |       |
| Derivative financial instruments               | ** ** | **22,148**     |                 | 63,580     |       |
| Labor obligations                              | ** ** | **9,595**      |                 | 8,436      |       |
| Allowance for doubtful accounts                | ** ** | **26,246**     |                 | 17,471     |       |
| Provisions                                     | ** ** | **82,599**     |                 | 31,568     |       |
| PTU liability incurred                         | ** ** | **9,335**      |                 | 12,593     |       |
| Asset tax recoverable                          | ** ** | **11,122**     |                 | 7,014      |       |
| Deferred ISR asset                             | ** ** | **1,697,618**  |                 | 987,999    |       |
|                                           |       |           |                 |       |       |
| Deferred ISR liability:                        |       |           |                 |       |       |
| Unbilled revenues on developments in  progress | ** ** | **(1,694,264** | **)**                | (1,279,401 | )          |
| Inventories                                    | ** ** | **(2,503,206** | **)**                | (1,511,047 | )          |
| Property and equipment                         | ** ** | **(121,797**   | **)**                | (60,096    | )          |
| Other assets                                   | ** ** | **(39,974**    | **)**                | (53,180    | )          |
| BETA trademark                                 | ** ** | **(63,738**    | **)**                | (95,893    | )          |
| Debt issuance costs                            | ** ** | **(19,594**    | **)**                | (23,055    | )          |
| Prepaid expenses                               | ** ** | **(3,232**     | **)**                | (4,872     | )          |
| Taxable inventory (1)                          | ** ** | **(93,708**    | **)**                | (62,172    | )          |
| Deferred ISR liability                         | ** ** | **(4,539,513** | **)**                | (3,089,716 | )          |
| Total deferred liability                       | ** ** | **Ps.**        | ** (2,841,895** | **)**      | Ps.        |  (2,101,717 | ) |

 

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(1)                                 In conformity withthe Mexican Income Tax Law (MITLA) in force through December 31, 2004, thecost of sales was considered as a non-deductible expense and inventorypurchases and production costs were considered as deductible items. This taxtreatment in the MITLA gave rise to a temporary difference because of thedifference in 

 

F-33

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thebook value of inventories and their corresponding tax value. Effective January 1,2005, the MITLA considers cost of sales as a deductible item instead ofinventory purchases and production costs. The MITLA established transition rules tobe followed to include the December 31, 2004 inventory balance intotaxable 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.93,708 as of December 31, 2007. This taxable inventoryrelates to the inventory item and tax law change described above as it is thesource of income on which the Company did not pay taxes.

 

d)                                     As of December 31,2007, the tax loss carryforwards expiring in the following 10 years amounted toPs.2,734,154.

 

i.                  The asset tax, whichis a minimum income tax, is payable based on 1.25% of the average value of mostassets net of certain liabilities. The balances as of December 31, 2007and 2006 of the asset tax were Ps.11,122 and Ps.7,014, respectively.

 

ii.               The tax 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, 2007 andexpiration dates are:

 

| **Year of expiration** | ** ** | **Tax loss  carryforwards** | ** **          | **Recoverable  IMPAC** | ** ** |
|----------------------------------|------------|----------------------------------|---------------------|------------------------|------------|
| 2012                             | ** ** | **Ps.**                          | ** 7,582**     |                   | Ps.        |  682 |   |
| 2013                             | ** ** | **124,110**                      |                | 1,167                  |       |
| 2014                             | ** ** | **319,065**                      |                | 2,172                  |       |
| 2015                             | ** ** | **12,686**                       |                | 1,545                  |       |
| 2016                             | ** ** | **310,187**                      |                | 1,458                  |       |
| 2017                             | ** ** | **1,960,524**                    |                | 4,098                  |       |
| ** **                       | ** ** | **Ps.**                          | ** 2,734,154** |                   | Ps.        |  11,122 |   |

 

e)                                     The Federaltax authority has the right to perform reviews of the taxes paid by Mexicancompanies for a period of five years; therefore, tax years beginning with 2002are subject to possible review.

 

f)                                       The Company does nothave any unrecognized tax benefits as of December 31, 2007.

 

**24.Subsequent events**

 

At December 31,2007, the Company had restricted cash of Ps.54,090 deposited in a trust as acondition of an acquisition transaction. On February 15, 2008, the Companydecided not to pursue this acquisition and recovered the deposit.

 

On March 10,2008, the Board of Directors authorized the Company to repurchase up to US$250million in treasury stock through market transactions.

 

In March 2008,the Company set up a subsidiary in India, Daksh Builders and Developers PrivateLimited, through which it intends to develop land for the construction ofentry-level and middle-income housing. Daksh Builders and Developers Private Limited is party to a developmentagreement to develop land in the state of Jammu and Kashmir. It has advancedUS$1.4 million to date under the development agreement and is committed toinvest a further US$8.6 million by August 2008 pursuant to Indian foreigninvestment law.

 

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** **

**25.Contingencies and commitments**

 

***Construction Warranties***

 

The Company provides a two-year warranty againstconstruction defects to all of its customers which could be due to the Company’sown activities, to defects in the construction materials provided by thirdparties (electrical installations, plumbing, gas, waterproofing, etc.) or toother circumstances not within the control of the Company.

 

The Company is insured against any defect, hidden orvisible, that could occur during the construction, and after the constructionfor a certain period of time. In addition, the contractors provide a suretyagainst any hidden or visible defects which is refunded on the approval ofcustomers. The contractors also provide a security fund to cover any probableclaims from customers during the warranty period, which is returned to themonce such period ends.

 

***Contingencies***

 

In July 2007,the Company entered into an agreement with Empreendimentos Imobiliários Limitada (“E.O.M.”), pursuant to which the Company agreed tocontribute 67% and E.O.M. agreed to contribute 33% of the projected 4.0 millionBrazilian Reals capital stock of Homex Brasil Incorporações and ConstruçõesImobiliários Limitada. As of December 31, 2007 no contributionhad been made under the agreement. Following disagreements with E.O.M., theCompany exercised its right to withdraw from the agreement. Although E.O.M. hassued the Company for specific performance of the agreement, the Companybelieves that any potential liability under the agreement would not be likelyto have a material effect on its financial condition or results of operations.

 

**26. New accounting principles(2008)**

 

**Mexican FRS B-2, *Statement of Cash Flows***

 

In November 2007,Mexican FRS B-2 was issued by the CINIF to replace Mexican accounting BulletinB-12, *Statement of Changes in FinancialPosition*. This standard establishes that the statement of changes infinancial position will be substituted by a statement of cash flows as part ofthe basic financial statements. The main differences between both statementslie in the fact that the statement of cash flows will show the entity’s cashreceipts and disbursements for the period, while the statement of changes infinancial position showed the changes in the entity’s financial structure ratherthan its cash flows. In an inflationary environment, the amounts of bothfinancial statements are expressed in constant Mexican pesos. However, inpreparing the statement of cash flows, the entity must first eliminate theeffects of inflation for the period and, accordingly, determine cash flows atconstant Mexican pesos, while in the statement of changes in financialposition, the effects of inflation for the period are not eliminated.

 

Mexican FRS B-2 establishesthat in the statement of cash flows, the entity must first present cash flowsderived from operating activities, then from investing activities, the sum ofthese activities and finally cash flows derived from financing activities. Thestatement of changes in financial position first shows the entity’s operatingactivities, then financing activities and finally its investing activities.Under this new standard, the statement of cash flows may be determined byapplying the direct or indirect method.

 

The transitory rules ofMexican FRS B-2 establish that the application of this standard is prospective.Therefore, the financial statements for years ended prior to 2008 presented forcomparative purposes, should include a statement of changes in financialposition, as established by Mexican accounting Bulletin B-12.

 

**Mexican FRS B-10, *Effects of Inflation***

 

In July 2007, the CINIFissued Mexican FRS B-10, *Effects ofInflation*, which is applicable for years beginning on or after January 1,2008 and replaces Mexican accounting Bulletin B-10, *Accounting Recognition of the Effects of Inflation on FinancialInformation*. Mexican FRS B-10 defines the two economic environmentsin Mexico that will determine whether

 

F-35

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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.

 

Mexican FRS B-10 alsoestablishes the accounting rules applicable whenever the economy changesfrom any type of environment to another. When the economy changes from aninflationary environment to a non-inflationary one, the entity must maintain inits financial statements the effects of inflation recognized through theimmediate prior year, since the amounts of prior periods are taken as the baseamounts of the financial statements for the period of change and subsequentperiods. Whenever the economy changes from a non-inflationary environment to aninflationary one, the effects of inflation on the financial information must berecognized retrospectively, meaning that all information for prior periods mustbe adjusted to recognize the accumulated effects of inflation of the periods inwhich the economic environment was considered non-inflationary.

 

This standard also abolishesthe use of the specific-indexation method for the valuation of imported fixedassets and the replacement-cost method for the valuation of inventories, thuseliminating the result from holding non-monetary assets. Therefore, at the datethis Mexican FRS comes into force, entities which have recognized anyaccumulated result from holding non-monetary assets in their stockholders’equity, under retained earnings (accumulated deficit), must identify therealized and unrealized portions of such result.

 

The realized result fromholding non-monetary assets must be reclassified to retained earnings, whilethe unrealized portion must be maintained as such within stockholders’ equity,and reclassified to results of operations when the asset giving rise to it isrealized. Whenever it is deemed impractical to separate the realized from theunrealized result from holding non-monetary assets, the full amount of thisitem may be reclassified to retained earnings.

 

The effect of the adoptionof this standard on the Company’s 2008 financial statements shall be theCompany’s ceasing to recognize the effects of inflation on its financialinformation (to the extent that inflation stays at current levels).

 

**Mexican FRS B-15, *Foreign Currency Translation***

 

In November 2007, theCINIF issued Mexican FRS B-15, *ForeignCurrency Translation*, which is effective for years beginning on orafter January 1, 2008. This standard replaces the previous Mexican accountingBulletin B-15, *Transactions in ForeignCurrency and Translation of Financial Statements of Foreign Operations*,as of its effective date.

 

Since Mexican FRS B-15includes the concepts of recording currency, functional currency and reportingcurrency, the standard eliminates the concept of integrated foreign operationsand foreign entity established in Mexican accounting Bulletin B-15. Therecording currency is defined as that currency in which accounting records arekept. Functional currency is the currency in which cash flows are generated andthe reporting currency is that in which the financial statements are presented.

 

Derived from the adoption ofthe aforementioned concepts, this standard also establishes new procedures fortranslating transactions with companies abroad, from the recording currency tothe functional currency, and from the functional currency to the reportingcurrency.

 

Under FRS B-15, the firststep in the translation of foreign operations is to determine the functionalcurrency, which is usually the currency of the primary economic environment inwhich the foreign operation is carried out. However, the functional currencymay in some cases differ from the local currency or recording currency, whichoccurs when these currencies do not represent the currency in which cash flowsof foreign operations are expressed.

 

If the functional currencydiffers from the recording currency, the financial statements must betranslated into their functional currency, as follows: i) monetary assets andliabilities by applying the exchange rates at the balance sheet date; ii)non-monetary assets and liabilities, as well as stockholders’ equity accounts,at the historical exchange rate; and iii) revenues, costs and expenses at thehistorical exchange rate, except for the effects of non-monetary assets andliabilities on results of operations of the period, such as depreciation andcost of sales, which must be translated at the historical exchange rate used inthe translation of the corresponding balance sheet item. Translationdifferences shall be carried directly to the income statement.

 

Once the financialstatements have been expressed in the functional currency, they must betranslated into the reporting currency by applying: i) the exchange rates atthe balance sheet date to all asset, liability and stockholders’ equityaccounts and ii) the historical exchange rate to revenues, costs and expenses.Any difference resulting from the translation or

 

F-36

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the consolidation process or from applying the equitymethod must be recognized as a cumulative translation adjustment as part ofcomprehensive income in stockholders’ equity.

 

This procedure is applicableto operations carried out in a non-inflationary environment. For foreignoperations carried out in an inflationary environment, Mexican FRS B-15requires that the effects of inflation on financial information be recognizedprior to translation and in conformity with Mexican accounting Bulletin B-10, usingthe price index of the country in which the operations are carried out. Oncethe effects of inflation on financial information have been recognized in therecording currency: i) asset, liability and stockholders’ equity accounts mustbe translated using the prevailing exchange rate at the balance sheet date; ii)income statement accounts must be translated at the exchange rate at thebalance sheet date; and iii) the difference resulting from the translation orthe consolidation process or from applying the equity method must be recognizedas a cumulative translation adjustment as part of comprehensive income instockholders’ equity.

 

Mexican FRS B-15 establishesthat the preparation of comparative financial statements must take into accountthe economic environment of the reporting entity, since if the entity operatesin a non-inflationary economic environment, the financial statements from prioryears included for comparative purposes shall be presented with no charge tothe translation made at the issuance date. However, if the reporting entityoperates in an inflationary economic environment, the financial statementsincluded for comparative purposes must be expressed in Mexican pesos withpurchasing power at the latest balance sheet date.

 

At the date of the financialstatements, management is evaluating what effect the observance of thisaccounting pronouncement will have on the Company’s results of operations andfinancial position.

 

**Mexican FRS D-3, *Employee Benefits***

 

On January 1, 2008, thenew Mexican FRS D-3, *Employee Benefits*,issued by the CINIF, went into effect and replaced the old Mexican accountingBulletin D-3, *Labor Obligations*.The most significant changes contained in Mexican FRS D-3 are as follows: i)shorter periods for the amortization of unamortized items, with the option tocredit or charge actuarial gains or losses directly to results of operations,as they accrue; ii) elimination of the recognition of an additional liabilityand resulting recognition of an intangible asset and comprehensive income item;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 Mexican FRS D-4; and iv) current-year and deferred employee profit-sharing expense isto be presented as an ordinary expense in the income statement rather than aspart of taxes on profits.

 

The adoption of thisstandard in 2008 will require that both the additional liability and therelated intangible asset and comprehensive income item be eliminated and thatthe unamortized items have an effect on results of operations in a period notexceeding five years. The initial effect of the recognition of deferredemployee profit-sharing must be charged or credited to retained earnings withno effect on results of operations for the year ending December 31, 2008.

 

At the date of the financialstatements, management is evaluating what effect the observance of thisaccounting pronouncement will have on the Company’s results of operations andfinancial position.

 

**Mexican FRS D-4, *Taxes on Profits***

 

In July 2007, the CINIFissued Mexican FRS D-4, *Taxes on Profits*,which is applicable for years beginning on or after January 1, 2008 andreplaces Mexican accounting Bulletin D-4, *Accountingfor Income Tax, Asset Tax and Employee Profit-Sharing*. The mostsignificant changes included in this standard with respect to Mexicanaccounting Bulletin D-4 are as follows: i) the concept of permanent differencesis eliminated, since the asset and liability method requires the recognition ofdeferred taxes on all differences in balance sheet accounts for financial andtax reporting purposes, regardless of whether they are permanent or temporary;ii) since current-year and deferred employee profit-sharing is considered as anordinary expense, it is excluded from this standard and is now addressed underMexican FRS D-3; iii) asset tax is required to be recognized as a tax creditand, consequently, as a deferred income tax asset only in those cases in whichthere is certainty as to its future realization; and iv) the cumulative effectof adopting Mexican accounting Bulletin D-4 is to be reclassified to retainedearnings, unless it is identified with comprehensive items in stockholders’equity not yet taken to income.

 

Under this standard, theaccumulated effect of deferred income tax, derived from the adoption of Mexicanaccounting Bulletin D-4, will temporarily be reclassified to retained earnings,except for the portion corresponding to comprehensive income items, which willbe reclassified to results of operations when the item giving rise to them istaken to income.

 

At the date of the financialstatements, management is evaluating what effect the observance of thisaccounting pronouncement will have on the Company’s results of operations andfinancial position.

 

F-37

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**27.****     ****Summaryof differences between Mexican Financial Reporting Standards (MFRS) and U.S.GAAP**

 

The consolidated financial statements of the Companyare prepared in accordance with MFRS, which vary in certain significantrespects from U.S. GAAP.  A reconciliation of the reported majority netincome, majority stockholders’ equity and majority comprehensive income to U.S.GAAP is presented in Note 28a and b.  It should be noted that thisreconciliation to U.S. GAAP does not include the reversal of the restatement ofthe financial statements for the effects of inflation as required by BulletinB-10, “Recognition of the Effects of Inflation in Financial Information” ofMFRS.  The application of Bulletin B-10 represents a comprehensive measureof the effects of price-level changes in the Mexican economy and, as such, isconsidered a more meaningful presentation than historical cost-based financialreporting in Mexican pesos for purposes of both MFRS and U.S. GAAP. Effective January 1,2008, a new Bulletin B-10 became effective; among the main changes is therequirement to cease the recognition of the effects of the inflation if theaccumulated three-year period rate is below 26%.

 

                The differencesbetween MFRS and U.S. GAAP included in the reconciliation that affect theaccompanying consolidated financial statements of the Company are as follows:

 

**a)****         ****Revenueand Cost Recognition**

 

The Company recognizes its USGAAP revenues whenall of the following events occur:

 

·    a sale isconsummated;

 

·    a significant initial consideration is received (whenapplicable);

 

·    the earnings process is complete and thecollection of any remaining receivables is reasonably assured.

 

Allsuch conditions typically occur at the time the title passes to the homebuyer,and he has the legal right to take possession of this property.

 

Insituations where we sell customers a house with incremental improvements beyondthe “basic” house, we recognize amounts from the customer on a cash-basis whenreceived, which is essentially cost recovery accounting.

 

UnderMFRS, the Company uses the percentage-of-completion method of accounting toaccount for housing project revenues and costs related to housing construction;progress towards completion is measured in terms of comparing the actual costsincurred to the estimated total cost of a project.

 

Accordingly, a reconciling item for the additionalrevenues and additional costs recognized under the percentage-of-completionmethod of accounting under MFRS is included in the U.S. GAAP reconciliation ofnet income and stockholders’ equity.

 

**b)****         ****Deferred Income Taxes**

 

The Company follows SFAS No. 109, “Accounting forIncome Taxes” for U.S. GAAP purposes, which differs from the MFRS. Under MFRS,the effects of inflation on the deferred tax balance generated by monetaryitems are recognized in the result on monetary position. Under U.S. GAAP, thedeferred tax balance is classified as a non-monetary item. As a result, theconsolidated statement of operations differs with respect to the presentationof the gain (loss) on monetary position and deferred income tax provision.

 

                As a result of the differences related to therecognition of revenue, costs and interest capitalization as described below,the related deferred income tax presented under MFRS is different from theeffect calculated in accordance with U.S. GAAP.

 

Belowis a reconciliation of deferred tax balances between MFRS and U.S. GAAP:

 

F-38

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| ** **                                                 | ** ** | **2007**       | ** **    | **2006**   | ** ** |
|------------------------------------------------------------|------------|----------------|---------------|------------|------------|
| Deferred income tax liability  according to MFRS, net      | ** ** | **Ps.**        | **2,841,895** | ** ** | Ps.        | 2,101,717 |   |
| Effect of U.S. GAAP  adjustments:                          |       |           | ** **    |       |       |
| Accounts receivable                                        | ** ** | **(1,910,950** | **)**         | (1,362,017 | )          |
| Inventories                                                | ** ** | **1,571,775**  | ** **    | 1,213,607  |       |
| Other, net                                                 | ** ** | **(10,382**    | **)**         | 22,174     |       |
| Deferred income tax liability  according to U.S. GAAP, net | ** ** | **Ps.**        | **2,492,338** | ** ** | Ps.        | 1,975,481 |   |

 

Deferred income tax balance sheet classification:

 
| ** **                          | ** ** | **2007**       | ** **     | **2006**        | ** ** |
|-------------------------------------|------------|----------------|----------------|-----------------|------------|
| ** **                          | ** ** | **Current**    | ** **     | **Non-current** | ** ** | **Current** | ** ** | **Non-current** | ** ** |
|                                |       |           |           |            | ** ** |   |   |   |   |
| Deferred tax assets                 | ** ** | **Ps.**        | **900,312**    | ** **      | **Ps.**    | **807,689** | ** ** | Ps. | 444,098 |   | Ps. | 555,860 |   |
| Deferred tax liability              | ** ** | **(4,087,037** | **)**          | **(113,302**    | **)**      | (2,887,954 | ) | (87,485 | ) |
| Net deferred tax (liability)  asset | ** ** | **Ps.**        | **(3,186,725** | **)**           | **Ps.**    | **694,387** | ** ** | Ps. | (2,443,856 | ) | Ps. | 468,375 |   |

 

At December 31,2007 and 2006, the Company had Ps. 694,386 and Ps. 468,375 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 U.S. 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 CurrentYear Financial Statements” (“SAB No. 108”), which addresses how theeffects of prior year uncorrected financial statement misstatements should beconsidered. SAB No. 108 requires registrants to quantify misstatementsusing both balance sheet and income statement approaches and to evaluatewhether either approach results in quantifying an error that is material inlight of relative quantitative and qualitative factors. The requirements of SABNo. 108 were effective for annual financial statements covering the firstfiscal year-ending after November 15, 2006.

 

During2006, the Company recorded a charge for U.S. GAAP purposes in relation to theadoption of SAB No.108 as follows:

 

ThroughDecember 31, 2005, receivables obtained from homebuyers representingdownpayments were considered as revenue under U.S. GAAP, consistent with theaccounting policy under MFRS. During 2006, the Company reevaluated thisaccounting policy and determined that under U.S. GAAP, a cost recovery methodshould have been applied not recognizing revenue until collection. The Companybelieves that the impact of its prior accounting was not material to its 2005consolidated financial statements.

 

ThroughDecember 31, 2005, the amortization of the prepaid sales commissions wasbased on an amortization methodology tied to MFRS revenue recognition(percentage-of-completion). For U.S. GAAP purposes, this prepaid expense shouldhave been amortized in a manner similar to the Company’s U.S. GAAP revenuerecognition (a completed contract method). The Company believes that the impactof its prior accounting was not material to its 2005 consolidated financialstatements.

 

F-39

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| ** **                                                     | ** ** | **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)****         ****Acquisition of Minority Interest**

 

Asdescribed in Note 2.d, on September 12, 2005, Beta del Centro acquired theremaining 50% of Super Abastos Centrales y Comerciales, S.A. de C.V.’soutstanding shares. Under MFRS, the excess cost of the shares acquired from theminority shareholders was recorded as a capital distribution, since this was atransaction between common shareholders.

 

UnderU.S. GAAP, the acquisition of the remaining outstanding shares from theminority shareholders was accounted for under the purchase method ofaccounting.

 

Accordingly,a reconciling item for the acquisition of minority interest is included in theU.S. GAAP reconciliation of stockholders’ equity in the amount of Ps. 79,437.

 

**e)****                   ****Statement of Cash Flows**

 

                Under MFRS, theCompany presents a consolidated statement of changes in financial position inaccordance with Bulletin B-12, “Statement of Changes in Financial Position”(B-12), which identifies the generation and application of resources by thedifferences between beginning and ending financial statement balances inconstant Mexican pesos. B-12 also requires that monetary and foreign exchangegains and losses be treated as cash items for the determination of resourcesgenerated by operations.

 

                Inaccordance with U.S. GAAP the Company follows the requirements of SFAS No. 95,“Statement of Cash Flows”, excluding the effects of inflation (see Note 28).

 

**f)****   ****ClassificationDifferences**

 

UnderMFRS, advances for the purchase of land and construction materials are recordedas part of the cost of real estate inventories. Under U.S. GAAP, such advancesare classified as prepaid expenses.

 

                Under MFRS, deferred taxes areclassified as non-current; U.S. GAAP requires a current or non-currentclassification based on the classification of the related asset or liability.

 

                Under MFRS, the commissions paidby 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;U.S. GAAP requires that such amounts be recorded as operating costs.

 

                Under MFRS, amounts due underthe Company’s factoring agreements are included in trade accounts payable; U.S.GAAP requires that such amounts be recorded as a borrowing from the financialintermediary.

 

                Through 2006, employeeprofit-sharing was presented after pre-tax income. In 2007, profit- sharingcosts were considered as other expense and not a tax. These provisions were appliedretroactively; therefore, and according to the Interpretation of MFRS 4,Presentation of employee profit-sharing in the statement of income, the amountsrelated to this category have been reclassified in other income, net (notdeducted from operating income). The reclassified balances for the years 2007,2006 and 2005 were Ps.30,684, Ps.36,728 and Ps.10,354, respectively. For U.S. GAAPpurposes, employee statutory profit-sharing is classified as an operatingexpense.

 

                Under MFRS, Ps.99,808 of otherexpenses were reclassified to operating expenses for U.S. GAAP purposes in2007; there were no additional reclassifications for 2006 and 2005.

 

F-40

----

 

**g)****         ****Backlog**

 

Theamount of backlog recorded in purchase accounting under U.S. GAAP differs fromthe amount reported under MFRS.  Under MFRS, sales are recognized usingthe percentage-of-completion method.  Accordingly, a greater portion ofthe housing costs for houses in construction has already been recognized in thecost of operations.  Under U.S. GAAP, sales are not recognized untilcollection has been assured. Therefore the portion of the housing costs that isincluded in the statement of operations under MFRS has not yet been recognizedunder U.S. GAAP and is considered backlog, thereby resulting in a greaterbacklog under U.S. GAAP.

 

**h)****        ****Goodwill**

 

Theamount of goodwill under U.S. GAAP is greater than that reported under MFRS,due to the difference in the revenue recognition methods between MFRS and U.S.GAAP.  Under MFRS, accounts receivable is greater than under U.S. GAAP.However, under MFRS, inventories are lower than under U.S. GAAP. Accordingly, profit recognized under MFRS that has not yet been recognized forU.S. GAAP purposes is included within goodwill under U.S. GAAP, resulting in ahigher goodwill for U.S. GAAP purposes.

 

**i)****           ****LaborObligations**

 

TheCompany has recorded liabilities for the seniority premium and terminationindemnity (severance) liabilities for its Mexican subsidiaries with employees(Administradora Picsa, Desarrolladora de Casas del Noroeste and Altos Mandos deNegocios). For its MFRS consolidated financial statements, the Company applies BulletinD-3 (NIF D-3 beginning January 1, 2008). Prior to 2006, the accountingtreatment for the termination indemnity and seniority premium plans set forthin this Bulletin is substantially the same as those set forth in SFAS No. 87,“Employers’ Accounting for Pensions”. The Company records the pension costdetermined by actuarial valuations, as described in Notes 3 m) and 13.Significant assumptions (weighted-average rates) used in determining netperiodic pension cost and the Company’s related plan obligations for 2007 and2006 are also described in Note 13.

 

Severanceindemnities: Under MFRS, effective 2005 revised Bulletin D-3 requires therecognition of a severance indemnity liability calculated based on actuarialvaluations. Similar recognition criteria under U.S. GAAP are established inSFAS No. 112, “Employers’ Accounting for Post-employment Benefits”, whichrequires that a liability for certain termination benefits provided under anongoing benefit arrangement such as these statutorily mandated severanceindemnities be recognized when the likelihood of future settlement is probableand the liability can be reasonably estimated. MFRS allows for the Company toamortize the transition obligation related to the adoption of revised BulletinD-3 over the expected service life of the employees, but beginning January 1,2008 the transition obligation must be amortized at most in five years.However, U.S. GAAP required the Company to recognize such effect upon initialadoption under SFAS No. 87, which results in an immaterial difference inthe amount recorded under the two accounting principles.

 

TheCompany adopted SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132(R),” in its December 31, 2006, consolidated financialstatements. This statement requires companies to (1) fully recognize, asan asset or liability, the overfunded or underfunded status of defined pensionand other postretirement benefit plans; (2) recognize changes in thefunded status through other comprehensive income in the year in which thechanges occur; and (3) provide enhanced disclosures. Retrospectiveapplication of this standard was not permitted.

 

Theincremental effect of this adoption on the individual line items in the December 31,2006 consolidated U.S. GAAP balance sheet is shown in the following table:

 

F-41

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| ** **                                                       |   | **Before** | ** ** | **SFAS  158** | ** ** | **After**  | ** ** |
|------------------------------------------------------------------|--------|------------|------------|---------------|------------|------------|------------|
| Application of SFAS No. 158                                 |   |       |       |          |       |       |       |
| Assets:                                                          |   |       |       |          |       |       |       |
| Intangible assets from  retirement obligation                    |   | Ps.        | 20,660     |          | Ps.        | (20,660    | )          | Ps. | — |   |
| Total assets under U.S. GAAP                                     |   | Ps.        | 19,106,271 |          | Ps.        | (20,660)   |       | Ps. | 19,085,611 |   |
| Long-term liabilities:                                           |   |       |       |          |       |       |       |
| Labor liabilities                                                |   | Ps.        | 52,275     |          | Ps.        | 5,879      |       | Ps. | 58,154 |   |
| Total liabilities under U.S.  GAAP                               |   | 11,908,008 |       | 5,879         |       | 11,913,887 |       |
| Other comprehensive income:                                      |   |       |       |          |       |       |       |
| Cumulative other comprehensive loss                              |   | 5,079      |       | (26,539       | )          | (21,460    | )          |
| Total stockholders’ equity  under U.S. GAAP                 |   | 7,109,528  |       | (26,539       | )          | 7,082,989  |       |
| Total liabilities and  stockholders’ equity under U.S. GAAP |   | Ps.        | 19,106,271 |          | Ps.        | (20,660)   |       | Ps. | 19,085,611 |   |
|                                                                  |        |            |            |               |            |            |            |  |  |  |  |

 

Priorto the adoption of SFAS No. 158, there was no difference in theliabilities recorded for pension plans and seniority premiums between MFRS andU.S. GAAP.

 
| ** **            | ** ** | **2007  Total** | ** ** | **2006  Total** | ** ** |
|-----------------------|------------|-----------------|------------|-----------------|------------|
| Unrecognized items:   |       |            |       |            |       |
| Transition obligation |       | **Ps.**         | **12,889** | ** **      | Ps.        | 15,739 |   |
| Prior service cost    | ** ** | **11,860**      |       | —          |       |
| Net actuarial loss    | ** ** | **19,609**      |       | 19,125          |       |
| Unrecognized items    |       | **Ps.**         | **44,358** | ** **      | Ps.        | 34,864 |   |

 

Asdisclosed in Note 13, during 2007, the Company amended its plan resulting inthe admission of additional employee participants who have received credit forprior service costs.

 

Forpurposes of determining the cost of our pension plans, seniority premiums andseverance indemnities under U.S. GAAP, the Company applies SFAS No. 87, asamended by SFAS No. 158, and SFAS No. 112. The Company uses a December 31measurement date for its seniority premiums and severance indemnities.

 
| ** **                               | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|------------------------------------------|------------|------------|-------------|------------|------------|
| **Change in benefit obligations:**       |       |       |        |       |       |
| Benefit obligation at  beginning of year | ** ** | **Ps.**    | **58,154**  | ** ** | Ps.        | 14,976 |   |
| Net periodic cost                        | ** ** | **35,127** |        | 23,047     |       |
| Other comprehensive income               | ** ** | **22,896** |        | 20,131     |       |
| **Unfunded status**                      | ** ** | **Ps.**    | **116,177** | ** ** | Ps.        | 58,154 |   |

 

Net periodic costs for 2007 and 2006 are summarizedbelow:

 
| ** **                          | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Integration of Net Periodic  Costs: |       |       |       |     |       |     |       |
| Labor cost                          | ** ** | **Ps.**    | **10,033** |     | Ps.        | 15,257   |       | Ps. | 3,688 |   |
| Financial cost                      | ** ** | **5,378**  |       | 2,862    |       | 1,424    |       |
| Transition liability                | ** ** | **13,473** |       | 2,965    |       | 2,760    |       |
| Actuarial losses                    | ** ** | **6,243**  |       | 1,402    |       | —   |       |
| Inflation adjustment                | ** ** | **—** |       | 561      |       | 696      |       |
| Net periodic costs                  | ** ** | **Ps.**    | **35,127** |     | Ps.        | 23,047   |       | Ps. | 8,568 |   |

 

F-42

----

 

**j)****        ****Disclosure about Fair Value of Financial Instruments**

 

Inaccordance with SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments,” under U.S. GAAP it is necessary to provide information about thefair value of certain financial instruments for which it is practicable toestimate that value.

 

Thefair values of the Company’s financial instruments are based on quoted marketprices, where available, or are estimated. Fair value estimates are made at aspecific point in time based on relevant market information and informationabout the financial instrument. These estimates are subjective in nature, involvematters of judgment and, therefore, cannot be determined with precision.Estimated fair values are significantly affected by the assumptions used. TheCompany’s methods and assumptions used in estimating fair values are describedbelow.

 

Thecarrying amounts of cash and short-term investments, accounts receivable andaccounts payable and accrued liabilities approximate fair values due to theshort-term maturity of these instruments.

 

Thefairvalueof total debt,excluding capital leases and interest payables, is estimated for variable ratedebt whereby changes in interest rates generally do not impact the fair valueof the debt instrument, and quoted market prices are used for senior guaranteednotes at December 31, 2007 and 2006. As of December 31, 2007 and2006, the carrying value of total debt is Ps. 3,283,997 and Ps. 3,391,736,respectively. The fair value is Ps. 3,408,134 at December 31, 2007 and Ps.3,443,746 at December 31, 2006.

 

Asof December 31, 2007 and 2006, the fair value of the Principal-Only Swapwas Ps.79,098 (US$7.2 million) and Ps.227,074 (US$20.2 million), respectively,which represents the estimated present value of future cash flows to be paid bythe Company.

 

**k)****         ****Prepaidsales commissions**

 

Theamortization of the prepaid sales commission expense asset is based on anamortization methodology tied to MFRS revenue recognition(percentage-of-completion). For U.S. GAAP purposes this prepaid expense isamortized linked to the revenue recognition method applied under U.S. GAAP (acompleted contract method).

 

**l)****         ****Capitalizationof Net Comprehensive Financing Cost**

 

UnderMFRS, the capitalization of net comprehensive financing cost (interest, foreignexchange gains and losses and monetary position gains and losses) incurred tofinance investment projects is obligatory as of the fiscal year 2007. TheCompany capitalizes the integral cost of financing for MFRS reporting from theyear 2007.

 

Inaccordance with U.S. GAAP, if interest is incurred during the construction ofqualifying assets, capitalization is required as part of the cost of suchassets. The Company applies the weighted-average interest rate on alloutstanding debt to the balance of construction-in-progress additions duringthe period. Accordingly, a reconciling item for the capitalization of interestis included in the U.S. GAAP reconciliation of net income and stockholders’equity, and the effect of interest capitalized to the cost of inventories isincluded within operating income for U.S. 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 financialstatements, we provide a two year warranty to all of our customers.  This warranty could apply to damages derived either from our operations or fromdefects in materials supplied by third parties (such as electricalinstallations, plumbing, gas, waterproofing, etc.) or other circumstancesoutside our control.

 

F-43

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For manufacturing defects, we do not recognize awarranty 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 isreimbursed to our contractors once the warranty for manufacturing defectsperiod expires.  We believe that at December 31, 2007 we had nounrecorded losses with respect to these warranties.

** **

**28.****      ****Reconciliationof MFRS net income and equity to U.S. GAAP net income and equity and thepresentation of condensed financial statements in accordance with U.S. GAAP.**

** **

a.**                            **Reconciliation ofMajority Net Income for the Year

 
| ** **                                                                                     | ** ** | **2007**       | ** **    | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------|---------------|------------|------------|------------|------------|
| Majority net income according  to MFRS                                                         | ** ** | **Ps.**        | **2,233,066** | ** ** | Ps.        | 1,391,281  |       | Ps. | 953,611 |   |
|                                                                                           |       |           | ** **    |       |       |       |       |
| U.S. GAAP adjustments:                                                                         |       |           | ** **    |       |       |       |       |
| Reversal of revenue recognized  under percentage-of-completion method of accounting (Note 27a) | ** ** | **(2,366,873** | **)**         | (220,766   | )          | (1,003,119 | )          |
| Reversal of cost recognized  under percentage-of-completion method of accounting (Note 27a)    | ** ** | **1,608,498**  | ** **    | 150,121    |       | 663,816    |       |
| Amortization of backlog (Notes  27g)                                                           | ** ** | **(16,747**    | **)**         | (47,682    | )          | (170,638   | )          |
| Labor obligations (Note 27i)                                                                   | ** ** | **(17,416**    | **)**         | (6,408     | )          | —     |       |
| Capitalization of interest  (Note 27l)                                                         | ** ** | **(261,734**   | **)**         | 198,772    |       | 189,928    |       |
| Deferral of unsecured  homebuyers’ receivables                                            | ** ** | **3,451**      | ** **    | 82,366     |       | —     |       |
| Deferral of future involvement                                                                 | ** ** | **2,119**      | ** **    | (7,574     | )          | —     |       |
| Sales commissions (Note 27k)                                                                   | ** ** | **36,825**     | ** **    | 2,490      |       | —     |       |
| Effects of inflation on U.S.  GAAP adjustments                                                 | ** ** | **203,634**    | ** **    | 171,736    |       | 143,753    |       |
| Total U.S. GAAP adjustments  before tax effects                                                | ** ** | **(808,243**   | **)**         | 323,055    |       | (176,260   | )          |
| Tax effects on U.S. GAAP  adjustments                                                          | ** ** | **242,411**    | ** **    | 81,759     |       | 64,441     |       |
| Total U.S. GAAP adjustments                                                                    | ** ** | **(565,832**   | **)**         | 241,296    |       | (111,819   | )          |
|                                                                                           |       |           | ** **    |       |       |       |       |
| Net income according to U.S.  GAAP                                                             | ** ** | **Ps.**        | **1,667,234** | ** ** | Ps.        | 1,632,577  |       | Ps. | 841,792 |   |

 

F-44

----

 

b.**           **Reconciliation of Majority Stockholders’ Equity

 
| ** **                                                                                     | ** ** | **2007**       | ** **    | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------|---------------|------------|------------|------------|------------|
| Majority stockholders’ equity  according to MFRS                                          | ** ** | **Ps.**        | **9,632,918** | ** ** | Ps.        | 7,503,771  |       | Ps. | 6,102,864 |   |
| U.S. GAAP adjustments:                                                                         |       |           | ** **    |       |       |       |       |
|                                                                                           |       |           | ** **    |       |       |       |       |
| Reversal of revenue recognized  under percentage-of-completion method of accounting (Note 27a) | ** ** | **(6,880,237** | **)**         | (4,789,556 | )          | (4,769,858 | )          |
| Reversal of cost recognized  under percentage-of-completion method of accounting (Note 27a)    | ** ** | **5,320,597**  | ** **    | 3,754,735  |       | 3,570,727  |       |
| Backlog (Note 27g)                                                                             | ** ** | **(237,001**   | **)**         | (211,674   | )          | (170,638   | )          |
| Labor obligations (Note 27i)                                                                   | ** ** | **(67,175**    | **)**         | (28,703    | )          | —     |       |
| Sales commissions (Note 27k)                                                                   | ** ** | **123,782**    | ** **    | 86,957     |       | —     |       |
| Deferral of unsecured  homebuyers’ receivables of the year                                | ** ** | **(62,911**    | **)**         | (66,362    | )          | —     |       |
| Deferral of future involvement                                                                 | ** ** | **(5,455**     | **)**         | (7,574     | )          | —     |       |
| Acquisition of minority  interest (Note 27d)                                                   | ** ** | **79,437**     | ** **    | 79,437     |       | 79,437     |       |
| Capitalization of interest  (Note 27l)                                                         | ** ** | **218,506**    | ** **    | 480,240    |       | 292,877    |       |
| Goodwill, net (Note 27h)                                                                       | ** ** | **86,754**     | ** **    | 86,754     |       | 86,754     |       |
| Deferred employee statutory  profit-sharing (Note 27b)                                         | ** ** | **—**     | ** **    | —     |       | 4,812      |       |
| Total U.S. GAAP adjustments  before tax effects                                                | ** ** | **(1,423,703** | **)**         | (615,746   | )          | (905,889   | )          |
| Tax effects on U.S. GAAP  adjustments                                                          | ** ** | **418,289**    | ** **    | 194,964    |       | 312,297    |       |
| Total U.S. GAAP adjustments                                                                    | ** ** | **(1,005,414** | **)**         | (420,782   | )          | (593,592   | )          |
|                                                                                           |       |           | ** **    |       |       |       |       |
| Stockholders’ equity according  to U.S. GAAP                                              | ** ** | **Ps.**        | **8,627,504** | ** ** | Ps.        | 7,082,989  |       | Ps. | 5,509,272 |   |

 

c.**                            **Reconciliation ofMajority Comprehensive Income

 
| ** **                                   | ** ** | **2007**     | ** **    | **2006**   | ** ** | **2005**  | ** ** |
|----------------------------------------------|------------|--------------|---------------|------------|------------|-----------|------------|
| Majority net income according  to MFRS       | ** ** | **Ps.**      | **2,233,066** | ** ** | Ps.        | 1,391,281 |       | Ps. | 953,611 |   |
|                                         |       |         | ** **    |       |       |      |       |
| Comprehensive income adjustments             | ** ** | **(481**     | **)**         | —     |       | —    |       |
|                                         |       |         | ** **    |       |       |      |       |
| Labor obligation                             | ** ** | **(22,896**  | **)**         | 13,941     |       | (8,864    | )          |
|                                         |       |         | ** **    |       |       |      |       |
| Net U.S. GAAP adjustments:                   |       |         | ** **    |       |       |      |       |
| Net income                                   | ** ** | **(565,832** | **)**         | 241,296    |       | (111,819  | )          |
|                                         |       |         | ** **    |       |       |      |       |
| Comprehensive income according  to U.S. GAAP | ** ** | **Ps.**      | **1,643,857** | ** ** | Ps.        | 1,646,518 |       | Ps. | 832,928 |   |

 

F-45

----

 

d.**                           **Condensed balancesheets according to U.S. GAAP

 
| ** **                                       | ** ** | **2007**      | ** **     | **2006**  | ** ** |
|--------------------------------------------------|------------|---------------|----------------|-----------|------------|
| **Assets**                                       |       |          |           |      |       |
| Current assets                                   | ** ** | **Ps.**       | **14,488,606** |      | Ps.        | 12,467,252 |   |
| Land for development                             | ** ** | **7,091,074** |           | 5,180,580 |       |
| Property and equipment                           | ** ** | **1,155,729** |           | 669,095   |       |
| Goodwill                                         | ** ** | **650,344**   |           | 650,344   |       |
| Other assets                                     | ** ** | **1,193,614** |           | 1,112,320 |       |
|                                             |       |          |           |      |       |
| Total assets                                     | ** ** | **Ps.**       | **24,579,367** |      | Ps.        | 20,079,591 |   |
|                                             |       |          |           |      |       |
| **Liabilities and stockholders’ equity**    |       |          |           |      |       |
| Current liabilities                              | ** ** | **Ps.**       | **11,054,629** |      | Ps.        | 9,147,783 |   |
| Long-term liabilities                            | ** ** | **4,689,022** |           | 3,760,086 |       |
| Minority interest                                | ** ** | **208,212**   |           | 88,733    |       |
| Majority stockholders’ equity               | ** ** | **8,627,504** |           | 7,082,989 |       |
|                                             |       |          |           |      |       |
| Total liabilities and  stockholders’ equity | ** ** | **Ps.**       | **24,579,367** |      | Ps.        | 20,079,591 |   |

 

e.                             Condensed statementsof operations according to U.S. GAAP

 
| ** **                                                      | ** ** | **2007**      | ** **     | **2006**  | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------|------------|---------------|----------------|-----------|------------|------------|------------|
| Revenues                                                        | ** ** | **Ps.**       | **13,849,728** |      | Ps.        | 13,224,145 |       | Ps. | 8,212,918 |   |
| Costs                                                           | ** ** | **9,814,725** |           | 9,311,415 |       | 6,150,813  |       |
| Gross profit                                                    | ** ** | **4,035,003** |           | 3,912,730 |       | 2,062,105  |       |
| Operating income                                                | ** ** | **2,116,650** |           | 2,519,346 |       | 1,142,318  |       |
| Income before income taxes                                      | ** ** | **2,504,715** |           | 2,432,458 |       | 1,232,731  |       |
| Income taxes                                                    | ** ** | **708,869**   |           | 751,603   |       | 398,190    |       |
| Minority interest                                               | ** ** | **128,612**   |           | 48,278    |       | (7,251     | )          |
| Net income according to U.S.  GAAP                              | ** ** | **Ps.**       | **1,667,234**  |      | Ps.        | 1,632,577  |       | Ps. | 841,792 |   |
|                                                            |       |          |           |      |       |       |       |
| Weighted average shares  outstanding (in thousands)             | ** ** | **335,688**   |           | 335,869   |       | 324,953    |       |
|                                                            |       |          |           |      |       |       |       |
| Earnings per share according  to  U.S. GAAP (basic and diluted) | ** ** | **Ps.**       | **4.96**       |      | Ps.        | 4.86       |       | Ps. | 2.59 |   |

 

F-46

----

 

f.                               Reconciliation ofchanges in stockholders’ equity according to U.S. GAAP

 
| ** **                                         | ** ** | **2007**      | ** **    | **2006**   | ** ** | **2005**      | ** ** |
|----------------------------------------------------|------------|---------------|---------------|------------|------------|---------------|------------|
| Stockholders’ equity at  beginning of year    | ** ** | **Ps.**       | **7,082,989** | ** ** | Ps.        | 5,509,272     |       | Ps. | 3,604,826 |   |
| Adoption of SFAS 158                               |       | —        | ** **    | (26,539    | )          |          |       |
| Cumulative effect of SAB  No. 108 adoption    |       | —        | ** **    | (46,262    | )          | —        |       |
|                                               |       |          | ** **    |       |       |          |       |
| Net income according to U.S.  GAAP                 | ** ** | **1,667,234** | ** **    | 1,632,577  |       | 841,792       |       |
| Labor obligations                                  | ** ** | **(22,896**   | **)**         | 13,941     |       | —        |       |
| Shares repurchased for  employee stock option plan | ** ** | **(99,342**   | **)**         | —     |       | —        |       |
| Comprehensive income  adjustment                   | ** ** | **(481**      | **)**         | —     |       | —        |       |
| Issuance of common stock                           |       | —        | ** **    | —     |       | 1,079,417     |       |
| Other                                              |       | —        | ** **    | —     |       | (16,763       | )          |
|                                               |       |          | ** **    |       |       |          |       |
| Stockholders’ equity at end of  year          | ** ** | **Ps.**       | **8,627,504** | ** ** | **Ps.**    | **7,082,989** |       | Ps. | 5,509,272 |   |

 

g.                            Condensed statementsof cash flows according to U.S. GAAP

 

UnderMFRS, statements of changes in financial position identify the sources and usesof resources based on the differences between beginning and ending consolidatedfinancial statement balances in constant pesos. Monetary position results andunrealized foreign exchange results are treated as cash items in thedetermination of resources provided by operations. Under U.S. GAAP (SFAS 95),statements of cash flows present only cash items and exclude non-cash items.SFAS 95 does not provide guidance with respect to inflation-adjusted financial statements. Thedifferences between MFRS and U.S. GAAP in the amounts reported are mainly dueto: (i) elimination of inflationary effects of monetary assets andliabilities from financing and investing activities against the correspondingmonetary position result in operating activities, and (ii) the recognitionin operating, financing and investing activities of the U.S. GAAP adjustments.

 

Thefollowing cash flow statements were prepared in accordance with SFAS 95provided by operating, financing and investing activities, giving effect to theU.S. GAAP adjustments, excluding the effect of inflation required by BulletinB-10. The following information is presented in thousands of historical pesosand is not presented in pesos of constant purchasing power:

 

F-47

----

 
| ** **                                                 | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| Operating activities:                                      | ** ** |       |        |       |       |       |       |
| Adjusted consolidated net income **(1)**                   | ** ** | **Ps.**    | 1,667,234   |       | Ps.        | 1,607,362  |       | Ps. | 838,924 |   |
| Non-cash items:                                            |       |       |        |       |       |       |       |
| Depreciation                                               |       | 175,717    |        | 112,404    |       | 59,913     |       |
| Deferred income tax and  statutory profit-sharing          |       | 575,996    |        | 586,260    |       | 288,391    |       |
| Amortization                                               |       | 106,566    |        | 156,335    |       | 320,103    |       |
| Exchange gain                                              |       | 20,000     |        | 53,250     |       | —     |       |
| Change in fair value in the  Swap payable                  |       | (139,749   | )           | 100,594    |       | —     |       |
| Changes in operating assets  and liabitilies               |       | (1,823,793 | )           | (1,282,408 | )          | (1,666,824 | )          |
| Recoverable tax, net                                       |       | —     |        | (5,725     | )          | (90,808    | )          |
| Net cash flows provided by  (used in) operating activities |       | 581,971    |        | 1,328,072  |       | (250,301   | )          |
|                                                       |       |       |        |       |       |       |       |
| Investing activities:                                      |       |       |        |       |       |       |       |
| Investments in:                                            |       |       |        |       |       |       |       |
| Property and equipment                                     |       | (680,748   | )           | (291,437   | )          | (141,048   | )          |
| Restricted cash                                            |       | (119,855   | )           | (35,924    | )          | 20,851     |       |
| Other assets                                               |       | —     |        | —     |       | (106,914   | )          |
| Acquisition of BETA                                        |       | —     |        | —     |       | (1,063,739 | )          |
| Net cash flows used in  investing activities               |       | (800,603   | )           | (327,361   | )          | (1,290,850 | )          |
|                                                       |       |       |        |       |       |       |       |
| Financing activities:                                      |       |       |        |       |       |       |       |
| Restricted investments                                     |       | —     |        | —     |       | 169,470    |       |
| Debt issuance costs, net                                   |       | —     |        | (12,523    | )          | —     |       |
| Proceeds from new borrowings                               |       | 2,647,276  |        | 1,537,908  |       | 3,899,298  |       |
| Payments of notes payable to  financial institutions       |       | (2,408,739 | )           | (1,549,468 | )          | (1,737,064 | )          |
| Shares repurchased for  employee stock option plan         |       | (99,342    | )           | —     |       | —     |       |
| Dividends paid by subsidiary                               |       | (9,133     | )           | —     |       | —     |       |
| Net cash flows provided by  (used in) financing activities |       | 130,062    |        | (24,083    | )          | 2,331,704  |       |
|                                                       |       |       |        |       |       |       |       |
| Net increase (decrease) in  cash and cash equivalents      |       | (88,570    | )           | 976,628    |       | 790,553    |       |
| Cash and cash equivalents at  the beginning of the year    |       | 2,295,404  |        | 1,318,776  |       | 528,223    |       |
| Cash and cash equivalents at  the end of the year          | ** ** | **Ps.**    | 2,206,834   |       | Ps.        | 2,295,404  |       | Ps. | 1,318,776 |   |
|                                                       |       |       |        |       |       |       |       |
| Supplemental cash flow information:                        |       |       |        |       |       |       |       |
| Interest paid                                              | ** ** | **Ps.**    | 399,943     |       | Ps.        | 428,489    |       | Ps. | 125,421 |   |
| Income tax and tax on assets  paid                         | ** ** | **Ps.**    | 132,873     |       | Ps.        | 17,473     |       | Ps. | 6,212 |   |
| Non-cash financing activities:                             |       | ** ** |        |       |       |       |       |
| Issuance of common stock for  purchase of BETA             | ** ** | **Ps.**    | —      | ** ** | Ps.        | **—** |       | Ps. | 977,469 |   |
| Capital lease obligation  incurred                         | ** ** | **Ps.**    | **350,331** |       | Ps.        | 8,704      |       | Ps. | 16,293 |   |

 

----

**(1) ** Net income under USGAAP was Ps. 1,632,577 during 2006 and Ps. 841,792 during 2005, after givingeffect to inflationary adjustments recorded in preparing the Company’s 2007consolidated financial statements.   TheCompany has excluded the effects of inflation from the presentation of its 2006and 2005 statements of cash flows above, and accordingly net income numbers aspresented above differ from those reported elsewhere in these consolidatedfinancial statements.

 

F-48

----

 

h.            Consolidated Statements of Changesin Stockholders’ Equity according to U.S. 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 January 1, 2005              |       | Ps.               | 242,249           |                                 | Ps.        |  2,486,567                                                     |          | —                 |        | Ps.                              | 876,010    |                                     |       |                                         | Ps.           | 3,604,826 |   |   |   |
|                                              |       |              |              |                                 |       |                                                                |          |                   |        |                             |       |                                     |       |                                         |          |
| Issuance  of common stock                         |       | 285,762           |              | 793,655                              |       | —                                                              |          | —                 |        |                             |       | 1,079,417                                |       |                                         |          |
|                                              |       |              |              |                                 |       |                                                                |          |                   |        |                             |       |                                     |       |                                         |          |
| Minority  dilution                                |       | —            |              | —                               |       | —                                                              |          | (7,899                 | )           |                             |       | (7,899                                   | )          |                                         |          |
| Labor  obligations                                |       | —            |              | —                               |       | —                                                              |          |                   |        | Ps.                              | (8,864     | )                                        | (8,864     | )                                            | Ps.           |  (8,864 | ) |
| Net  income                                       |       |              |              |                                 |       |                                                                |          | 841,792                |        |                             |       | 841,792                                  |       | 841,792                                      |          |
|                                              |       |              |              |                                 |       |                                                                |          |                   |        |                             |       |                                     |       |                                         |          |
| Balances  as of December 31, 2005            |       | 528,011           |              | 3,280,222                            |       |                                                                |          | 1,709,903              |        | (8,864                           | )          | 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                                |       | Ps.                                          | 1,646,518     |   |
| Shares repurchased for employee stock option plan | ** ** | ** **        | ** **        | ** **                           |       | Ps.                                                                 |  (99,342 | )                      |        |                             |       |                                     | (99,342    | )                                            |          |   |
| Comprehensive income adjustment                   | ** ** | ** **        | ** **        | ** **                           | ** ** |                                                                |          |                   |        | (481                             | )          | (481                                     | )          | Ps.                                          | (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            | ** ** | **Ps.**           | ** 528,011** | ** **                           | **Ps.**    | ** 3,280,222**                                                 | ** **    | **Ps.**                | **(99,342** | **)**                            | **Ps.**    | **4,963,452**                            | ** ** | **Ps.**                                      | **(44,839**   | **)** | **Ps.** | **8,627,504** | ** ** | **Ps.** | **1,643,857** | ** ** |

 

F-49

----

** **

**29.****                    ****AdditionalU.S. GAAP disclosure information**

 

**Accounting for uncertainty in incometaxes:**

** **

The Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48) as of January 1, 2007.   The adoption of FIN 48 did not have animpact on the Company’s financial statements and did not result in a cumulativeadjustment to retained earnings at adoption,

 

We establish reserves to removesome or all of the tax benefit of any of our tax positions at the time wedetermine that it becomes uncertain based upon one of the following conditions:(1) the tax position is not “more likely than not” to be sustained, (2) thetax position is “more likely than not” to be sustained, but for a lesseramount, or (3) the tax position is “more likely than not” to be sustained,but not in the financial period in which the tax position was originally taken.

 

For purposes of evaluatingwhether or not a tax position is uncertain, (1) we presume the taxposition will be examined by the relevant taxing authority that has fullknowledge of all relevant information, (2) the technical merits of a taxposition are derived from authorities such as legislation and statutes,legislative intent, regulations, rulings and case law and their applicabilityto the facts and circumstances of the tax position, and (3) each taxposition is evaluated without consideration of the possibility of offset oraggregation with other tax positions taken.

 

A number of years may elapsebefore a particular uncertain tax position is audited and finally resolved orwhen a tax assessment is raised. The number of years subject to tax assessmentsvaries depending on the tax jurisdiction and is generally five years for thecountries in which the Company principally operates. The tax benefit that hasbeen previously reserved because of a failure to meet the “more likely than not”recognition threshold would be recognized in our income tax expense in thefirst period when the uncertainty disappears under any one of the followingconditions: (1) the tax position is “more likely than not” to besustained, (2) the tax position, amount, and/or timing is ultimatelysettled through negotiation or litigation, or (3) the statute oflimitations for the relevant taxing authority to examine and challenge the taxposition has expired.

 

**EITF 06-3**

** **

In June 2006, the EITFratified the consensus on EITF Issue No. 06-3 (EITF 06-03), How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That is, Gross versus Net Presentation).EITF 06-03 concluded that the presentation of taxes assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer, such as sales, use, value-added and certain excise taxesis an accounting policy decision that should be disclosed in a company’sfinancial statements. In addition, companies that record such taxes on a grossbasis should disclose the amounts of those taxes in interim and annualfinancial statements for each period for which an income statement is presentedif those amounts are significant. EITF 06-03 is effective for interim andannual reporting periods beginning after December 15, 2006. The Companycontinued with its accounting policy of net presentation; therefore, theadoption of EITF 06-03 did not have any impact on our financial condition orresults of operations.

 

A summary of the mostimportant new pronouncements in U.S. GAAP that will come into force in 2008 orafter and may apply to the Company is as follows:

 

**Fair value measurement (FASBStatement 157):**

** **

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157defines fair value, establishes a framework for the measurement of fair value,and enhances disclosures about fair value measurements. The statement does notrequire any new fair value measures.

 

The statement is effectivefor fair value measures already required or permitted by other standards forfiscal years beginning after November 15, 2007. The Company is required toadopt SFAS No. 157 beginning on January 1, 2008. SFAS No. 157 isrequired to be applied prospectively, except for certain financial instruments.Any transition adjustment will be recognized as an adjustment to openingretained earnings in the year of adoption. The Company is currently evaluatingthe impact of adopting this standard on its consolidated results of operationsand financial position.

 

F-50

----

** **

**Business Combinations (FASB StatementNo. 141(R))**

** **

On December 4, 2007,the Financial Accounting Standards Board (FASB) issued Statement No. 141(R), Business Combinations (Statement 141(R)). This new standard significantlychanges the financial accounting and reporting of business combinationtransactions.

 

Current practice underStatement 141 involves accumulating costs of acquiring a target entity andallocating those costs to individual assets acquired and liabilities assumed.

 

In step acquisitions andpartial acquisitions, this process generally results in recognizing theacquiree’s assets and liabilities as a mixture of values at the acquisitiondate (or dates) and, to the extent of interest in the acquiree not held by theacquirer, historical carrying values (i.e. accounting bases established beforethe acquirer made its acquisition(s)). Those historical carrying values areattributed to the non-controlling interests (previously referred to as minorityinterests) in the acquiree.

 

Under Statement 141(R) abusiness combination is treated as a transaction in which an entity (theacquirer) takes control of another entity (the target), and the fair value ofthe underlying exchange transaction should be used to establish a newaccounting basis of the acquired entity.

 

Furthermore, becauseobtaining control leaves the acquirer responsible and accountable for all ofthe acquiree’s assets, liabilities, and operations, the acquirer shouldrecognize and measure the fair value of the acquiree as a whole, and the assetsacquired and liabilities assumed at their full fair values as of the datecontrol is obtained, regardless of the percentage ownership in the acquiree orhow the acquisition was achieved (e.g., a step acquisition, a single purchaseresulting in control, or a change in control without a purchase of equityinterests).

 

The most significant changesto business combination accounting pursuant to Statement 141(R) includerecognizing, with certain exceptions, 100% of the fair values of assetsacquired, liabilities assumed, and non-controlling interests in acquisitions ofless than a 100% controlling interest when the acquisition constitutes a changein control of the acquired entity; measuring acquirer shares in considerationfor a business combination at fair value on the acquisition date; recognizingcontingent consideration arrangements at their acquisition-date fair values,with subsequent changes in fair value generally reflected in earnings; with certainexceptions, recognizing preacquisition loss and gain contingencies at theiracquisition-date fair values; capitalizing in-process research and development(IPR&D) assets acquired; expensing, as incurred, acquisition-relatedtransaction costs; capitalizing acquisition-related restructuring costs only ifthe criteria in Statement 146 are met as of the acquisition date; andrecognizing changes that result from a business combination transaction in anacquirer’s existing income tax valuation allowances and tax uncertaintyaccruals as adjustments to income tax expense.

 

Statement 141(R) isrequired to be adopted concurrently with Statement 160 and is effective forbusiness combination transactions for which the acquisition date is on or afterthe beginning of the first annual reporting period beginning on or after December 15,2008. Early adoption is prohibited.

 

The Company is currentlyevaluating the effect of adopting this new standard.

 

**Accounting for Non-controllingInterests (FASB Statement No. 160)**

** **

On December 4, 2007,the FASB issued Statement No. 160, Non-controlling Interests inConsolidated Financial Statements, an amendment of ARB No. 51 (Statement160). This new standard did not change significantly the financial accountingand reporting of non-controlling (or minority) interests in consolidatedfinancial statements.

 

Statement 160 defines anon-controlling interest as: “The portion of the equity (residual interests) ina subsidiary attributable to the owners of the subsidiary other than the parentand the parent’s associates”.

 

In current U.S. GAAP, equityinterests not held by the controlling shareholders are generally referred to asnon-controlling minority interests.

 

In a significant change fromcurrent U.S. GAAP practice, Statement 160 requires that non-controllinginterests in subsidiaries be reported as a component of equity in theconsolidated statement of financial position. This contrasts with theprevailing practice of reporting non-controlling interests as a “mezzanine”item between liabilities and stockholder’s equity. Statement 160 is based on an“economic entity” concept of consolidated financial statements.

 

In acknowledgement of thedifference between non-controlling interests in consolidated subsidiaries andcontrolling interests in a consolidated group, Statement 160 requires thepresentation of non-controlling interests and controlling interests 

 

F-51

----

 

as separate components of equity in the statement offinancial position along with comprehensive disclosures about attributes andtransactions pertaining to non-controlling interests.

 

Statement 160 requires thatearnings attributed to the non-controlling interests be reported as part ofconsolidated earnings and not as a separate component of income or expense, anddisclosure of the attribution of consolidated earnings to the controlling andnon-controlling interests on the face of the consolidated income statement.

 

Statement 160 also amendsFASB No. 128, Earnings per Share, to specify that earnings per share datain consolidated financial statements that include one or more partially-ownedsubsidiaries is calculated using only the amount of earnings attributable tothe controlling interests.

 

Changes in a parent’scontrolling ownership interest that do not result in a loss of control of thesubsidiary will now be treated as transactions among shareholders in theconsolidated entity. These transactions include decreases or increases in aparent’s controlling ownership interest in any subsidiary-issued security thatis classified in accordance with GAAP as equity in the consolidated statementof financial position (e.g., common stock, preferred stock, etc.).

 

Under SFAS 160, when thereis a decrease in ownership interest in a subsidiary, the carrying amount of thenon-controlling interest should be increased to reflect the change in thenon-controlling interest’s ownership in the subsidiary’s net assets. Anydifference between consideration received and the adjustment made to thecarrying amount of the non-controlling interest should be recognized directlyin equity attributable to the controlling interest (i.e., as an adjustment topaid-in capital).

 

When an increase inownership interest in a subsidiary occurs, the carrying amount of thenon-controlling interest is adjusted to reflect the non-controlling interest’sreduced ownership interest in the subsidiary’s net assets.

 

Any difference betweenconsideration paid by the parent to the non-controlling interest holders andthe adjustment to the carrying amount of the non-controlling ownershipinterests in the subsidiary is recognized directly in equity attributable tothe controlling interest (i.e., paid-in capital).

 

Statement 160 is effectivefor the first annual reporting period beginning on or after December 15,2008, and earlier application is prohibited. Statement 160 is required to beadopted prospectively, except for the following provisions, which are requiredto be adopted retrospectively:

 

·                  Reclassifynon-controlling interests from the “mezzanine” to equity, separate from theparent’s shareholders’ equity in the consolidated statement of financialposition.

 

·                  Recast consolidatednet income (loss) to include net income (loss) attributable to both thecontrolling and non-controlling interests.

 

The Company is currentlyevaluating the effect of adopting this new standard.

 

**The Fair Value Option for FinancialAssets and Financial Liabilities, Including an amendment of FASB Statement No. 115(FASB Statement No. 159)**

** **

In February 2007, theFASB issued FASB Statement No. 159, The Fair Value Option for FinancialAssets and Financial Liabilities (the “Statement” or “Statement 159”).Statement 159 allows entities to voluntarily choose, at specified electiondates, to measure many financial assets and financial liabilities (as well ascertain nonfinancial instruments that are similar to financial instruments) atfair value (the “fair value option”, or “FVO”). The election is made on aninstrument-by-instrument basis and is irrevocable. If the fair value option iselected for an instrument, the Statement specifies that all subsequent changesin fair value for that instrument shall be reported in earnings (or anotherperformance indicator for entities such as not-for-profit organizations that donot report earnings).

 

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

 

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

 

F-52

----

 

The Statement is effectiveas of the beginning of an entity’s first fiscal year that begins after November 15,2007 (January 1, 2008 for the Company).

 

The effect of initialadoption will be accounted for as a cumulative-effect adjustment throughbeginning retained earnings.

 

For items existing at theeffective date for which the fair value option is elected, the followingdisclosures should be provided:

 

·                  A schedule thatpresents the pretax portion of the cumulative effect adjustment for items onthat line.

·                  The fair value at theeffective date for items for which the FVO is elected.

·                  The carrying amountof items immediately before electing the FVO.

·                  The net effect on theentity’s deferred tax assets and liabilities of electing the FVO.

 

The Company is currentlyevaluating the effect of adopting this new standard.

 

**30.****                             ****Valuationand qualifying accounts  for the years ended December 31, 2007, 2006and 2005**

 
| **Description**                 | ** ** | **Beginning  balance  accrual** | ** ** | **Additions  charged to  income** | ** ** | **Write-off** | ** ** | **Ending  balance  accrual** | ** ** |
|---------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|---------------|------------|------------------------------|------------|
|                            |       |                            |       |                                   |       |          |       |                         |       |
| Allowance for doubtful accounts |       |                            |       |                                   |       |          |       |                         |       |
| 2007                            |       | Ps.                             | 73,554     |                                   | Ps.        | 115,572       |       | Ps.                          | (99,808    | ) | Ps. | 89,318 |   |
| 2006                            |       | 27,899                          |       | 45,655                                 |       |          |       | 73,554                       |       |
| 2005                            |       | 12,588                          |       | 15,311                                 |       |          |       | 27,899                       |       |
|                                 |            |                                 |            |                                        |            |               |            |                              |            |  |  |  |  |

 

**31.****                             ****Supplementalguarantor information**

** **

**Supplementalguarantor information**

** **

TheSenior Guaranteed Notes are fully and unconditionally guaranteed, on anunsecured senior, joint and several basis, by each of the Company’s significantsubsidiaries. Eachof the guarantor subsidiaries (Proyectos Inmobiliarios de Culiacán, S. A. de C.V., Desarrollodora de Casas del Noroeste, S. A. de C. V., Casas Beta delCentro, S. de R.L. de C.V., Casas Beta del Norte, S. de R.L. de C.V., Casas Beta del Noroeste, S. de R.L. de C.V., Edificaciones Beta, S. de R.L. deC.V., Edificaciones Beta del Norte, S. de R. L. de C.V. and Edificaciones Betadel Noroeste, 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.

 

Investmentsin subsidiaries are accounted for by the parent company under the equity methodfor purpose of the supplemental combining presentation. Earnings ofsubsidiaries are therefore reflected in the parent company’s investment accountand earnings. The principal elimination entries eliminate the parent company’sinvestment in subsidiaries and intercompany balances and transactions.

 

F-53

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Balance Sheet as of December 31,2007**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
| ** **                                        | ** ** | **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-54

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Balance Sheet as of December 31,2006**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                                        |       | **Parent  company** |           | **Wholly-  owned  guarantor  gubsidiaries** |    | **Eliminations** |       | **Parent company**

**and wholly-owned  guarantor  subsidiaries** |            | **Non-  guarantor  subsidiaries** |    | **Eliminations** |       | **Consolidated** |          |
|-------------------------------------------------------------|------------|---------------------|----------------|---------------------------------------------|---------|------------------|------------|-------------------------------------------------------------------|-----------------|-----------------------------------|---------|------------------|------------|------------------|---------------|
| Assets                                                      |       |                |           |                                        |    |             |       |                                                              |            |                              |    |             |       |             |          |
| Currents  assets:                                           |       |                |           |                                        |    |             |       |                                                              |            |                              |    |             |       |             |          |
| Cash and  cash equivalents                                  |       | Ps.                 | 101            |                                        | Ps.     | 2,324,238        |       | Ps.                                                               | —          |                              | Ps.     | 2,324,339        |       | Ps.              | 57,350        |   | Ps. | — |   | Ps. | 2,381,689 |   |
| Restricted  cash                                            |       | —              |           | —                                      |    | —           |       | —                                                            |            | 37,597                            |    |             |       | 37,597           |          |
| Trade  accounts receivable, net                             |       | —              |           | 4,668,651                                   |    | —           |       | 4,668,651                                                         |            | 1,288,084                         |    | (415,649         | )          | 5,541,086        |          |
| Accounts  receivable from affiliates                        |       | 1,438,949           |           | 11,118,076                                  |    | (11,987,858      | )          | 569,167                                                           |            | 849,015                           |    | (1,418,182       | )          | —           |          |
| Inventories                                                 |       | —              |           | 3,724,807                                   |    | —           |       | 3,724,807                                                         |            | 487,636                           |    | —           |       | 4,212,443        |          |
| Other  current assets, net                                  |       | 12,590              |           | 238,795                                     |    | —           |       | 251,385                                                           |            | 148,039                           |    | —           |       | 399,424          |          |
| Total  current assets                                       |       | 1,451,640           |           | 22,074,567                                  |    | (11,987,858      | )          | 11,538,349                                                        |            | 2,867,721                         |    | (1,833,831       | )          | 12,572,239       |          |
| Land held for future development                            |       | —              |           | 5,180,583                                   |    | —           |       | 5,180,583                                                         |            | —                            |    | —           |       | 5,180,583        |          |
| Property  and equipment, net                                |       | —              |           | 358,735                                     |    | —           |       | 358,735                                                           |            | 310,360                           |    | —           |       | 669,095          |          |
| Investment  in shares                                       |       | 7,925,055           |           | 329,070                                     |    | (8,254,125       | )          | —                                                            |            | —                            |    | —           |       | —           |          |
| Other  assets                                               |       | 507,237             |           | 41,308                                      |    | (93,993          | )          | 454,552                                                           |            | 12,398                            |    | (666             | )          | 466,284          |          |
| Goodwill                                                    |       | 731,861             |           | —                                      |    |             |       | 731,861                                                           |            | —                            |    |             |       | 731,861          |          |
| **Total**                                                   | ** ** | **Ps.**             | **10,615,793** | ** **                                  | **Ps.** | **27,984,263**   | ** ** | **Ps.**                                                           | **(20,335,976** | **)**                             | **Ps.** | **18,264,080**   | ** ** | **Ps.**          | **3,190,479** | ** ** | **Ps.** | **(1,834,497** | **)** | **Ps.** | **19,620,062** | ** ** |
|                                                        |       |                |           |                                        |    |             |       |                                                              |            |                              |    |             |       |             |          |
| Liabilities  and stockholders’ equity                  |       |                |           |                                        |    |             |       |                                                              |            |                              |    |             |       |             |          |
| Current  liabilities:                                       |       |                |           |                                        |    |             |       |                                                              |            |                              |    |             |       |             |          |
| Current portion of long-term debt                           |       | Ps.                 | 86,316         |                                        | Ps.     | —           |       | Ps.                                                               | —          |                              | Ps.     | 86,316           |       | Ps.              | 5,076         |   | Ps. | — |   | Ps. | 91,392 |   |
| Current  portion of leases                                  |       | —              |           | 8,704                                       |    | —           |       | 8,704                                                             |            | —                            |    | —           |       | 8,704            |          |
| Trade  accounts payable                                     |       | 29,979              |           | 2,079,542                                   |    | (415,650         | )          | 1,693,871                                                         |            | 441,267                           |    | —           |       | 2,135,138        |          |
| Land  suppliers                                             |       | 2,306               |           | 3,414,001                                   |    | —           |       | 3,416,307                                                         |            | 85,588                            |    | —           |       | 3,501,895        |          |
| Advance  from customers                                     |       | —              |           | 373                                         |    | —           |       | 373                                                               |            | 302,295                           |    | —           |       | 302,668          |          |
| Accrued expenses and taxes other than income taxes          |       | 6,670               |           | 68,768                                      |    | —           |       | 75,438                                                            |            | 7,823                             |    | —           |       | 83,261           |          |
| Due to  related parties                                     |       | 12,285              |           | 11,975,573                                  |    | (11,987,858      | )          | —                                                            |            | 1,418,255                         |    | (1,418,255       | )          | —           |          |
| Income tax  payable                                         |       | 7,874               |           | 71,807                                      |    | —           |       | 79,681                                                            |            | 26,144                            |    | —           |       | 105,825          |          |
| Employee  profit-sharing                                    |       |                |           | 33,960                                      |    |             |       | 33,960                                                            |            | 5,694                             |    |             |       | 39,654           |          |
| Total  current liabilities                                  |       | 145,430             |           | 17,652,728                                  |    | (12,403,508      | )          | 5,394,650                                                         |            | 2,292,142                         |    | (1,418,255       | )          | 6,268,537        |          |
| Long-term  debt                                             |       | 2,800,573           |           | 563,021                                     |    | —           |       | 3,363,594                                                         |            | 14,361                            |    | —           |       | 3,377,955        |          |
| Swap  payable                                               |       | 227,074             |           | —                                      |    | —           |       | 227,074                                                           |            | —                            |    | —           |       | 227,074          |          |
| Employee  retirement obligations                            |       | —              |           | 36,809                                      |    | —           |       | 36,809                                                            |            | 15,466                            |    | —           |       | 52,275           |          |
| Deferred income taxes and employee statutory profit-sharing |       | (92,382             | )              | 2,201,803                                   |    | (93,993          | )          | 2,015,428                                                         |            | 86,956                            |    | (667             | )          | 2,101,717        |          |
| Total  liabilities                                          |       | 3,080,695           |           | 20,454,361                                  |    | (12,497,501      | )          | 11,067,555                                                        |            | 2,408,925                         |    | (1,418,922       | )          | 12,027,558       |          |
| Stockholders’  equity:                                 |       |                |           |                                        |    |             |       |                                                              |            |                              |    |             |       |             |          |
| Common stock                                                |       | 528,011             |           | 2,683,796                                   |    | (2,683,796       | )          | 528,011                                                           |            | 477,403                           |    | (477,403         | )          | 528,011          |          |
| Additional  paid-in capital                                 |       | 3,280,223           |           | —                                      |    | —           |       | 3,280,223                                                         |            | —                            |    | —           |       | 3,280,223        |          |
| Retained  earnings                                          |       | 3,382,089           |           | 4,703,964                                   |    | (5,012,561       | )          | 3,073,492                                                         |            | 302,852                           |    | (28,212          | )          | 3,348,132        |          |
| Other  stockholders’ equity accounts                   |       | 344,775             |           | 142,142                                     |    | (142,118         | )          | 344,799                                                           |            | 1,299                             |    | 1,307            |       | 347,405          |          |
| Majority  stockholders’ equity                         |       | 7,535,098           |           | 7,529,902                                   |    | (7,838,475       | )          | 7,225,525                                                         |            | 781,554                           |    | (504,308         | )          | 7,503,771        |          |
| Minority interest in consolidated subsidiaries              |       | —              |           | —                                      |    | —           |       | —                                                            |            | —                            |    | 88,733           |       | 88,733           |          |
| Total  stockholders’ equity                            |       | 7,535,098           |           | 7,529,902                                   |    | (7,838,475       | )          | 7,226,525                                                         |            | 781,554                           |    | (415,575         | )          | 7,592,504        |          |
| **Total**                                                   | ** ** | **Ps.**             | **10,615,793** | ** **                                  | **Ps.** | **27,984,263**   | ** ** | **Ps.**                                                           | **(20,335,976** | **)**                             | **Ps.** | **18,264,080**   | ** ** | **Ps.**          | **3,190,479** | ** ** | **Ps.** | **(1,834,497** | **)** | **Ps.** | **19,620,062** | ** ** |

 

F-55

----

 

 **Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Statement of Income for the YearEnded December 31, 2007**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                         |       | **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-56

----

 

** DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Statement of Income for the YearEnded December 31, 2006**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                         |       | **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-57

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Statement of Income for the YearEnded December 31, 2005**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                     |       | **Parent  company** | ** **  | **Wholly-  owned  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent  company and  wholly-  owned  guarantor  subsidiaries** | ** **     | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** |      |
|------------------------------------------|------------|---------------------|-------------|---------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|----------------|-----------------------------------|------------|------------------|------------|------------------|-----------|
| Revenues                                 |       | Ps.                 | —      |                                        | Ps.        | 13,346,453       |       | Ps.                                                                   | (4,135,710     | )                                 | Ps.        | 9,210,743        |       | Ps.              | 514,116   |   | Ps. | (508,816 | ) | Ps. | 9,216,043 |   |
| Costs                                    |       | 125,807             |        | 10,380,280                                  |       | (4,110,018       | )          | 6,396,069                                                             |           | 22,498                            |       |             |       | 6,418,567        |      |
| Gross  profit                            |       | (125,807            | )           | 2,966,173                                   |       | (25,692          | )          | 2,814,674                                                             |           | 491,618                           |       | (508,816         | )          | 2,797,476        |      |
| Selling  and administrative expenses     |       | 77,433              |        | 849,566                                     |       | —           |       | 926,999                                                               |           | 494,982                           |       | (508,816         | )          | 913,165          |      |
| Income  (loss) from operations           |       | (203,240            | )           | 2,116,607                                   |       | (25,692          | )          | 1,887,675                                                             |           | (3,364                            | )          | —           |       | 1,884,311        |      |
| Other  income, net                       |       | —              |        | 12,931                                      |       | —           |       | 12,931                                                                |           | 2,025                             |       | —           |       | 14,956           |      |
| Net  comprehensive financing cost:       |       |                |        |                                        |       |             |       |                                                                  |           |                              |       |             |       |             |      |
| Interest  expense                        |       | 191,354             |        | 322,422                                     |       | (93,033          | )          | 420,743                                                               |           | 34,218                            |       | (2,452           | )          | 452,509          |      |
| Interest  income                         |       | (92,535             | )           | (28,697                                     | )          | 93,033           |       | (28,199                                                               | )              | (37,207                           | )          | 2,452            |       | (62,954          | )         |
| Exchange  loss                           |       | 58,828              |        | 11,791                                      |       | —           |       | 70,619                                                                |           | 56                                |       | —           |       | 70,675           |      |
| Monetary  position loss (gain)           |       | 10,742              |        | 110,651                                     |       | (87,481          | )          | 33,912                                                                |           | (137                              | )          | —           |       | 33,775           |      |
|                                     |       | 168,389             |        | 416,167                                     |       | (87,481          | )          | 497,075                                                               |           | (3,070                            | )          | —           |       | 494,005          |      |
| Income (loss) before income taxes        |       | (371,629            | )           | 1,713,371                                   |       | 61,789           |       | 1,403,531                                                             |           | 1,731                             |       | —           |       | 1,405,262        |      |
| Income  tax (benefit) expense            |       | (111,795            | )           | 578,081                                     |       | —           |       | 466,286                                                               |           | (7,384                            | )          | —           |       | 458,902          |      |
| Equity in income of associated companies |       | 1,206,194           |        | 2,615                                       |       | (1,208,809       | )          | —                                                                |           | —                            |       | —           |       | —           |      |
| Consolidated  net income                 |       | Ps.                 | 946,360     |                                        | Ps.        | 1,137,905        |       | Ps.                                                                   | (1,147,020     | )                                 | Ps.        | 937,245          |       | Ps.              | 9,115     |   | Ps. | — |   | Ps. | 946,360 |   |
| Net income of majority stockholders      |       | 953,611             |        | 1,137,905                                   |       | (1,147,020       | )          | 944,496                                                               |           | 9,115                             |       | —           |       | 953,611          |      |
| Net income of minority stockholders      |       | (7,251              | )           | —                                      |       | —           |       | (7,251                                                                | )              | —                            |       | —           |       | (7,251           | )         |
| Consolidated  net income                 | ** ** | **Ps.**             | **946,360** | ** **                                  | **Ps.**    | **1,137,905**    | ** ** | **Ps.**                                                               | **(1,147,020** | **)**                             | **Ps.**    | **937,245**      | ** ** | **Ps.**          | **9,115** | ** ** | **Ps.** | **—** | ** ** | **Ps.** | **946,360** | ** ** |

 

F-58

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Statement of Changes in FinancialPosition for the Year Ended December 31, 2007**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                              |       | **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-59

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Statement of Changes in FinancialPosition for the Year Ended December 31, 2006**

**(In thousands of Mexican pesos(Ps.) of purchasing power as of December 31, 2007)**

 
|                                             |       | **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-60

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningFinancial Information**

**Statement of Changes in FinancialPosition for the Year Ended December 31, 2005**

**In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                                |       | **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.                 | 946,360     |                                        | Ps.        | 1,137,905        |       | Ps.                                                                   | (1,147,020 | )                                 | Ps.           | 937,245          |       | Ps.              | 9,115  |   | Ps. | — |   | Ps. | 946,360 |   |
| Add items that did not require resources:           |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Depreciation                                        |       | —              |        | 51,807                                      |       | —           |       | 51,807                                                                |       | 14,819                            |          | —           |       | 66,626           |   |
| Equity in  income subsidiaries                      |       | (1,206,194          | )           | (2,615                                      | )          | 1,208,809        |       | —                                                                |       | —                            |          | —           |       | —           |   |
| Amortization of BETA trademark and backlog          |       | 174,960             |        | —                                      |       | —           |       | 174,960                                                               |       | —                            |          | —           |       | 174,960          |   |
| Labor  obligations                                  |       | —              |        | 27,233                                      |       | —           |       | 27,233                                                                |       | 6,457                             |          | —           |       | 33,690           |   |
| Deferred  income taxes                              |       | 100,037             |        | 311,525                                     |       | —           |       | 411,562                                                               |       | (9,192                            | )             | —           |       | 402,370          |   |
|                                                |       | 15,163              |        | 1,525,855                                   |       | 61,789           |       | 1,602,807                                                             |       | 21,199                            |          |             |       | 1,624,006        |   |
| Changes in operating assets and liabilities         |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| (Increase)  decrease in:                            |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Trade  accounts receivable                          |       | (5,993              | )           | (705,553                                    | )          | 13,730           |       | (697,816                                                              | )          | 52,422                            |          | (54,530          | )          | (699,924         | )      |
| Accounts  receivable from affiliates                |       | (1,229,300          | )           | 122,006                                     |       | 911,555          |       | (195,739                                                              | )          | (63,509                           | )             | 259,248          |       | —           |   |
| Inventories and land held for future development    |       | (91,387             | )           | (2,186,343                                  | )          | —           |       | (2,277,730                                                            | )          | (95,807                           | )             | —           |       | (2,373,537       | )      |
| Other  assets                                       |       | (268,529            | )           | 39,622                                      |       | —           |       | (228,907                                                              | )          | (132,189                          | )             | —           |       | (361,096         | )      |
| Increase  (decrease) in:                            |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Trade  accounts payable                             |       | 7,803               |        | 121,748                                     |       | —           |       | 129,551                                                               |       | 121,953                           |          | —           |       | 251,504          |   |
| Land  suppliers                                     |       | —              |        | 969,822                                     |       | —           |       | 969,822                                                               |       | —                            |          | —           |       | 969,822          |   |
| Accrued  expenses and taxes                         |       | —              |        | 290,866                                     |       | —           |       | 290,866                                                               |       | —                            |          | —           |       | 290,866          |   |
| Due to  related parties                             |       | 5,815               |        | 914,817                                     |       | (920,632         | )          | —                                                                |       | 227,960                           |          | (227,960         | )          | —           |   |
| Other  liabilities                                  |       | —              |        | 138,321                                     |       | —           |       | 138,321                                                               |       | —                            |          | —           |       | 138,321          |   |
| Net resources used in operating activities          |       | (1,566,428          | )           | 1,231,161                                   |       | 66,442           |       | (268,825                                                              | )          | 132,029                           |          | (23,242          | )          | (160,038         | )      |
|                                                |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Financing  activities:                              |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Proceeds  from new borrowings                       |       | 1,831,606           |        | 1,446,479                                   |       | 875,772          |       | 4,153,857                                                             |       | 31,167                            |          | 2,866            |       | 4,187,890        |   |
| Payments of notes payable to financial institutions |       | —              |        | (1,875,415                                  | )          | —           |       | (1,875,415                                                            | )          | —                            |          | —           |       | (1,875,415       | )      |
| Proceeds from issuance of common stock              |       | 1,079,417           |        | —                                      |       | —           |       | 1,079,417                                                             |       | (23,657                           | )             | 23,657           |       | 1,079,417        |   |
| Net resources generated by financing activities     |       | 2,911,023           |        | (428,936                                    | )          | 875,772          |       | 3,357,859                                                             |       | 7,510                             |          | 26,523           |       | 3,391,892        |   |
|                                                |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Investing  activities:                              |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Restricted  investments                             |       | 47,909              |        | —                                      |       | —           |       | 47,909                                                                |       | —                            |          | —           |       | 47,909           |   |
| Acquisition of property and equipment               |       | —              |        | (44,014                                     | )          | —           |       | (44,014                                                               | )          | (114,388                          | )             | (3,281           | )          | (161,683         | )      |
| Acquisition  of minority interest                   |       | (79,436             | )           | (87,337                                     | )          | 79,436           |       | (87,337                                                               | )          | —                            |          | —           |       | (87,337          | )      |
| Acquisition  of BETA                                |       | (1,178,084          | )           | —                                      |       | (1,021,650       | )          | (2,199,734                                                            | )          | —                            |          | —           |       | (2,199,734       | )      |
| Net resources used in investing activities          |       | (1,209,611          | )           | (131,351                                    | )          | (942,214         | )          | (2,283,176                                                            | )          | (114,388                          | )             | (3,281           | )          | (2,400,845       | )      |
|                                                |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Cash, cash equivalents and restricted cash:         |       |                |        |                                        |       |             |       |                                                                  |       |                              |          |             |       |             |   |
| Net  increase                                       |       | 134,984             |        | 670,874                                     |       | —           |       | 805,858                                                               |       | 25,151                            |          | —           |       | 831,009          |   |
| Balance at beginning of year                        |       | 23,541              |        | 511,878                                     |       | —           |       | 535,419                                                               |       | 57,721                            |          | —           |       | 593,140          |   |
| Balance at end of year                              | ** ** | **Ps.**             | **158,525** | ** **                                  | **Ps.**    | **1,182,752**    |       | —                                                                | ** ** | **Ps.**                           | **1,341,277** | ** **       | **Ps.**    | **82,872**       |   | — | ** ** | **Ps.** | **1,424,149** | ** ** |
|                                                     |            |                     |             |                                             |            |                  |            |                                                                       |            |                                   |               |                  |            |                  |        |  |  |  |  |  |  |  |

 

F-61

----

 

** DesarrolladoraHomex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningReconciliation of Mexican Financial Reporting Standards (MFRS) to U.S. GAAP**

**As of and for the Year Ended December 31,2007**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                                                                |       | **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 |   |
| U.S. 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            |      |
| Selling  commission                                                                 |       | —                    |       | 27,461                                      |       | —           |       | 27,461                                                                      |       | 9,364                             |       | —           |       | 36,825           |      |
| Effects of inflation on U.S. GAAP adjustments                                       |       | —                    |       | 153,309                                     |       | —           |       | 153,309                                                                     |       | 50,325                            |       | —           |       | 203,634          |      |
| Tax effects on U.S. 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 U.S. 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. | (1,130,714 | ) | Ps. | 9,632,918 |   |
| U.S. 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 U.S. GAAP adjustments before tax effects                                      |       | 14,531                    |       | (921,570                                    | )          | —           |       | (907,039                                                                    | )          | (516,664                          | )          | —           |       | (1,423,703       | )         |
| Tax effects on U.S. 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 U.S. 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-62

----

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningReconciliation of Mexican Financial Reporting Standards (MFRS) to U.S. GAAP**

**As of and for the Year Ended December 31,2006**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                                                                |       | **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 |   |
| U.S. 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           | )           |
| Selling  commission                                                                 |       | —                    |          | 2,490                                       |       | —           |       | 2,490                                                                       |           |                              |       |             |       | 2,490            |        |
| Effects of inflation on U.S. GAAP adjustments                                       |       | —                    |          | 141,644                                     |       | —           |       | 141,644                                                                     |           | 30,092                            |       | —           |       | 171,736          |        |
| Tax effects on U.S. 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 U.S. 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 |   |
| U.S. 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                                                                   |           | 644,603                           |       | —           |       | 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 U.S. GAAP adjustments before tax effects                                      |       | 272,495                   |          | (712,442                                    | )          | —           |       | (439,947                                                                    | )              | (175,799                          | )          | —           |       | (615,746         | )           |
| Tax effects on U.S. 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 U.S. 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-63

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**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed CombiningReconciliation of Mexican Financial Reporting Standards (MFRS) to U.S. GAAP**

**As of and for the Year Ended December 31,2005**

**(In thousands of Mexican pesos (Ps.)of purchasing power as of December 31, 2007)**

 
|                                                                                |       | **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.                       | 953,611       |                                        | Ps.        | 1,137,905        |       | Ps.                                                                         | (1,147,020     | )                                 | Ps.        | 944,496          |       | Ps.              | 9,115       |   | Ps. | — |   | Ps. | 953,611 |   |
| U.S. GAAP  adjustments:                                                             |       |                      |          |                                        |       |             |       |                                                                        |           |                              |       |             |       |             |        |
| Reversal of revenue recognized under percentage-of-completion method  of accounting |       | —                    |          | (1,003,119                                  | )          | —           |       | (1,003,119                                                                  | )              | —                            |       | —           |       | (1,003,119       | )           |
| Reversal of cost recognized under percentage-of-completion method of  accounting    |       | —                    |          | 663,816                                     |       | —           |       | 663,816                                                                     |           | —                            |       | —           |       | 663,816          |        |
| Backlog  and BETA trademark                                                         |       | (170,638                  | )             |                                        |       |             |       | (170,638                                                                    | )              |                              |       |             |       | (170,638         | )           |
| Capitalization  of interest                                                         |       | 54,878                    |          | 135,050                                     |       | —           |       | 189,928                                                                     |           | —                            |       | —           |       | 189,928          |        |
| Effects of inflation on U.S. GAAP adjustments                                       |       | —                    |          | 143,753                                     |       | —           |       | 143,753                                                                     |           | —                            |       | —           |       | 143,753          |        |
| Tax effects on U.S. GAAP adjustments                                                |       | (163,679                  | )             | 228,120                                     |       | —           |       | 64,441                                                                      |           | —                            |       | —           |       | 64,441           |        |
| Total  adjustments                                                                  |       | (279,439                  | )             | 167,620                                     |       | —           |       | (111,819                                                                    | )              | —                            |       | —           |       | (111,819         | )           |
| Net income according to U.S. GAAP                                                   | ** ** | **Ps.**                   | **674,172**   | ** **                                  | **Ps.**    | **1,305,525**    | ** ** | **Ps.**                                                                     | **(1,147,020** | **)**                             | **Ps.**    | **832,677**      | ** ** | **Ps.**          | **9,115**   | ** ** | **Ps.** | **—** | ** ** | **Ps.** | **841,792** | ** ** |
|                                                                                |       |                      |          |                                        |       |             |       |                                                                        |           |                              |       |             |       |             |        |
| Majority stockholders’ equity according to MFRS                                |       | Ps.                       | 6,102,863     |                                        | Ps.        | 5,874,605        |       | Ps.                                                                         | (5,871,735     | )                                 | Ps.        | 6,105,733        |       | Ps.              | 278,918     |   | Ps. | (281,787 | ) | Ps. | 6,102,864 |   |
| U.S. GAAP  adjustments:                                                             |       |                      |          |                                        |       |             |       |                                                                        |           |                              |       |             |       |             |        |
| Reversal of revenue recognized under percentage-of-completion method  of accounting |       | —                    |          | (4,636,002                                  | )          | —           |       | (4,636,002                                                                  | )              | (133,856                          | )          | —           |       | (4,769,858       | )           |
| Reversal of cost recognized under percentage-of-completion method of  accounting    |       | —                    |          | 3,464,617                                   |       | —           |       | 3,464,617                                                                   |           | 106,110                           |       | —           |       | 3,570,727        |        |
| Backlog  and BETA trademark                                                         |       | (170,638                  | )             | —                                      |       | —           |       | (170,638                                                                    | )              | —                            |       | —           |       | (170,638         | )           |
| Goodwill                                                                            |       | 86,754                    |          | —                                      |       | —           |       | 86,754                                                                      |           | —                            |       | —           |       | 86,754           |        |
| Acquisition  of minority interest                                                   |       |                      |          | 79,437                                      |       |             |       | 79,437                                                                      |           | —                            |       |             |       | 79,437           |        |
| Capitalization  of interest                                                         |       | 102,382                   |          | 190,495                                     |       | —           |       | 292,877                                                                     |           | —                            |       | —           |       | 292,877          |        |
| Deferred employee statutory profit-sharing                                          |       | —                    |          | (4,699                                      | )          | —           |       | (4,699                                                                      | )              | 9,511                             |       | —           |       | 4,812            |        |
| Total U.S. GAAP adjustments before tax effects                                      |       | 18,498                    |          | (906,152                                    | )          | —           |       | (887,654                                                                    | )              | (18,235                           | )          | —           |       | (905,889         | )           |
| Tax effects on U.S. GAAP adjustments                                                |       | 105,222                   |          | 203,973                                     |       | —           |       | 309,195                                                                     |           | 3,102                             |       | —           |       | 312,297          |        |
| Total  adjustments                                                                  |       | 123,720                   |          | (702,179                                    | )          | —           |       | (578,459                                                                    | )              | (15,133                           | )          | —           |       | (593,592         | )           |
| Stockholders’ equity according to U.S. GAAP                                    | ** ** | **Ps.**                   | **6,226,583** | ** **                                  | **Ps.**    | **5,172,426**    | ** ** | **Ps.**                                                                     | **(5,871,735** | **)**                             | **Ps.**    | **5,527,274**    | ** ** | **Ps.**          | **263,785** | ** ** | **Ps.** | **(281,787** | **)** | **Ps.** | **5,509,272** | ** ** |

 

F-64

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