** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 20-F**

** **

**o**** REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**ý**** ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2004**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**for thetransition period from          to           **

 

**CommissionFile Number:  1-32229**

 

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

(Exactname of Registrant as specified in its charter)

 
| **Homex  Development Corp.**                          | ** ** | **United  Mexican States**                       |
|-------------------------------------------------------|------------|--------------------------------------------------|
| (Translation of  Registrant’s name into English) | ** ** | (Jurisdiction of  incorporation or organization) |

 

**Andador Javier Mina 891-B**

**Colonia Centro Sinaloa**

**80200Culiacán, Sinaloa, México**

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

(Addressof principal executive offices)

 

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

** **
| **Title of each class:**                                                            | ** ** | **Name of 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                  |

** **

**Securities registered or to be registered pursuant to Section 12(g) ofthe Act:**

** **

**None**

** **

**Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:**

** **

**None**

** **

**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:**

 

**313,856,490Common Shares, without par value**

 

**Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.**

 

| **Yes**ý | ** ** | **No**o |
|---------------|------------|---------|

 

**Indicate by check mark which financial statement itemthe registrant has elected to follow:**

 

| **Item 17**o | ** ** | **Item 18**ý |
|--------------|------------|-------------------|

** **

----

*    Not for trading but only in connection with the registration ofAmerican Depositary Shares, pursuant to the requirements of the Securities andExchange Commission.

 

 

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

 

----

 

**PRESENTATION OFFINANCIAL INFORMATION**

** **

DearrolladoraHomex, S.A. de C.V. is a corporation (*sociedad anónima decapital variable*) organized under the laws of the United MexicanStates, or Mexico.

 

In this Annual Report on Form 20-F,references to “U.S.$” and “U.S. dollars” are to the lawful currency of theUnited States of America.  References to “Ps.”and “pesos” are to the lawful currency of Mexico.  References to “UDI” and “UDIs” are to *Unidades de Inversion*, units of accountwhose value in pesos is indexed to inflation on a daily basis by the MexicanCentral Bank (*Banco de México*).  Unlessotherwise specified or the context otherwise requires, references to “we,” “us,”“our,” or “Homex” mean Desarrolladora Homex, S.A. de C.V. and its subsidiaries.

 

This Annual Report contains our audited consolidatedfinancial statements as of December 31, 2003 and 2004 and for the yearsended December 31, 2002, 2003 and 2004. Our financial statements have been audited by Galaz, Yamazaki, RuizUrquiza, S.C., a member of Deloitte Touche Tohmatsu and an independent registeredpublic accounting firm.

 

Wepublish our financial statements in pesos and our financial statements areprepared in accordance with generally accepted accounting principles in Mexico,commonly referred to as “Mexican GAAP.” Mexican GAAP differs in certain significant respects from accountingprinciples generally accepted in the United States of America, commonlyreferred to as “U.S. GAAP.”  See Notes 22and 23 to our audited consolidated financial statements for informationrelating to the nature and effect of such differences and for a quantitativereconciliation of our majority net income and majority stockholders’ equity accordingto Mexican GAAP to consolidated net income and consolidated stockholders’equity according to U.S. GAAP.

 

As the Mexican economy has experienced significantlevels of inflation in the past, we are required under Mexican GAAP torecognize the effects of inflation in our financial statements.  Under Bulletin B-10, issued by the MexicanInstitute of Public Accountants, we are required to present our financialinformation in inflation-adjusted monetary units to allow for more accuratecomparisons of financial line items over time and to mitigate the distortiveeffects of inflation on our financial statements.  Unless otherwise indicated, all financialinformation in this Annual Report has been restated in pesos of constantpurchasing power as of December 31, 2004.

 

We are required to determine our monetary positiongain/loss to reflect the effect of inflation on our monetary assets andliabilities.  We determine our netmonetary position by subtracting our monetary liabilities from our monetaryassets and then adjusting our net monetary position by the appropriateinflation rate for the period with the resulting monetary gain or lossreflected in earnings.  In so doing, wecan reflect the effect inflation is having on our monetary items.

 

Pursuantto Mexican GAAP, we recognize income from the sale of homes based on thepercentage-of-completion method of accounting, which requires us to recognizeincome as we incur the cost of construction. Accordingly, we use “sell” and refer to homes “sold” in connection withhomes where:

 

•                  we establish that the home buyer willobtain the required financing from the mortgage lender;

 

•                  the home buyer has submitted all requireddocuments in order to obtain financing from the mortgage lender;

 

•                  the home buyer has signed a purchaseagreement (*contrato de promesa decompra-venta*); and

 

•                  the home buyer has made a down payment,in the case that a down payment is required.

 

We use “deliver”and refer to homes “delivered” in connection with homes for which title haspassed to the buyer and for which we have received the sale proceeds.

 

1

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This Annual Reportcontains translations of various peso amounts into U.S. dollars at specifiedrates solely for the convenience of the reader. You should not construe these translations as representations that thepeso amounts actually represent these U.S. dollar amounts or could be convertedinto U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated U.S. dollar amounts atthe exchange rate of Ps. 11.15 to U.S.$1.00, which was the noon buyingrate for cable transfers in pesos published by the Federal Reserve Bank of NewYork, expressed in pesos per U.S. dollar, on December 31, 2004.  Unless otherwise indicated, references toUDIs are to UDIs at the Mexican Central Bank UDI conversion rate ofPs. 3.53 to UDI 1.00 on December 31, 2004.  On June 23, 2005, the noon buying ratefor pesos was Ps. 10.78 to U.S.$1.00. On June 23, 2005, the Mexican Central Bank UDI conversion rate wasPs. 3.56 to UDI 1.00.

 

2

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**MARKET SHARE ANDOTHER INFORMATION**

** **

Wehave prepared the information concerning the Mexican securities market setforth below based on materials obtained from public sources, including theMexican Banking and Securities Commission, or CNBV *(ComisiónNacional Bancaria y de*Valores), the Mexican Stock Exchange, theMexican Central Bank, and publications by market participants.

 

**FORWARD LOOKINGSTATEMENTS**

** **

ThisAnnual Report includes “forward-looking statements” within the meaning of Section 27Aof the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21Eof the Securities Exchange Act of 1934, as amended, or the Exchange Act,including the statements about our plans, strategies and prospects under “Item 4.  Information on the Company” and “Item 5.  Operating and Financial Review and Prospects.”  Some of these statements contain words suchas “believe,” “expect,” “intend,” “anticipate,” “estimate,” “strategy,” “plans”and other similar words.  Although webelieve that our plans, intentions and expectations as reflected in orsuggested by these forward-looking statements are reasonable, we cannot assureyou that these plans, intentions or expectations will be achieved.  Actual results could differ materially fromthe forward-looking statements as a result of risks, uncertainties and otherfactors discussed in “Item 3.  KeyInformation—Risk Factors,” “Item 4. Information on the Company,”  “Item 5.  Operating and Financial Review and Prospects”and “Item 11.  Quantitative andQualitative Disclosures About Market Risk.” These risks, uncertainties and factors include:  projections of revenues, net income (loss),earnings per share, earnings per ADS, statements regarding the anticipatedresults of recent acquisitions, capital expenditures, capital structure, orother financial items or ratios; statements of our plans, objectives, or goals,including those relating to competition, regulation, and government housingpolicy; statements about our future economic performance or that of Mexico orother countries; statements of assumptions underlying such statements; andother factors discussed herein.

 

3

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| **PART I** | ** **      | ** **                                                  |
|-----------------|-----------------|-------------------------------------------------------------|
|            |            |                                                        |
| **ITEM 1**.     | ** **      | **Identity  of Directors, Senior Management and Advisors.** |
| ** **      | ** **      | ** **                                                  |
|            | Not applicable. |
|            |            |                                                        |
| **ITEM 2.**     | ** **      | **Offer  Statistics and Expected Timetable.**               |
| ** **      | ** **      | ** **                                                  |
|            | Not applicable. |
|            |            |                                                        |
| **ITEM 3.**     | ** **      | **Key  Information.**                                       |

 

**SELECTED FINANCIALDATA**

 

The followingtables present our selected consolidated financial data as of and for each ofthe years indicated.  The data as of December 31,2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004 arederived from and should be read together with our financial statements includedherein and “Item 5.  Operating andFinancial Review and Prospects.”

 

Our consolidatedfinancial statements are prepared in accordance with Mexican GAAP, whichdiffers in certain significant respects from accounting principles generallyaccepted in the United States of America. Notes 22 and 23****to theconsolidated financial statements provide information relating to the natureand effect of such differences, as they relate to us, and provides areconciliation to U.S. GAAP of consolidated net income and consolidated stockholders’equity.

 

Pursuant toMexican GAAP, the consolidated financial statements and the selectedconsolidated financial data set forth below restate the components ofstockholders’ equity using the NCPI factors and record gains and losses inpurchasing power from holding monetary assets or liabilities.  Under Mexican GAAP, non-monetary assets, withthe exception of inventories and fixed assets of non-Mexican origin, arerestated using the NCPI factors. Inventories are restated at current replacement costs while fixed assetsof foreign origin are restated by the inflation rate of the country of originprior to translation to pesos at the period-end exchange rate.  Mexican GAAP also requires restatement of allfinancial statements to pesos of constant purchasing power as of the date ofthe most recent balance sheet presented, and accordingly all data in theconsolidated financial statements and in the selected consolidated financialdata set forth below have been restated in pesos of constant purchasing poweras of December 31, 2004.  Theeffects of inflation accounting under Mexican GAAP, other than for the use of aspecific index for the restatement of fixed assets of foreign origin, have notbeen reversed in the reconciliation to U.S. GAAP.  See Notes 22 and 23 to our consolidatedfinancial statements.

 

On May 16,2004, Econoblock, S.A. de C.V. (our affiliate) merged with Desarrolladora deCasas del Noroeste, S.A. de C.V. (our subsidiary) with the latter assuming allthe rights and obligations of the merged company.  Because the companies were under commoncontrol, the merger was recorded by recognizing the assets and liabilitiestransferred at their carrying amounts in the accounts of the transferringentity at the date of transfer, in a manner similar to a pooling of interests, basedon the guidance incorporated in Statement of Financial Accounting Standards No. 141,“Business Combinations”, issued by the Financial Accounting Standards Board, andin accordance with Bulletin A-8, “Supplemental Application of InternationalAccounting Standards” issued by the Mexican Institute of Public Accountants.Therefore, the accompanying financial statements include those of the mergedcompany as if the merger had taken place as of the beginning of the earliestperiod presented.  See Note 2 to ourconsolidated financial statements.

 

Except for ratios,percentages, per share, per ADS, and operating data, all amounts are presentedin thousands of U.S. dollars or constant pesos.  Unless otherwise indicated, we have translatedU.S. dollar amounts at the exchange rate of Ps. 11.15 to U.S.$1.00, whichwas the noon buying rate for cable transfers in pesos published by the FederalReserve Bank of New York, expressed in pesos per U.S. dollar, on December 31,2004.  On June 23, 2005, the noonbuying rate for pesos was Ps. 10.78 to U.S.$1.00.

 

4

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| ** **                                                                     | ** ** | **Year Ended December 31,** | *** *** |
|--------------------------------------------------------------------------------|------------|----------------------------------|--------------|
| ** **                                                                     | ** ** | **2004**                         | ** **   | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Statement  of operations data:**                                             | ** ** | ** **                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mexican GAAP:**                                                              | ** ** | ** **                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues(1)                                                                    |       | Ps.                              | 5,312,769    |   | Ps. | 2,911,022 |   | Ps. | 1,357,634 |   | Ps. | 812,157 |   | Ps. | 1,145,574 |   |
| Costs                                                                          |       | 3,699,266                        |         | 2,082,202 |   | 951,437 |   | 569,716 |   | 779,234 |   |
| Gross profit                                                                   |       | 1,613,503                        |         | 828,820 |   | 406,197 |   | 242,442 |   | 366,340 |   |
| Selling and  administrative expenses                                           |       | 433,340                          |         | 266,682 |   | 167,543 |   | 123,674 |   | 153,022 |   |
| Income from  operations                                                        |       | 1,180,163                        |         | 562,138 |   | 238,654 |   | 118,768 |   | 213,318 |   |
| Other income  (expense)                                                        |       | 43,027                           |         | 77,838 |   | (1,766 | ) | 10,557 |   | 3,259 |   |
| Net  comprehensive financing cost(2)                                           |       | 159,584                          |         | 127,547 |   | 149,288 |   | 130,513 |   | 126,629 |   |
| Income (loss)  before income tax and employee statutory profit sharing expense |       | 1,063,606                        |         | 512,429 |   | 87,600 |   | (1,188 | ) | 89,948 |   |
| Income tax  expense                                                            |       | 339,536                          |         | 183,314 |   | 53,613 |   | 16,832 |   | 54,238 |   |
| Employee  statutory profit sharing expense                                     |       | 8,520                            |         | 276 |   | 1,563 |   | 192 |   | 2,674 |   |
| Consolidated net  income (loss)                                                |       | 715,550                          |         | 328,839 |   | 32,424 |   | (18,212 | ) | 32,914 |   |
| Net income of  majority stockholders                                           |       | 706,487                          |         | 323,537 |   | 31,059 |   | (18,212 | ) | 32,914 |   |
| Net income of  minority stockholders                                           |       | 9,063                            |         | 5,302 |   | 1,365 |   |   |   |   |   |
| Weighted average  shares outstanding                                           |       | 281,997                          |         | 241,521 |   | 191,896 |   | 147,637 |   | 147,559 |   |
| Basic and diluted earnings (loss) per share                                    |       | 2.51                             |         | 1.34 |   | 0.16 |   | (0.12 | ) | 0.22 |   |
| Basic and diluted earnings (loss) per  ADS(3)                                  |       | 15.06                            |         | 8.04 |   | 0.96 |   | (0.72 | ) | 1.32 |   |
| **U.S.  GAAP:**                                                                |       |                             |         |   |   |   |   |   |   |   |   |
| Revenues(1)                                                                    |       | 3,945,073                        |         | 2,723,777 |   | 1,217,654 |   |   |   |   |   |
| Costs                                                                          |       | 2,973,858                        |         | 2,089,026 |   | 963,550 |   |   |   |   |   |
| Gross profit                                                                   |       | 971,215                          |         | 634,751 |   | 254,104 |   |   |   |   |   |
| Operating  income(4)(5)                                                        |       | 522,092                          |         | 367,748 |   | 86,188 |   |   |   |   |   |
| Majority net  income                                                           |       | 422,126                          |         | 246,291 |   | 64,314 |   |   |   |   |   |
| Weighted average  shares outstanding                                           |       | 281,997                          |         | 241,521 |   | 191,896 |   |   |   |   |   |
| Basic and  diluted earnings per share                                          |       | 1.50                             |         | 1.02 |   | 0.34 |   |   |   |   |   |
| Basic and  diluted earnings per ADS(3)                                         |       | 9.0                              |         | 6.12 |   | 2.04 |   |   |   |   |   |
|                                                                                |            |                                  |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Balance  sheet data:**                           |       |                        |       |   |   |   |   |   |   |   |   |
| **Mexican  GAAP:**                                 |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and  temporary investments                    |       | Ps.                         | 511,050    |   | Ps. | 220,111 |   | Ps. | 68,887 |   | Ps. | 47,416 |   | Ps. | 20,554 |   |
| Restricted cash                                    |       | 20,474                      |       |   |   |   |   |   |   |   |   |
| Trade accounts  receivable                         |       | 3,169,945                   |       | 1,844,577 |   | 1,269,506 |   | 1,092,170 |   | 1,009,232 |   |
| Total current  assets                              |       | 5,890,578                   |       | 3,109,288 |   | 1,706,381 |   | 1,249,267 |   | 1,208,182 |   |
| Land held for  future development                  |       | 503,920                     |       | 239,885 |   | 87,805 |   | 140,283 |   | 141,488 |   |
| Property and  equipment                            |       | 251,391                     |       | 57,252 |   | 27,096 |   | 18,390 |   | 22,137 |   |
| Total assets                                       |       | 6,773,436                   |       | 3,451,510 |   | 1,831,574 |   | 1,419,433 |   | 1,376,096 |   |
| Notes payable to  financial institutions           |       | 397,042                     |       | 671,913 |   | 416,944 |   | 484,323 |   | 501,225 |   |
| Total current  liabilities                         |       | 2,184,109                   |       | 1,730,902 |   | 696,499 |   | 667,497 |   | 686,952 |   |
| Long-term notes  payable to financial institutions |       | 160,092                     |       |   |   |   |   |   |   |   |   |
| Land purchases—long-term                      |       | 20,086                      |       |   |   |   |   |   |   |   |   |
| Total long-term  liabilities                       |       | 633,144                     |       | 355,386 |   | 198,601 |   | 170,513 |   | 169,518 |   |
| Total  liabilities                                 |       | 2,997,431                   |       | 2,086,288 |   | 895,100 |   | 838,010 |   | 856,470 |   |
| Common stock                                       |       | 217,083                     |       | 173,248 |   | 167,365 |   | 132,621 |   | 116,092 |   |
| Total stockholders’  equity                   |       | 3,776,005                   |       | 1,365,222 |   | 936,473 |   | 581,423 |   | 519,627 |   |
| **U.S.  GAAP:**                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                         |       | 511,050                     |       | 220,111 |   | 68,887 |   |   |   |   |   |
| Restricted Cash                                    |       | 20,474                      |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                               |       | 719,124                     |       | 581,395 |   | 186,959 |   |   |   |   |   |
|                                                    |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

5

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| ** **                                                                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Total current  assets                                                                |       | 5,545,512                   |       | 2,845,351 |   | 1,533,551 |   |   |   |   |   |
| Land held for  future development                                                    |       | 503,920                     |       | 236,164 |   | 87,805 |   |   |   |   |   |
| Property and  equipment                                                              |       | 251,391                     |       | 57,252 |   | 27,096 |   |   |   |   |   |
| Total assets                                                                         |       | 6,428,370                   |       | 3,176,265 |   | 1,658,745 |   |   |   |   |   |
| Total current  liabilities                                                           |       | 2,957,424                   |       | 2,011,919 |   | 845,902 |   |   |   |   |   |
| Total majority  stockholders’ equity                                            |       | 3,230,347                   |       | 1,118,330 |   | 807,653 |   |   |   |   |   |
|                                                                                 |       |                        |       |   |   |   |   |   |   |   |   |
| **Other  financial data:**                                                           |       |                        |       |   |   |   |   |   |   |   |   |
| **Mexican  GAAP:**                                                                   |       |                        |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                         |       | 24,239                      |       | 11,064 |   | 6,771 |   | 7,325 |   | 7,647 |   |
| Gross margin(6)                                                                      |       | 30                          | %          | 28 | % | 30 | % | 30 | % | 32 | % |
| Operating  margin(7)                                                                 |       | 22                          | %          | 19 | % | 18 | % | 15 | % | 19 | % |
| **Other  financial data computed from Mexican GAAP financial information:**          |       |                        |       |   |   |   |   |   |   |   |   |
| EBITDA(8)                                                                            |       | 1,247,429                   |       | 651,040 |   | 243,659 |   | 136,650 |   | 224,102 |   |
| Net debt(9)                                                                          |       | 46,084                      |       | 451,802 |   | 348,327 |   | 436,907 |   | 480,671 |   |
| Ratio of notes  payable to financial institutions to total stockholders’ equity |       | 15.3                        | %          | 49.2 | % | 44.5 | % | 83.3 | % | 96.5 | % |
| Ratio of notes  payable to financial institutions to total assets                    |       | 8.5                         | %          | 19.5 | % | 22.8 | % | 34.1 | % | 36.4 | % |
| **U.S.  GAAP:**                                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Gross  margin(5)(6)                                                                  |       | 24.62                       | %          | 23.30 | % | 20.86 | % |   |   |   |   |
| Operating  margin(7)                                                                 |       | 13.23                       | %          | 13.50 | % | 7.07 | % |   |   |   |   |
| **Other  financial data derived from U.S. GAAP financial information:**              |       |                        |       |   |   |   |   |   |   |   |   |
| EBITDA(8)                                                                            |       | 623,453                     |       | 438,283 |   | 91,087 |   |   |   |   |   |
|                                                                                      |            |                             |            |  |  |  |  |  |  |  |  |  |

 

6

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(1)               For U.S. GAAP purposes, sales arerecognized when title passes to the home buyer, as opposed to thepercentage-of-completion method of accounting used for Mexican GAAP purposes,which requires us to recognize income from homes we sell as we incur the costof their construction.

 

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

 

(3)               Assumes all Common Shares are representedby ADSs.  Each ADS represents six CommonShares.  Any discrepancies between pershare and per ADS amounts in the table are due to rounding.

 

(4)               Employee statutory profit sharing expenseis classified as an operating expense under U.S. GAAP.

 

(5)               Interest capitalized as part of the costof inventories is included in operating expense under U.S. GAAP.

 

(6)               Represents gross profit divided by totalrevenues.

 

(7)               Represents operating income divided bytotal revenues.

 

(8)               EBITDA is not a financial measurecomputed under Mexican or U.S. GAAP. EBITDA derived from our Mexican GAAP financial information means MexicanGAAP net income (loss) excluding (i) depreciation, (ii) netcomprehensive financing costs (which is composed of net interest expense,foreign exchange gain or loss and monetary position gain or loss), and (iii) incometax expense and employee statutory profit sharing expense.

 

EBITDA derived from our U.S. GAAP financialinformation means U.S. GAAP net income excluding (i) depreciation, (ii) interestexpense and monetary position gain or loss, and (iii) income tax expense.

 

We believe that EBITDA can be useful to facilitatecomparisons of operating performance between periods and with other companiesin our industry because it excludes the effect of (i) depreciation, whichrepresents a non-cash charge to earnings, (ii) certain financing costs,which are significantly affected by external factors, including interest rates,foreign currency exchange rates, and inflation rates, which have little or nobearing on our operating performance, and (iii) income tax expense and,for EBITDA derived from our Mexican GAAP financial information, employeestatutory profit sharing expense.

 

EBITDA is also a useful basis of comparing our resultswith those of other companies because it presents operating results on a basisunaffected by capital structure.  Youshould review EBITDA, along with net income (loss) and cash flow from operatingactivities, investing activities and financing activities, when trying tounderstand our operating performance.  WhileEBITDA may provide a useful basis for comparison, our computation of EBITDA is notnecessarily comparable to EBITDA as reported by other companies, as each iscalculated in its own way and must be read in conjunction with the explanationsthat accompany it.  While EBITDA is arelevant and widely used measure of operating performance, it does notrepresent cash generated from operating activities in accordance with Mexicanor U.S. GAAP and should not be considered as an alternative to net income(loss), determined in accordance with Mexican or U.S. GAAP, as an indication ofour financial performance, or to cash flow from operating activities,determined in accordance with Mexican or U.S. GAAP, as a measure of our liquidity, nor is it indicative of fundsavailable to fund our cash needs.

 

EBITDA has certain material limitations as follows: (i) itdoes not include interest expense. Because we have borrowed money to finance some of our operations,interest is a necessary and ongoing part of our costs and assisted us ingenerating revenue.  Therefore, anymeasure that excludes interest expense has material limitations; (ii) itdoes not include taxes.  Because thepayment of taxes is a necessary and ongoing part of our operations, any measurethat excludes taxes has material limitations; and (iii) it does notinclude depreciation.  Because we mustutilize property and equipment in order to generate revenues in our operations,depreciation

 

7

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is a necessary and ongoing part of our costs.  Therefore, any measure that excludesdepreciation has material limitations.

 

***Reconciliationof Net Income (Loss) to EBITDA Computed from Our Mexican GAAP FinancialInformation.***

*** ***
| ** **                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Net income  (loss)                                                |       | Ps.                              | 715,550    |   | Ps. | 328,839 |   | Ps. | 32,424 |   | Ps. | (18,212 | ) | Ps. | 32,914 |   |
| Depreciation                                                      |       | 24,239                           |       | 11,064 |   | 6,771 |   | 7,325 |   | 7,647 |   |
| Net  comprehensive financing cost                                 |       | 159,584                          |       | 127,547 |   | 149,288 |   | 130,513 |   | 126,629 |   |
| Income tax  expense and employee statutory profit sharing expense |       | 348,056                          |       | 183,590 |   | 55,176 |   | 17,024 |   | 56,912 |   |
| EBITDA                                                            |       | Ps.                              | 1,247,429  |   | Ps. | 651,040 |   | Ps. | 243,659 |   | Ps. | 136,650 |   | Ps. | 224,102 |   |

*** ***

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

*** ***
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income         |       | Ps.                              | 422,126    |   | Ps. | 246,291 |   | Ps. | 64,314 |   |
| Depreciation       |       | 24,239                           |       | 11,064 |   | 6,771 |   |
| Interest expense   |       | (28,316                          | )          | 23,351 |   | (17,551 | ) |
| Income tax expense |       | 205,404                          |       | 157,577 |   | 37,533 |   |
| EBITDA             |       | Ps.                              | 623,453    |   | Ps. | 438,283 |   | Ps. | 91,087 |   |

 

(9)               Net debt is not a financial measurecomputed under Mexican GAAP.  We computenet debt as the sum of all notes payable to financial institutions less cashand temporary investments, each of which is computed in accordance with MexicanGAAP.  Management uses net debt as ameasure of our total amount of leverage, as it gives effect to cash accumulatedon our balance sheets.  Managementbelieves net debt provides useful information to investors because it reflectsour actual debt as well as our available cash and temporary investments thatcould be used to reduce this debt.  Netdebt has certain material limitations in that it assumes the use of our cashand temporary investments to repay debt that is actually still outstanding.

 

8

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***Reconciliationof Notes Payable to Financial Institutions to Net Debt Derived from Our MexicanGAAP Financial Information.***

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Notes payable to financial institutions            |       |                        |       |   |   |   |   |   |   |   |   |
| Affiliates                                         |       | Ps.                         | —     |   | Ps. | 144,249 |   | Ps. | 153,148 |   | Ps. | — |   | Ps. | — |   |
| Other                                              |       | 397,042                     |       | 527,664 |   | 263,796 |   | 484,323 |   | 501,225 |   |
| Long-term notes  payable to financial institutions |       | 160,092                     |       | — |   | — |   | — |   | — |   |
| Total notes  payable to financial institutions     |       | 557,134                     |       | 671,913 |   | 416,944 |   | 484,323 |   | 501,225 |   |
| Cash and  temporary investments                    |       | 511,050                     |       | 220,111 |   | 68,617 |   | 47,416 |   | 20,554 |   |
| Net debt                                           |       | Ps.                         | 46,084     |   | Ps. | 451,802 |   | Ps. | 348,327 |   | Ps. | 436,907 |   | Ps. | 480,671 |   |
|                                                    |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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**DIVIDENDS**

 

A vote by themajority of our shareholders present at a shareholders’ meeting determines thedeclaration, amount, and payment of dividends. Under Mexican law, dividends may only be paid from retained earnings andif losses for prior fiscal years have been paid.  In addition, under Mexican law, companies mayonly pay dividends:

 

•                  fromearnings included in year-end financial statements that are approved byshareholders at a duly convened meeting;

 

•                  afterany existing losses applicable to prior years have been made up or absorbedinto capital;

 

•                  afterat least 5% of net profits for the relevant fiscal year have been allocated toa legal reserve until the amount of the reserve equals 20% of a company’spaid-in capital stock; and

 

•                  aftershareholders have approved the payment of the relevant dividends at a dulyconvened ordinary shareholders’ meeting.

 

We have not paiddividends since we were formed in 1998 and we do not currently expect to paydividends.  We intend to devote asubstantial portion of our future cash flow to funding working capitalrequirements, financing acquisitions, purchasing land and other liquidityrequirements.  We may consider adopting adividend policy in the future based on a number of factors, including ourresults of operations, financial condition, cash requirements, taxconsiderations, future prospects, and other factors that our board of directorsand our shareholders may deem relevant, including the terms and conditions offuture debt instruments that may limit our ability to pay dividends.  We may also consider instituting a sharerepurchase program.  Because we are aholding company with no significant operations of our own, we havedistributable profits to pay dividends to the extent that we receive dividendsfrom our subsidiaries.  Accordingly,there can be no assurance that we will pay dividends or of the amount of anysuch dividends.

 

**EXCHANGERATE INFORMATION**

 

The following table sets forth, for the periodsindicated, the period-end, average, high and low exchange rate between the pesoand 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 onnoon buying rates published by the Federal Reserve Bank of New York for cabletransfers in Mexican pesos.  All amountsare stated in pesos, and we have not restated the rates in constant currencyunits.  We make no representation thatthe Mexican peso amounts referred to in this Annual Report could have been orcould be converted into U.S. dollars at any particular rate or at all.

 
| ** **                       | ** ** | **Noon Buying Rate (Ps. Per U.S.$)** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| **Year Ended December 31,** | ** ** | **High (1)**                         | ** ** | **Low (1)** | ** ** | **Average (2)** | ** ** | **Period End** | ** ** |
| 2000                             |       | 9.18                                 |       | 10.09 |   | 9.47 |   | 9.62 |   |
| 2001                             |       | 8.95                                 |       | 9.97 |   | 9.33 |   | 9.16 |   |
| 2002                             |       | 9.00                                 |       | 10.43 |   | 9.66 |   | 10.43 |   |
| 2003                             |       | 10.11                                |       | 11.41 |   | 10.79 |   | 11.24 |   |
| 2004                             |       | 11.64                                |       | 10.81 |   | 11.29 |   | 11.15 |   |
|                             |       |                                 |       |   |   |   |   |   |   |
| **Month  Ended**                 |       |                                 |       |   |   |   |   |   |   |
| December 31,  2004          |       | 11.33                                |       | 11.20 |   | 11.20 |   | 11.15 |   |
| January 31,  2005           |       | 11.41                                |       | 11.17 |   | 11.26 |   | 11.21 |   |
| February 28,  2005          |       | 11.21                                |       | 11.04 |   | 11.14 |   | 11.09 |   |
| March 31,  2005             |       | 11.33                                |       | 10.98 |   | 11.16 |   | 11.18 |   |
| April 30,  2005             |       | 11.23                                |       | 11.04 |   | 11.11 |   | 11.08 |   |
| May 31,  2005               |       | 11.03                                |       | 10.89 |   | 10.98 |   | 10.91 |   |
| June 23,  2005              |       | 10.88                                |       | 10.76 |   | 10.83 |   | 10.79 |   |

 

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

(2)  Average ofmonth-end rates.

 

10

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On June 23,2005, the noon buying rate for pesos was Ps. 10.78 to U.S.$1.00.  On June 23, 2005, the Mexican CentralBank UDI conversion rate was Ps. 3.56 to UDI 1.00.

 

Except during aliquidity crisis lasting from September through December 1982, theMexican Central Bank (*Banco de México*),has consistently made foreign currency available to Mexican private-sectorentities (such as us) to meet their foreign currency obligations.  Nevertheless, in the event of renewedshortages of foreign currency, it is possible that foreign currency will notcontinue to be available to private-sector companies or that foreign currencythat we may need to service foreign currency obligations or to import goodswill not be available for purchase in the open market without substantialadditional cost.

 

Fluctuations in theexchange rate between the peso and the U.S. dollar have affected the U.S.dollar equivalent of the peso price of securities traded on the Mexican StockExchange and, as a result, have also affected the market price of ADSsrepresenting securities traded on the Mexican Stock Exchange.  Because we will pay any cash dividends inpesos, exchange rate fluctuations will also affect the U.S. dollar amountsreceived by ADS holders on conversion by the depositary of any cash dividendson the Common Shares represented by the ADSs.

 

**RISK FACTORS**

** **

***Risks Relating to Our Business Generally***

*** ***

***Decreasesin the amount of mortgage financing provided by agencies controlled by theMexican government on which we depend, or disbursement delays, could result ina decrease in our sales and revenues.***

*** ***

The home buildingindustry in Mexico has been and continues to be characterized by a significantshortage of mortgage financing. Historically, the limited availability of financing has restricted homebuilding and contributed to the current shortage of affordable entry-levelhousing.  Substantially all financing foraffordable entry-level housing in Mexico is provided by government-sponsoredhousing funds such as:

 

•                  the National Workers’ Housing Fund, orINFONAVIT (*Instituto del Fondo Nacional para la Vivienda delos Trabajadores*), which is financed primarily through mandatorycontributions from the gross wages of private-sector workers;

 

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

 

•                  public mortgage providers such as theFederal Mortgage Society, or SHF (*Sociedad HipotecariaFederal, S.N.C., Institución de Banca de Desarrollo*), which isfinanced through its own funds as well as funds provided by the World Bank andthe Mexican Central Bank (*Banco de México*).

 

See “Item4.  Information on the Company—BusinessOverview—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.

 

Thesegovernment-sponsored entities have significant discretion in terms of theallocation and timing of disbursement of mortgage funds.  We depend on the availability of mortgagefinancing provided by these government-sponsored entities for:

 

•                  substantially all of our sales ofaffordable entry-level housing, which sales represented 78.2% of our revenuesand 67.6% of our operating income for 2004; and

 

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•                  a portion of our sales of middle-incomehousing, which sales represented 20.9% of our revenues and 28.2% of ouroperating income for 2004 and which we expect will represent a larger share ofour revenues and of our operating income in 2005.

 

Accordingly, ourfinancial results are affected by policies and administrative procedures ofINFONAVIT, FOVISSSTE, and SHF, as well as by the Mexican government’s housingpolicy.  The availability of mortgagefinancing granted by these government-sponsored entities has increasedsignificantly during the past three years as compared to historical levels.  From 2001 through 2004, the amount of mortgagefinancing granted by these government-sponsored entities increased by68.20%.  However, future Mexicangovernment housing finance policy may limit or delay the availability ofmortgage financing provided by these agencies or otherwise institute changes,including changes in the methods by which these agencies grant mortgages and,in the case of INFONAVIT, the geographic allocation of mortgage financing, thatcould result in a decrease in our sales and revenues.

 

Additionally, in 2001 weexperienced delays of up to three months in the disbursement of mortgage fundsfor homes that were financed by INFONAVIT. Due to the change in presidential administration following the 2000elections in Mexico and the resulting change in the administration of INFONAVIT,the agency suspended processing mortgages pending the appointment of its newgeneral director.  Although we have notexperienced delays of this magnitude since 2001, there is a possibility ofdelays in early 2007.  Disruptions in theoperations of government-sponsored lenders, for any reason, may occur andresult in a decrease in our sales and revenues.

 

Decreases or delays inthe amount of funds available from INFONAVIT, FOVISSSTE, SHF or other sources,or substantially increased competition for these funds, could result in adecrease in our sales and revenues. These funds may not continue to be allocated at their current levels orin regions in which we have or can quickly establish a significant presence.

 

See “Item 3.  Key Information—Risk Factors—SHF will limitthe amount of funding it provides to commercial banks and special-purposefinancing entities organized under the laws of Mexico, or *sofoles*(*sociedades financieras de objeto limitado*),for individual mortgage loans, which could result in a decrease in our salesand revenues.”

 

***Aslowdown in the Mexican economy could limit the availability of private-sectorfinancing in Mexico, on which we depend for our sales of middle-income housing,which could result in a decrease in our sales and revenues.***

*** ***

One of our principalstrategies is to expand our operations in the middle-income housingsector.  Our expansion into this marketdepends on private-sector lenders, such as commercial banks and *sofoles*, which provide a substantialmajority of mortgage financing for the middle-income sector.  The availability of private-sector mortgagefinancing in Mexico has been severely constrained in the past as a result ofvolatile economic conditions in Mexico, the level of liquidity and stability ofthe Mexican banking system, and the resulting adoption of more stringentlending criteria and bank regulations. From 1995 through 2001, commercial bank mortgage lending was generallyunavailable in Mexico.  Since 2002,private-sector lenders have gradually increased their mortgage financingactivities as a result of improved economic conditions and increasing consumerdemand.  However, it is possible that theamount of mortgage financing provided by private-sector entities for the middle-incomehousing market will not increase or be maintained at current levels.  See “Item 3. Key Information—Risk Factors—SHF will limit the amount of funding itprovides to commercial banks and *sofoles* forindividual mortgage loans, which could result in a decrease in our sales andrevenues.”

 

***SHFwill limit the amount of funding it provides to commercial banks and sofolesfor individual mortgage loans, which could result in a decrease in our salesand revenues.***

*** ***

SHF isa public mortgage provider that makes financing available to commercial banksand *sofoles* for the purpose ofproviding individual home mortgages for affordable entry-level andmiddle-income homes.  Historically, SHFhas financed mortgages for amounts up to approximately UDI 500,000(approximately U.S.$160,000).  As of January 1,2005, however, SHF replaced its financing of mortgages for homes with apurchase price greater than UDI 150,000 (approximately U.S.$50,000) withcredit enhancements and loan guarantees for commercial banks and

 

12

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*sofoles* to support their capital-raising effortsfor the financing of such individual home mortgages.  Commercial banks and *sofoles* may not be able to raise enoughcapital to compensate for the reduced SHF funding and this reduction in SHF’sfunding of mortgages could result in a decrease in our sales and revenues.

 

***Weexperience significant seasonality in our results of operations.***

 

The Mexican affordableentry-level housing industry experiences significant seasonality during theyear, principally due to the operational and lending cycles of INFONAVIT andFOVISSSTE.  The programs, budgets, andchanges in the authorized policies of these mortgage lenders are approvedduring the first quarter of the year. Payment by these lenders for home deliveries is slow at the beginning ofthe year and increases gradually through the second and third quarters with arapid acceleration in the fourth quarter. We build and deliver affordable entry-level homes based on the seasonalityof this cycle because we do not begin construction of these homes until amortgage provider commits mortgage financing to a qualified home buyer in aparticular development.  Accordingly, wealso tend to recognize significantly higher levels of revenue in the third andfourth quarters and our debt levels tend to be highest in the first and secondquarters.  We anticipate that ourquarterly results of operations and our level of indebtedness will continue toexperience variability from quarter to quarter in the future.

 

***Increasesin the price of land may increase our cost of sales and decrease our earnings.***

 

Our continued growthdepends in large part on our ability to continue to acquire land at areasonable cost.  As more developersenter or expand their operations in the Mexican home building industry, landprices could rise significantly and suitable land could become scarce due toincreased demand or decreased supply.  Aresulting rise in land prices may increase our cost of sales and decrease ourearnings.  We may not be able to continueto acquire suitable land at reasonable prices in the future.

 

***Increasesin the price of raw materials may increase our cost of sales and reduce our netearnings.***

 

Increases in the price ofraw materials, including increases that may occur as a result of shortages,duties, restrictions, or fluctuations in exchange rates, could increase ourcost of sales and reduce our net earnings to the extent we are unable toincrease our sales prices.  It ispossible that the prices of our raw materials will increase in the future.

 

***Wemay fail to realize the anticipated benefits of our merger with Beta and theintegration of the Beta with our operations will present significant challenges.***

 

On April 21, 2005, we signed an agreement toacquire 100% of the capital stock of Controladora Casas Beta, S.A. de C.V., orBeta, the seventh largest homebuilder in Mexico, in a transaction valued atapproximately Ps.2,040 million (or approximately US$188.9 million).  The transaction will require that we purchaseapproximately 53.0% of Beta’s stock for approximately Ps.1,163.0****million (or approximately US$98.4 million) in cash and 47.0%of Beta’s stock for approximately 22.0 million of our common shares valued atapproximately Ps.977.6 million (or approximately US$90.5 million).  Beta will then be merged into us.  We expect this acquisition to be completedwithin the third quarter 2005.

 

The success of the merger will depend, in part, on ourability to realize the anticipated growth opportunities and cost savings fromcombining our business with Beta’s business. In addition, we and Beta have operated, and until the completion of themerger, will continue to operate, independently.  We and Beta will face significant challengesin consolidating functions, integrating their organizations, procedures andoperations in a timely and efficient manner and retaining our and Beta’s keypersonnel.  The integration of Beta willbe costly, complex and time consuming and the managements will have to devotesubstantial effort to it.  Theintegration process and other disruptions from the transaction could be morecostly than we expect or result in the loss of key employees, the disruption ofour ongoing businesses or inconsistencies in standards, controls, proceduresand policies that adversely affect our ability to maintain relationships withcustomers, suppliers, employees and others who have business dealings or toachieve the anticipated benefits of the merger.

 

13

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***Becausewe recognize income from sales of homes under the percentage-of-completionmethod of accounting before receiving cash revenue, failed closings couldresult in a shortfall of actual cash received and require an adjustment torevenue previously recorded.***

*** ***

In accordance withMexican GAAP, and consistent with industry practice in Mexico, we recognizeincome from the sale of homes based on the percentage-of-completion method ofaccounting, which in Mexico requires us to recognize income as we incur thecost of construction.  See Note 3 to ourconsolidated financial statements for a discussion of thepercentage-of-completion method. However, we do not receive the proceeds from these sales until the homesare delivered.  As a result, there is arisk that revenue in respect of the income recognized for accounting purposeswill not be received due to the failure of a sale to close.

 

***Reducedavailability of bridge loans and SHF-sponsored funds, on which we rely as asecondary source of funding for our home development operations, could limitour ability to achieve anticipated growth levels.***

*** ***

In the Mexican housingindustry, the majority of development and construction activities are financedprimarily through bridge loans secured with mortgages over land anddevelopments in progress.  Additionally,SHF, through commercial banks and *sofoles*,was an important source of bridge financing for housing development.  As of September 1, 2004, however, SHFprovides funding for bridge loans only for homes with a purchase price of up toUDI 166,667 (approximately U.S.$53,000). In lieu of funding bridge loans for homes with a higher purchase price(up to UDI 500,000 (approximately U.S.$160,000)), SHF now providesguarantees to support efforts by commercial banks and *sofoles* to raise capital for the financingof bridge loans to build such homes.  Asa result, SHF-sponsored construction financing has decreased significantly.

 

Althoughwe currently finance our development and construction activities primarily outof our working capital and commercial paper programs (certificados bursátilesde corto plazo), we have used and may use secured bridge loans in the future asa back-up source of financing.  If theavailability of bridge loans were to be reduced significantly, our ability toplan new developments and continue our construction operations could be limitedand our business operations could be disrupted.

 

We mayuse these bridge loans as a source of financing to plan and construct newdevelopments and achieve anticipated levels of growth.  This kind of financing may not continue to beavailable or it may not be available on reasonable terms.

 

***Lossof services 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, ourCEO.  We do not have employment ornon-compete agreements with nor maintain key-man life insurance in respect ofeither of these individuals.  Because oftheir knowledge of the industry and our operations and their experience withour Company, we believe that our future results will depend upon their efforts,and the loss of services of any of these individuals for any reason couldresult in disruptions to our business operations.

 

***Competitionfrom other home builders could result in a decrease in our sales and revenues.***

*** ***

The home buildingindustry in Mexico is competitive.  Ourprincipal competitors include Corporacion GEO, S.A. de C.V., Consorcio ARA,S.A. de C.V., URBI Desarrollos Urbanos, S.A. de C.V., and Grupo SADASI.  Our ability to maintain existing levels ofhome sales depends to some extent on competitive conditions, including price competition,competition for available mortgage financing, and competition for availableland.  Competition is likely to continueor intensify.  Competitive conditions mayprevent us from achieving our goal of increasing our volumes of sales, orincreased competition may result in a decrease in our sales and revenues.

 

14

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***Changesin building and zoning regulations to which we are subject could cause delaysin construction and result in increased costs.***

*** ***

The Mexican housingindustry is subject to extensive building and zoning regulation by variousfederal, state, and municipal authorities. These authorities oversee land acquisition, development and constructionactivities, and certain dealings with customers.  The costs associated with obtaining buildingand zoning permits, paying purchase or development fees and taxes, securingutility service rights, and titling new homes are substantially higher inMexico than in other countries and vary significantly from region to region inMexico.  We are required to obtain theapproval of numerous federal, state, and local governmental authorities for ourdevelopment activities.  Changes in localcircumstances or applicable law or regulations of such entities may require modifyingor applying for additional approvals or changing our processes and proceduresto comply with them.  It is possible thatthese factors could cause delays in construction and result in increased costs.

 

***Changesto environmental laws and regulations to which we are subject could causedelays in construction and result in increased costs.***

*** ***

Our operations aresubject to Mexican federal, state, and municipal environmental laws andregulations.  Changes to environmentallaws and regulations, or stricter interpretation of existing laws orregulations, could cause delays in construction and result in increased costs.

 

***Ouruninsured housing developments under construction could suffer unforeseencasualties, which could result in significant losses to us.***

*** ***

We donot generally obtain liability insurance to cover housing developments underconstruction unless it is required by providers of construction financing.  In the event that our uninsured housingdevelopments suffer unforeseen casualties, we may experience significantlosses.

 

***Ourprincipal shareholders can take actions that do not reflect the interests ofour other shareholders.***

*** ***

Our principalshareholders, the de Nicolás family and Equity International Properties, Ltd.,or EIP, beneficially own more than 65.5% of our outstanding share capital asfollows:

 

•                  de Nicolás family:  43.8%; and

 

•                  EIP: 21.7%.

 

Following the acquisitionof Beta, the de Nicolás family will beneficially own 40.9% of our outstandingshare capital and EIP will beneficially own 20.3% of our outstanding sharecapital.  Collectively, theseshareholders may elect the majority of our board of directors and can determinethe outcome of most actions requiring shareholder approval, including paymentof dividends, if any.  Additionally, representativesof our principal shareholders hold positions on our board of directors andother executive positions in our company. As a result, our principal shareholders can influence actions at theshareholder and board of directors levels that may not reflect the interests ofour other shareholders, such as setting forth share repurchase policies, namingcertain members of board committees and senior management, or authorizingmergers or spin-offs.  See “Item 10.  Additional Information.”

 

***Reductionin distributions from our operating subsidiaries could limit our ability to paydividends and service our debt obligations.***

*** ***

We are a holding companywith no substantial operations and no significant assets other than the commonshares of our majority-owned subsidiaries. We depend on receiving sufficient funds from our subsidiaries forvirtually all our internal cash flow, including cash flow to pay dividends andservice our debt obligations.  As aresult, our cash flow will be affected if we do not receive dividends and otherincome from our subsidiaries.  Theability of our subsidiaries to pay dividends and make other transfers to us islimited by Mexican law.  This ability mayalso be limited by credit agreements entered into by our subsidiaries.  See “Item 5.  Operating and Financial

 

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Review andProspects— Management’s Discussion and Analysis of Financial Condition andResults of Operation — Liquidity and Capital Resources”.

 

**RisksRelating to Mexico**

 

***Adverseeconomic conditions in Mexico may result in a decrease in our sales andrevenues.***

*** ***

We area Mexican company with all of our assets located in Mexico and all of ourrevenues derived from operations in Mexico. As such, our business may be significantly affected by the generalconditions of the Mexican economy.

 

Mexico experienced aperiod of slow growth from 2001 through 2003 primarily as a result of thedownturn in the U.S. economy.  In 2001,Mexico’s gross domestic product, or GDP, declined by 0.3%, while inflationreached 4.4%.  In 2002, GDP grew by 0.9%and inflation reached 5.7%.  In 2003, GDPgrew by 1.2% and inflation declined to 4.0%. In 2004, GDP grew by 4.2% and inflation increased to 5.2%.

 

Mexicoalso has, and is expected to continue to have, high real and nominal interestrates.  The interest rates on 28-dayMexican government treasury securities (*certificadosde tesoreria*) averaged approximately 15.2%, 11.3%, 7.1%, 6.2% and8.75% for 2000, 2001, 2002, 2003 and 2004. Accordingly, to the extent that we incur peso-denominated debt in thefuture, it could be at high interest rates.

 

If theMexican 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, arecession could affect our operations to the extent that we are unable toreduce our costs and expenses in response to falling demand.  These factors could result in a decrease inour sales and revenues.

 

***Fluctuationsof the peso relative to the U.S. dollar could affect our revenues and earningsin U.S.-dollar terms and the market price of our Common Shares and the ADSs.***

*** ***

Thevalue of the peso fluctuates considerably against the U.S. dollar.  Fluctuations in the exchange rate between thepeso and the U.S. dollar, particularly depreciations, may adversely affect theU.S.-dollar equivalent of the peso price of the Common Shares on the MexicanStock Exchange.  As a result, such pesodepreciations will likely affect our revenues and earnings in U.S.-dollar termsand the market price of the ADSs. Exchange rate fluctuations would also affect the depositary’s ability toconvert into U.S. dollars and make timely payment of any peso cash dividendsand other distributions paid in respect of the Common Shares.

 

***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 foreign debt thatwe may incur in the future, including any debt we may incur in connection withthe acquisition of Beta.***

*** ***

Becausesubstantially all of our revenues are and will continue to be denominated inpesos, if we incur any debt denominated in U.S. dollars in the future and thevalue of the peso decreases against the U.S. dollar, our cost of financing willincrease.  Severe depreciation of thepeso may also result in disruption of the international foreign exchangemarkets.  This may limit our ability totransfer or convert pesos into U.S. dollars and other currencies for thepurpose of making timely payments of interest and principal on any U.S.dollar-denominated debt that we may incur in the future, including any debt wemay incur in connection with the acquisition of Beta.  While the Mexican government has notrestricted the right or ability of Mexican or foreign individuals to convertpesos into U.S. dollars or to transfer other currencies out of Mexico since1982, the Mexican government could institute restrictive exchange rate policiesin the future.

 

***Politicalevents in Mexico may result in disruptions to our business operations anddecreases in our sales and revenues.***

*** ***

The Mexican governmentexercises significant influence over many aspects of the Mexican economy.  In addition, we depend on Mexican governmenthousing finance policy, especially with regard to the funding and

 

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operation ofgovernment-sponsored mortgage providers, for a large portion of ourbusiness.  As a result, the actions ofthe Mexican government concerning the economy, regulating certain industries,and setting housing finance policy could have a significant effect on Mexicanprivate-sector entities, including Homex, and on market conditions, prices, andreturns on Mexican securities.

 

The Mexican nationalelections held on July 2, 2000 ended 71 years of rule by theInstitutional Revolutionary Party (*PartidoRevolucionario Institucional*) with the election of President VicenteFox Quesada, a member of the National Action Party (*Partido Accion Nacional*), and resulted in the increasedrepresentation of opposition parties in the Mexican national congress and inmunicipal and gubernatorial positions. As a result of these elections and legislative elections held on July 6,2003, no political party has a majority in the Mexican national congress.  This shift in political power has transformedMexico from a one-party state to a multi-party democracy.

 

Althoughthere have not yet been any material adverse repercussions resulting from thispolitical change, multi-party rule is still relatively new in Mexico andcould result in economic or political conditions that could cause disruptionsto our business operations.  The lack ofa majority party in the legislature and the lack of alignment between thelegislature and the executive branch could result in gridlock and prevent thetimely implementation of economic reforms or other necessary actions, which inturn could have a material adverse effect on the Mexican economy and causedisruptions to our business operations and decreases in our sales and revenues.

 

In 2006 the Mexicanpresidential and congressional elections will occur.  We cannot assure you that the nextadministration will continue to support the highly favorable current housingpolicies, and any change in such policies could have a significant effect onMexican homebuilders, including Homex, as well as on housing finance, marketconditions, and the prices of and returns on Mexican securities or that resultsof the 2006 presidential elections and presidential succession will not adverselyaffect the Mexican economy, including the stability of its currency, which inturn could have a material adverse effect on our business, financial conditionand results of operations, as well as market conditions and prices for oursecurities. These and other future developments in the Mexican political orsocial environment may cause disruptions to our business operations anddecreases in our sales and revenues.

 

***Developmentsin other countries may result in decreases in the price of our ADSs.***

*** ***

As is the case withrespect to securities of issuers from other emerging markets, the market valueof securities of Mexican companies is, to varying degrees, affected by economicand market conditions in other emerging market countries.  Although economic conditions in thesecountries may differ significantly from economic conditions in Mexico,investors’ reactions to developments in any of these other countries may havean adverse effect on the market value of securities 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.

 

In addition, the directcorrelation between economic conditions in Mexico and the United States hassharpened in recent years as a result of the North American Free TradeAgreement and increased economic activity between the two countries.  As a result, economic downturns in the UnitedStates could have a significant adverse effect on the Mexican economy.  The market value of the ADSs and CommonShares may decrease as a result of events in other emerging market countries,in the United States, or elsewhere.

 

***Minorityshareholders may be less able to enforce their rights against us, ourdirectors, or our controlling shareholders in Mexico.***

*** ***

Currently, under Mexicanlaw, the protections afforded to minority shareholders are different from thoseafforded to minority shareholders in the United States.  For example, because Mexican laws concerningfiduciary duties of directors are not well developed, it is difficult forminority shareholders to bring an action against directors for breach of thisduty as permitted in most jurisdictions in the United States.  The grounds for shareholder derivativeactions under Mexican law are extremely limited, which effectively bars most ofthese kinds of suits in Mexico. Procedures for class action lawsuits do not exist under Mexican law.  Therefore, it may be more difficult

 

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for minorityshareholders to enforce their rights against us, our directors, or ourcontrolling shareholders than it would be for minority shareholders of a U.S.company.

 

There is a bill currentlypending before the Mexican national congress that would, if passed, amendcertain Mexican securities laws and would require certain amendments to ourbylaws, including provisions of our bylaws with respect to the rights ofminority shareholders.

 

***Weare subject to different corporate disclosure and accounting standards thanU.S. companies.***

*** ***

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

 

**RisksRelating to the ADSs and the Common Shares**

 

***Thelower level of liquidity and the higher level of volatility of the MexicanStock Exchange may decrease the market price of the ADSs and Common Shares andlimit the ability of ADS holders to sell the underlying Common Shares.***

*** ***

The Mexican securitiesmarket is not as large or as active as the securities markets in the UnitedStates and certain other countries with developed market economies.  As a result, the Mexican securities markethas experienced less liquidity and more volatility than those markets haveexperienced.  These characteristics maylimit the ability of a holder of ADSs to sell the underlying Common Shares andmay also affect the market price of the ADSs and Common Shares.

 

***Futureissuances of shares may result in a decrease of the market price of the ADSsand Common Shares.***

*** ***

In thefuture, we may issue additional equity securities for financing and othergeneral corporate purposes, although there is no present intention to doso.  Any such sales or the prospect ofany such sales could result in a decrease of the market price of the ADSs andCommon Shares.

 

***Futuresales of our shares by our principal shareholders may result in a decrease ofthe share price of our securities.***

*** ***

Ourprincipal shareholders, including the de Nicolás family and EquityInternational Properties, hold approximately 65.5% of our outstanding sharecapital.  Actions by these shareholderswith respect to the disposition of the shares they beneficially own, or theperception that such actions might occur, may decrease the trading price of ourshares on the Mexican Stock Exchange and the price of the ADSs on the New YorkStock Exchange following the completion of the offering.  See “Item 7. Major Shareholders and Related Party Transactions.”

 

***Preemptiverights may be unavailable to holders of our ADSs, which may result in adilution of ADS holders’ equity interest in our company.***

*** ***

Under Mexican law,subject to limited exceptions, if we issue new shares for cash as part of acapital increase, we generally must grant preemptive rights to our shareholders,giving them the right to purchase a sufficient number of shares to preventdilution.  However, we may not be legallypermitted to offer ADS holders in the United States the right to exercisepreemptive rights in any future issuances of shares unless:

 

•                  we file a registration statement with theU.S. Securities and Exchange Commission, or SEC, with respect to that futureissuance of shares; or

 

•                  the issuance qualifies for an exemptionfrom the registration requirements of the U.S. Securities Act of 1933, orSecurities Act.

 

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At thetime of any future capital increase, we will evaluate the costs and potentialliabilities associated with filing a registration statement with the SEC, thebenefits of enabling U.S. holders of ADSs to exercise preemptive rights, andany other factors that we consider important in determining whether to file aregistration statement.  However, it ispossible that we will not file such a registration statement.  As a result, the equity interests of ADSholders would be diluted to the extent that ADS holders cannot participate in afuture capital increase.  See “Item10.  Additional Information—Changes inShare Capital and Preemptive Rights.”

 

Inaddition, although the deposit agreement permits the depositary, if lawful andfeasible at the time, to sell preemptive rights and distribute the proceeds ofthe sale to entitled ADS holders, sales of preemptive rights are not currentlypermitted in Mexico.

 

***ADSholders may only vote through the depositary and are not entitled to attendshareholders’ meetings.***

 

Underthe terms of the ADSs, you have a general right to vote the Common Sharesunderlying ADSs that you hold.  You mayinstruct the depositary, JPMorgan Chase Bank, to vote the ordinary sharesunderlying our ADSs, but only if we request the depositary to ask for yourinstructions.  Otherwise, you will not beable to exercise your right to vote unless you withdraw the Common Sharesunderlying the ADSs.  However, you maynot receive voting materials in time to ensure that you are able to instructthe depositary to vote your shares or receive sufficient notice of ashareholders’ meeting to permit you to withdraw your Common Shares to allow youto cast your vote with respect to any specific matter.  In addition, the depositary and its agentsmay not be able to send out your voting instructions on time or carry them outin the manner you have instructed.  As aresult, you may not be able to exercise your right to vote and you may lackrecourse if the Common Shares underlying your ADSs are not voted as you requested.

 

Inaddition, Mexican law and our bylaws require shareholders to deposit theirshares with our secretary or with a Mexican custodian or provide evidence oftheir status as shareholders in order to attend shareholders’ meetings.  ADS holders will not be able to meet thisrequirement and accordingly are not entitled to attend shareholders’meetings.  ADS holders will also not bepermitted to vote the Common Shares underlying the ADSs directly at ashareholders’ meeting or to appoint a proxy to do so without withdrawing theCommon Shares.

 

## **ITEM4.  Information on the Company.**

 

**HISTORY ANDDEVELOPMENT**

 

Desarrolladora Homex, S.A. de C.V. is a corporation (*sociedad anónima de capital variable*) registered inCuliacán, Sinaloa, Mexico under the Mexican Companies Law (*Ley Generalde Sociedades Mercantiles*) on March 30, 1998 with an indefinitecorporate existence.  Our full legal nameis Desarrolladora Homex, S.A. de C.V., or Homex.  Our principal executive offices are locatedat Andador Javier Mina 891-B, Colonia Centro Sinaloa, 80200 Culiacán, Sinaloa,México.  Our telephone number is (52667)758-5800.  Our legal domicile is AndadorJavier Mina 891-B, Colonia Centro Sinaloa, 80200 Culiacán, Sinaloa, México.

 

Ourcompany traces its origins to 1989 and established its current structure in1998.  Beginning in 1999, variousstrategic investors including, in 2002, EIP, an entity affiliated with EquityGroup Investments, L.L.C., an investment company founded by Samuel Zell,chairman of EIP, made equity investments in our company.  These strategic investors have assisted us indeveloping and refining our operating and financial strategies.  In addition, this increased access to equityfinancing has allowed us to accelerate our growth.

 

**Capital Expenditures**

 

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 2004, we spentPs. 218 million******on capitalexpenditures, primarily to purchase construction equipment and productionequipment for our concrete manufacturing facility.  In 2005, we expect to spend approximatelyPs. 161 million on capital expenditures, of which we spent Ps. 6 millionduring the first quarter of the year, primarily to purchase constructionequipment to support our growth.

 

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**Recent Developments**

 

On April 21, 2005, we signed an agreement to acquire 100% of thecapital stock of Controladora Casas Beta, S.A. de C.V., or Beta, the seventhlargest homebuilder in Mexico, in a transaction valued at approximately Ps.2,040million (or approximately US$188.9 million). The transaction will require that we purchase approximately 53.0% ofBeta’s stock for approximately Ps.1,163.0****million (orapproximately US$98.4 million) in cash and 47.0% of Beta’s stock forapproximately 22.0 million of our common shares valued at approximatelyPs.977.6 million (or approximately US$90.5 million).  Beta will then be merged into us.  Beta shareholders are expected to ownapproximately 6.6% of Homex after the merger. We expect to finance the cash portion of the purchase price principallywith bank financing, a portion of which may be denominated in U.S. dollars.

 

Upon completion of the transaction, we expect to be the largesthomebuilder in Mexico in terms of operating income and net income.  We expect this acquisition to be completedwithin the third quarter 2005.

 

**BUSINESS OVERVIEW**

 

***General***

 

We area vertically-integrated home development company focusing on affordableentry-level and middle-income housing in Mexico.  During 2004, we sold 21,053****homes, an increase of 57.2% over 2003.  As of December 31, 2004, we had 85developments under construction in 28 cities located in 17 Mexican states.  We had total land reserves under title ofapproximately 13 million square meters as of December 31, 2004, onwhich we estimate we could build approximately 58,031 affordable entry-levelhomes and approximately 7,258 middle-income homes.  As of December 31, 2004, we also hadapproximately 2 million square meters of land for which we had signed purchaseagreements and made partial payment, and for which title was in the process ofbeing transferred.  We estimate that wecould build approximately 11,010 affordable entry-level homes and 528middle-income homes on this land.

 

During2004, 78.20% of our revenues was attributable to affordable entry-levelhousing.  The remainder was attributableto middle-income housing.  We intend toexpand our presence in the higher-margin, middle-income housing market in 2005.

 

Forthe year ended December 31, 2004, we had revenues of Ps.** **5,313 million (U.S.$476.3 million), ascompared to Ps.** **2,911 million(U.S.$260.9 million) in 2003, and net income of Ps. 715 million(U.S.$64.2 million) in 2004, as compared to Ps.** **328 million(U.S.$29.4 million) in 2003.

 

Basedon information filed publicly in Mexico, we believe that we are growing fasterthan the three largest publicly traded Mexican home development companies overthe last two years, based on:

 

•                  number of homes sold, reflected by ouraverage growth rate of homes sold of 43% during the three-year period ended December 31,2004 versus average growth rates of homes sold of 7%, 7.2%, and 2.6% for thesethree companies over the same period;

 

•                  revenues, reflected by our averagerevenue growth rate of 57.7% during the three-year period ended December 31,2004 versus average revenue growth rates of 13%, 13.5%, and 8% for these threecompanies over the same period; and

 

•                  net income, reflected by our average netincome growth rate of 32.1% during the three-year period ended December 31,2004 versus average net income growth rates of 26.3%, 26.3%, and 27% for thesethree companies over the same period.

 

We have been able to achieve this growth while reducing financialleverage.  In addition, we believe ourgeographic diversity is one of the strongest among home builders in Mexico,reflected by our operations in 28 cities located in 17 Mexican states, ascompared to operations in 19, 7 and 16 Mexican states by these three companies.

 

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***OurProducts***

 

Mexico’sdeveloper-built housing industry is divided into three tiers according to cost:affordable entry-level, middle-income, and residential.  We consider affordable entry-level homes torange in price between Ps. 165,000 and Ps. 400,000 (U.S.$14,800 andU.S.$35,800) and middle-income homes to range in price between Ps. 400,000and Ps. 1,300,000 (U.S.$35,800 and U.S.$116,550).  We currently focus on providing affordableentry-level and middle-income housing for our clients.

 

Ouraffordable entry-level developments range in size from 500 to 20,000 homes andare developed in stages typically comprising 300 homes each.  During 2004, our affordable entry-level homeshad an average sales price of approximately Ps. 217,000(U.S.$19,455).  A typical affordable entry-levelhome consists of a kitchen, living-dining area, one to three bedrooms, and onebathroom.  We are able to deliver acompleted affordable entry-level home in approximately seven to ten weeks fromthe time a buyer obtains a mortgage approval. Currently, our largest affordable entry-level housing developments arelocated in the cities of Guadalajara, Monterrey, Culiacán, and Nuevo Laredo.

 

Ourmiddle-income developments range in size from 400 to 2,000 homes and aredeveloped in stages typically comprising 200 homes each.  During 2004, our middle-income homes had anaverage sales price of approximately Ps. 600,000 (U.S.$53,790).  A typical middle-income home consists of akitchen, dining room, living room, two or three bedrooms, and twobathrooms.  We are able to deliver acompleted middle-income home in approximately twelve to fourteen weeks from thetime a buyer obtains a mortgage approval. In response to the increase in demand for middle-income housing inMexico and the higher margins generally obtainable from middle-income housingdevelopments, we launched ten middle-income developments in 2004 in the citiesof Atizapán, Culiacán, La Paz, Metepec, Guadalajara, Vallarta, Tijuana, andTuxtla.  In 2004, 20.9% of our revenuewas attributable to sales of middle-income housing compared to 9.8% in 2003.  We expect that a higher portion of ourrevenue in 2005 will be attributable to sales of middle-income housing ascompared to 2004.

 

***LandReserve***

 

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 locatednear areas with sufficient demand, generally in areas where at least 500 homescan be built, and must be topographically amenable to housing development.  We also consider the feasibility of obtainingrequired governmental licenses, permits, authorizations, and adding necessaryimprovements and infrastructure in balance with a purchase price that willmaximize margins within the limits of available mortgage financing.  We conduct engineering and environmentalassessments, and in some cases urbanization and land composition studies, ofland we consider for purchase in order to determine that it is suitable forconstruction.  We budget the majority ofour land purchases for the second half of the year to coincide with peak cashflow.  As a result, our total landreserves fluctuate between our targeted 18 to 24 months of future homedeliveries depending upon the time of year.

 

As of December 31,2004, we had total land reserves under title of approximately 13 millionsquare meters on which we estimate we could build approximately 58,031****affordable entry-level homes and 7,258 middle-incomehomes.  We also had approximately2 million square meters of land for which we had signed purchaseagreements and made partial payment, and for which title was in the process ofbeing transferred.  We estimate that wecould build approximately 11,010 affordable entry-level homes and 528middle-income homes on this land.

 

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

 

Beginningin 1999, private investors, including in 2002, Equity International Properties,Ltd., or EIP, a privately held investment company specializing in real estateinvestments outside the United States and particularly in Mexico, made a numberof equity investments in our company in an aggregate amount ofU.S.$32.0 million.  EIP isaffiliated with Equity Group Investments, L.L.C., a privately held investmentcompany founded by Samuel Zell, chairman of EIP.  Equity Group Investments, L.L.C., together withits affiliates, is one of the largest real estate investment companies in theUnited States.  EIP participates on ourboard of directors.

 

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**Business Strengths**

 

***StandardizedBusiness Processes***

 

Overseveral years, we have developed and refined scalable and standardized businessprocesses that allow us to enter new markets rapidly and efficiently.  We have designed proprietary informationtechnology systems that integrate and monitor every aspect of our operations,including land acquisition, construction, payroll, purchasing, sales, qualitycontrol, financing, delivery, and maintenance. Our systems connect every one of our branch locations and help usmonitor and control the home building process, to administer our clientrelations, and to oversee the financing process for our clients.  This standardized model drives our growth,geographic diversification, and profitability, and is an integral component ofour 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 not commence construction on adevelopment stage until prospective buyers representing at least 10% of theplanned number of homes in that stage have qualified to receive mortgagefinancing.  We seek to maintain a shortconstruction period of less than ten weeks for affordable entry-level housingand less than fourteen weeks for middle-income housing by using our systems tomaximize the efficiency of our standardized methods.  This speed allows us to maximize our workingcapital by minimizing overhead and coordinating payables with receivables,which greatly reduces our borrowing needs.

 

***GeographicDiversification***

 

Webelieve that we are one of the most geographically diversified home developmentcompanies in Mexico.  As of December 31,2004, our operations included 85 developments in 28 cities located in 17Mexican states, which states represent 68% of Mexico’s population, according tothe Mexican Institute of Statistics, Geography and Computing, or INEGI (*Instituto Nacional de Estadística, Geografía e Informática*).  Many of our developments are located inmarkets where no major competitors currently operate.  We believe that this geographicdiversification reduces our risk profile as compared to our less-diversifiedcompetitors.

 

***Experiencedand Committed Management Team***

*** ***

EustaquioTomás de Nicolás Gutiérrez, our chairman, co-founded our predecessor in 1989,and Gerardo de Nicolás Gutiérrez, our CEO, joined us in 1993.  Our senior management team is comprised ofexecutives with an average of 15 years experience in their respective areas ofresponsibility.  Senior management ownsan aggregate of 17.54% of our Common Shares. Consistent with our standardized business processes and geographicdiversification, we delegate significant managerial responsibility to ourseasoned team of branch managers.  Uponcompletion of a development, we typically relocate our branch managers toanother development in order to capitalize on their significant experience.

 

**Business Strategies**

 

***Focuson Growth Consolidation and High-Margin Opportunities***

*** ***

Ourstrategy is to consolidate our growth rate and to identify and target highmargin opportunities.  We have developedan operating model that allows us to enter underserved markets quickly andefficiently in order to take advantage of attractive opportunities offered byincreased availability of public- and private-sector mortgage financing.  In response to these opportunities, duringthe last three years we launched 29 new affordable entry-level developments in14 cities.  Increased availability ofprivate-sector financing also has allowed us to expand our presence in thehigher-margin, middle-income sector. Since the beginning of 2004, we launched 8 new middle-incomedevelopments in 8 cities.  We expect tocontinue to expand our operations in the middle-income sector in 2005.

 

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***MaintainAppropriate and Balanced Land Reserves***

 

Ourability to identify, acquire, and improve land is critical to our success.  Because the growth of our operations dependson managing our land reserves efficiently, we continually review our portfolioand seek new real estate opportunities. We balance our need for additional land for growth with our desire tominimize leverage and avoid excessive land inventory.  Our current goal is to maintain sufficientland reserves for a minimum of 18 to 24 months of future homedeliveries.  This time period allows usto undertake the lengthy processes necessary to prepare land for development,including identifying suitable parcels, locating adequate water supplies,obtaining required governmental permits and authorizations, and incorporatingparcels into existing urban zones.  Wegenerally purchase large parcels of land in order to amortize our acquisitionand infrastructure costs over a large number of homes, minimize competition,and take advantage of economies of scale. As of December 31, 2004, we had total land reserves ofapproximately 13 million square meters, which had an aggregate capacity ofapproximately 58,031 affordable entry-level homes and 7,258 middle-incomehomes.

 

***MaintainConservative Financial Posture***

*** ***

Weoperate our business with the goal of minimizing our leverage in order toreduce our exposure to interest rate and financing risk.  We begin construction only when an approvedbuyer has qualified for a mortgage and, if applicable, made a down payment,thereby reducing our working capital needs. The resulting financial flexibility enhances our ability to respondquickly to market opportunities and minimizes any negative effects that mightresult from a downturn in the economy.

 

***BuildSuccessful 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 providing other social services to residents.  We are committed to fulfilling our clients’needs by responding to and meeting their demands.  Through market studies, for example, wedetermine that home buyers prefer larger home sizes over higher-priced finishingdetails.  We allow our clients to improvethese details at their own expense in order to offer more square footage perhouse than similarly priced homes offered by our competitors.  At the same time, we seek to become the bestemployer to our employees through training and educational opportunities.  We seek to hire and keep talented employeesand invest in training our workforce at all levels by offering programs such asmiddle-school equivalency courses for our construction laborers.  We are committed to becoming the bestcustomer to our suppliers by offering various payment alternatives andopportunities for cooperative growth, and through our factoring structure andother initiatives, including electronic ordering and payment systems.  We believe that these factors make us apreferred home builder, employer, and customer and ultimately enhance ouroverall business.

 

***OurMarkets***

*** ***

Weoperate in geographically diverse markets throughout Mexico, from Tijuana inthe north to Tapachula in the south, which represent 17 states as of December 31,2004.  Since December 31, 2004, webegan work on two middle income developments in the city of Leon in theState of Guanajuato and in the city of Guadalajara in the State of Jalisco andone affordable entry-level development in the border city of Nuevo Laredo inthe State of Tamaulipas.  No cityrepresented more than 10% of our total revenues as of December 31, 2004,with the exception of Guadalajara, which represented 26% of our revenues in2004.  We anticipate that in the future,revenues attributable to our developments in Guadalajara will represent an evensmaller portion of our total revenues. We expanded into Guadalajara, the capital of the state of Jalisco andMexico’s second-largest city, because the financing available fromgovernment-sponsored lenders such as INFONAVIT during 2003 significantlyexceeded the construction capacity of existing developers in the area.  We seek to continue operations in marketswhere we have a strong presence and to expand into underserved markets wheredemand for housing is high.

 

Thefollowing table sets forth information on our historical sales by state.  During 2002, all of the homes we sold wereaffordable entry-level homes.  During2003, 96.5% of the homes we sold were affordable entry-level homes and 3.5% ofthe homes we sold were middle-income homes. During 2004, 91% of the homes we sold were affordable entry-level homesand 9% of the homes we sold were middle-income homes.  No middle-income homes were sold in 2002.

 

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***TotalHomes Sold***

 
| ** **             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| **State**              | ** ** | **AEL**                          | ** ** | **Middle-income** | ** ** | **AEL** | ** ** | **Middle-income** | ** ** | **AEL** | ** ** |
| Baja  California       |       | 220                              |       | 289 |   | — |   | — |   | — |   |
| Baja  California Sur   |       | 1,180                            |       | — |   | 584 |   | 84 |   | 865 |   |
| Chiapas                |       | 1,317                            |       | 18 |   | 391 |   | 6 |   | 174 |   |
| Chihuahua              |       | 1,171                            |       | — |   | 980 |   | — |   | 824 |   |
| Guanajuato             |       | 783                              |       | — |   | 356 |   | — |   | 308 |   |
| Estado de  México |       | 30                               |       | 262 |   | — |   | 115 |   | — |   |
| Guerrero               |       | 867                              |       | — |   | — |   | — |   | — |   |
| Hidalgo                |       | —                           |       | 31 |   | — |   | — |   | — |   |
| Jalisco                |       | 5,264                            |       | 501 |   | 6,341 |   | 121 |   | 1,406 |   |
| Michoacan              |       | 686                              |       | — |   | 388 |   | — |   | 313 |   |
| Nayarit                |       | —                           |       | — |   | 444 |   | — |   | 204 |   |
| Nuevo Leon             |       | 1,691                            |       | — |   | — |   | — |   | — |   |
| Oaxaca                 |       | 246                              |       | — |   | — |   | — |   | — |   |
| Sinaloa                |       | 2,092                            |       | 464 |   | 1,412 |   | 108 |   | 2,017 |   |
| Sonora                 |       | 751                              |       | 247 |   | 603 |   | 29 |   | 477 |   |
| Tamaulipas             |       | 2,471                            |       | — |   | 1,434 |   | — |   | 589 |   |
| Veracruz               |       | 5                                |       | — |   | — |   | — |   | — |   |
| Yucatan                |       | —                           |       | — |   | — |   | — |   | 29 |   |
| Total                  |       | 19,141                           |       | 1,912 |   | 12,933 |   | 463 |   | 7,206 |   |

 

**The Mexican Housing Market**

 

*We have obtained the following information from publicsources, including publications and materials from the Mexican Ministry ofSocial Development, or SEDESOL (Secretaria de Desarrollo S**ocial), the Mexican PopulationCouncil, or CONAPO (Consejo Nacional de Población),**INEGI, INFONAVIT, SHF,the Mexican Home Building and Development Industry Chamber of Commerce, orCANADEVI (Camara Nacional de la**Industria del Desarrollo y Promocion de Vivienda),and the Mexican Housing Development Commission, or CONAFOVI (Comisión Nacionalde Fomento a la Vivienda).  We have notindependently verified any of the information provided in this section.*

 

***General***

 

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

 

***Demographics***

 

Nationaldemographic trends drive demand for housing in Mexico.  These trends include:

 

•                  sustained growth of a relatively youngpopulation;

 

•                  a high rate of new household formation;

 

•                  a high urban area growth rate; and

 

•                  a decrease in number of occupants perhome.

 

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Accordingto INEGI, Mexico had a population of approximately 97.5 million in 2000,or approximately 22.3 million households. CONAPO estimates that there will be 27.5 million households by theend of 2004.

 

Mexicoexperienced a period of particularly high population growth during the 1970sand 1980s.  The children born during thisboom are contributing to the current increased demand for housing.  The target consumer group for our homes istypically between 25 and 49 years old. In 2000, the 25-49 year old age group represented approximately31 million people or 32% of Mexico’s total population.  CONAPO estimates that by 2020, this age groupwill represent 46 million or 38% of Mexico’s total population.  The growth of this group will contribute toincreased housing demand in Mexico.

 

**Mexican Population Age Distribution 1950 - 2020**

 

 

***HousingSupply***

*** ***

In2001, CONAFOVI housing statistics indicated there was a shortage of 4.3 millionhomes in Mexico.  This figure includedthe 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 inneed of extensive repair and possible replacement.  In addition, there is expected to beapproximately 27.5 million households in Mexico by the end of 2004 and32.9 million households by 2010.

 

Theseestimates suggest that Mexico will have to increase its housing stock by5.3 million units between 2004 and 2010. CONAFOVI estimates that the growth of the Mexican population willgenerate a sustained demand for new homes of at least 766,000 units per yearinto the near future.  To address theimmediate shortage of 4.3 million homes as well as the anticipated newdemand, the Mexican government has committed to financing and/or building atleast 750,000 units a year until at least 2006.

 

***MarketSectors***

 

Ingeneral, Mexico’s developer-built (as opposed to self-built) housing market isdivided into three sectors according to cost: affordable entry-level,middle-income, and residential.  Thedeveloper-built housing market includes homes built by contractors anddevelopers, which are generally financed by mortgage providers.  These homes are built with official permits,have municipal services, and are located on land that is registered and titledby

 

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the buyer.  Developers must obtain proper zoning permits,install infrastructure, obtain any necessary financing commitments fromlenders, and clear title to the land.

 

Wecategorize Mexico’s developer-built housing market as follows:

 

***HousingMarket Sectors***

 
| **Sector**             | ** ** | **Cost**                                                                      | ** ** | **Size**                               | ** ** | **Characteristics**                                                                                                                      |
|------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|
| Affordable entry-level |       | between Ps. 165,000 and Ps. 400,000 (U.S.$14,800-U.S.$35,800)       |       | 45m2-76m2  (452 ft2 - 818 ft2)         |       | kitchen; living-dining area; 1-3 bedrooms; 1 bath; parking; titled;  all utilities available                                             |
|                   |       |                                                                          |       |                                   |       |                                                                                                                                     |
| Middle-income          |       | between Ps. 400,000 and Ps. 1,300,000 (U.S.$35,800 -  U.S.$115,700) |       | 76m2-172m2  (818 ft2 – 1,851 ft2) |       | 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. 1,300,000 (U.S.$115,700)                                   |       | more than 172 m2  (1,851 ft2)          |       | kitchen; family room; living room; dining room; 3-4 bedrooms; 3-5  baths; 3-6 parking; service quarters; titled; all utilities available |

 

***GovernmentPolicy and Available Financing***

 

Thesize of the developer-built market depends on the availability of mortgagefinancing.  Due to liquidity crisesoccurring in the last twenty years, Mexico has experienced fluctuations in theavailability of mortgage financing, particularly from private-sector sources.  As a result, the supply of affordable entry-leveland middle-income housing has also remained low during this period.

 

Duringthe 1980s, Mexican government policy focused on encouraging investment by theprivate sector, reducing development costs, and stimulating construction.  Government-sponsored funds provided mortgageloan guarantees and direct payment and savings procedures.  In 1994, Mexico experienced an economiccrisis that led to the devaluation of the Mexican peso and a steep rise ininterest rates.  Smaller housingdevelopment companies went out of business, and the industry experienced asharp fall in home sales between 1995 and 1996 due to diminished commercialbank 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 government-sponsored funds in the affordable entry-levelsector.  Government funds no longerprovided development or sales activities and functioned instead as truesavings-and-loan programs.  Legislativereforms with regard to community-owned agricultural territories (ejidos), whichmade it possible to sell these formerly restricted properties, also increasedthe potential supply of land available for development.  During this period, the government authorized*sofoles* that underwrite mortgageswith funds and guarantees provided by government agencies, private investment,national, foreign or development bank loans, or through the Mexican capitalmarkets.  Furthermore, the governmentencouraged industry growth and private-sector lending by supportingconsolidation in the housing development industry.

 

Between1997 and 1998, home sales stabilized, growing slightly in 1997 due to improvingeconomic conditions.  During 1999 and2000, mortgage financing increased due to stabilizing economic conditions.  The level of available financing hascontinued to grow as a result of Mexican government policies implementedfollowing the crisis and the current Mexican presidential administration’s goalto provide 750,000 new mortgages per year by 2006 pursuant to its nationalhousing plan.  The administration setforth four objectives to achieve this growth:

 

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

 

•                  increase deregulation of the homebuilding industry;

 

•                  encourage consolidation within theindustry; and

 

•                  increase financing opportunitiesavailable to qualified home buyers.

 

In conjunction with these efforts, the Mexican legislature amendedexisting tax regulations in order to allow individuals to deduct a portion oftheir mortgage loan interest payments from their personal income taxesbeginning in 2003, which the administration expects will lead to increasedmortgage financing activity.

 

In thelast four years, the developer-built market has continued to expand due tohigher levels of available mortgage financing, especially throughgovernment-sponsored funds such as INFONAVIT, SHF, and FOVISSSTE.  Between 1998 and 2000, the housing stock inMexico increased by 2.4 million homes, 37% of which (900,000 homes) werebuilt by developers, with the remainder being self-built.  Between 2001 and 2003, CONAPO estimates thatthe housing stock increased by another 2.5 million homes, 46% of which(1.1 million homes) were built by developers, with the remainder beingself-built.

 

**Sources of Mortgage Financing**

 

Fourprincipal sources provide mortgage financing for Mexico’s housing market:

 

•                  Mortgage providers financed by mandatoryemployer or member contributions to public funds, including:

 

•                  INFONAVIT, serving private-sectoremployees,

 

•                  FOVISSSTE, serving public-sectoremployees, and

 

•                  the Mexican Armed Forces Social SecurityInstitute, or ISSFAM (*Instituto de SeguridadSocial de las Fuerzas Armadas Mexicanas*), serving militarypersonnel;

 

•                  SHF, which provides financing tocredit-qualified homebuyers through financial intermediaries such as commercialbanks or *sofoles* through fundsfrom the World Bank, the Mexican government, and its own portfolio;

 

•                  Commercial banks and *sofoles* using their own funds; and

 

•                  Direct subsidies from public housingagencies and state housing trusts, including the Mexican Fund for the People’sHomes, or FONHAPO (*Fondo Nacional deHabitaciones Populares*).

 

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Accordingto CONAFOVI, these mortgage providers originated 536,404 home mortgages in2004, as follows:

 

 

***INFONAVIT***

 

INFONAVITwas established by the Mexican government, labor unions, and private-sectoremployees in 1972 as a mutual fund for the benefit of private-sectoremployees.  INFONAVIT functions as asavings and loan that provides financing primarily for affordable entry-levelhousing to credit-qualified home buyers. INFONAVIT makes loans for home construction, acquisition, or improvementto workers whose individual monthly earnings are generally less than five timesthe minimum monthly wage.  It is fundedthrough payroll contributions by private-sector employers on behalf of theiremployees equal to 5% of their employees’ gross wages.

 

Homebuyers qualify for INFONAVIT loans according to a point system whereby pointsare awarded based on income, age, amount of monthly contributions, and numberof dependents, among others.  INFONAVITis phasing in a requirement that mortgage loan applicants make a down paymentof between 5% to 10% of a home’s total 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 borrower’smonthly minimum wages, depending on geographical region.  Repayment is calculated based on the borrower’swages, for a term of up to thirty years, and is made by direct wage deductionsby employers.  INFONAVIT generally grantsloans at variable annual interest rates, which are indexed to inflation andbased on a borrower’s income.  INFONAVITallows for a one-year grace period with no interest or principal payments inthe event of job loss and seeks direct repayment from the borrower after thisperiod.

 

INFONAVIThas a program called a program called *ApoyoINFONAVIT* that is directed at assisting higher income borrowersobtain mortgage financing.  *Apoyo INFONAVIT* customers can use theamounts contributed via payroll deductions to their INFONAVIT accounts ascollateral for mortgage loans held by private-sector lenders.  In addition, these clients can apply theirmonthly INFONAVIT contributions toward the monthly mortgage payments owed toprivate-sector 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 programenables COFINAVIT customers to obtain a mortgage loan granted by INFONAVIT inconjunction with a commercial bank or a *sofol*.  In addition, the customers can use theirindividual contributions in their INFONAVIT accounts as part of the financingor as collateral for the mortgage loan.

 

In addition,during late 2004 and early 2005, INFONAVIT initiated a new mortgage financingsystem, enabling INFONAVIT to expedite the issuance of mortgages in response topublic demand by reducing documentation necessary for initial processing,permitting INFONAVIT to achieve its year-end goals.  In addition, this new system enhancestransparency and quality of service in connection with mortgage services.  Mortgage financing is expected to increase25% to approximately 375,000 mortgages granted in 2005 from approximately305,000 mortgages granted in 2004 partially as a results of the implementationof the new mortgage financing system.

 

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INFONAVIThas made a commitment to provide 375,000 new mortgages in 2005 and 435,000 newmortgages in 2006.  In addition, thisagency has agreed to guarantee mortgage loans granted to employees bycommercial banks and *sofoles* inthe case of job loss.  INFONAVIT expectsto continue to modernize its operations and increase available financing byfocusing on reducing payment defaults, participating more closely with theprivate sector, and implementing a voluntary savings program.  INFONAVIT has also recently begunsecuritizing its loan portfolio in order to contribute to the growth of thesecondary mortgage market in Mexico and expand its available sources of funds.

 

INFONAVITprovided approximately 56.6% of all mortgage financing in Mexico during theyear ended December 31, 2004.

 

***FOVISSTE***

 

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

 

FOVISSSTEmortgage financing is typically available for housing ranging from theaffordable entry-level sector through the lower end of the middle-incomesector.  Eligible applicants can obtainFOVISSSTE mortgage loans to purchase new or used homes, remodel or repairexisting homes, finance construction of self-built homes, and make downpayments on homes not financed through FOVISSSTE.  FOVISSSTE loans are granted based onseniority within the public sector and allocated on a first-come first-servedbasis that also takes into account wages, number of dependents, and geographiclocation.  Once the program establishes anumber of approved applicants, it allocates mortgage loans by state based onhistorical demand.

 

FOVISSSTEgenerally grants loans at variable interest rates, indexed to inflation, for amaximum amount of approximately U.S.$40,000. Repayment is calculated based on the borrower’s wages, for a term of upto thirty years, and is made by direct wage deductions.

 

FOVISSTEhas publicly announced that it is seeking to increase the total number ofmortgage loans it grants to 50,000 in 2005 and 62,000 in 2006.

 

FOVISSSTEprovided approximately 11.3% of all mortgage financing in Mexico during theyear ended December 31, 2004.

 

***SHF***

 

SHFwas created in 2002 as a public-sector development bank.  SHF obtains funds from the World Bank, theMexican government, and SHF’s own portfolio and provides financing throughintermediaries such as commercial banks and *sofoles*.  In turn, financial intermediaries administerSHF-sponsored mortgage loans, including disbursement and servicing.

 

Traditionally,SHF has been an important source of construction financing for housingdevelopers by providing loans to commercial banks and *sofoles* (which in turn make direct bridgeloans to developers).  As of September 1,2004, however, SHF provided funding for bridge loans only for homes with apurchase price of up to UDI 166,667 (approximately U.S.$53,000).  In lieu of funding bridge loans for homeswith a higher purchase price (up to UDI 500,000 (approximatelyU.S.$160,000)), SHF will provide guarantees to support efforts by commercialbanks 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 the purpose of providingindividual home mortgages for affordable entry-level and middle-incomehomes.  Historically, SHF has onlyfinanced a total amount equal to 80% to 90% of a home’s value, generally for amaximum of approximately UDI 500,000 (U.S.$160,000).  Beginning in 2005, however, in order tomaximize the availability of affordable

 

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entry-levelmortgages, SHF has replaced its financing of mortgages for homes with apurchase price greater than UDI 150,000 (approximately U.S.$50,000) withcredit enhancements and loan guarantees for commercial banks and *sofoles* to support their capital-raisingefforts for the financing of such individual mortgage loans.

 

Interms of total homes financed, SHF (through commercial banks and *sofoles*) provided approximately 19% of allmortgage financing in Mexico during the year ended December 31, 2004.

 

***CommercialBanks and Sofoles***

*** ***

Commercialbanks generally target the middle-income and residential markets while *sofoles* generally target the affordableentry-level housing market and a portion of the middle-income housing marketusing SHF financing, and the balance of the middle-income housing market aswell as the residential housing market using other sources of funding.  *Sofoles*provide mortgage loans to borrowers using funds from securities offerings onthe Mexican stock market, loans from Mexican and foreign lenders, their ownportfolios, and public agencies such as SHF. They are not allowed to accept deposits from the public.

 

Althoughcommercial banks and *sofoles*provide mortgage financing directly to home buyers, the financing is commonlycoordinated 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, lendersprovide construction financing and disburse funds as each stage of the housingdevelopment advances.

 

Commercialbank and *sofol* mortgage loans aretypically available for housing ranging from the upper tier of the affordable sectorthrough the residential sector.  Homebuyers qualifying for these private-sector mortgages are generally assumed tobe those purchasing homes with a value in excess of U.S.$35,000.  Private-sector lenders require down paymentsof approximately 20% of a home’s total value and make loans at fixed orvariable annual interest rates based on consumer indices and inflation.  Commercial bank and *sofol*mortgage loans generally mature in ten to thirty years, and payments aresometimes adjusted for increases in the monthly minimum wage and rates ofinflation.

 

Commercialbanks and *sofoles* (not includingSHF financing) provided approximately 6.7% of all mortgage financing in Mexicoduring the year ended December 31, 2004.

 

***OtherPublic Housing Agencies***

*** ***

Otherpublic housing agencies such as FONHAPO and the Mexican Trust for Housing,Social, and Urban Development, or FIVIDESU (*Fideicomisode Vivienda, Desarrollo Social y Urbano*), operate at the federal andlocal levels and target mainly non-salaried workers earning less than 25 timesthe 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 availableto both the self-built and developer-built markets.  The total amount of available funds dependson the Mexican government budget.

 

Otherpublic housing agencies provided approximately 6.4% of all mortgage financingin Mexico during the year ended December 31, 2004.

 

***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 Corporación GEO, S.A. de C.V.,Consorcio ARA, S.A. de C.V., URBI Desarrollos Urbanos, S.A. de C.V., and GrupoSADASI.  We estimate that approximately1,200 different companies operate approximately 3,000 new home developments inMexico at any one time.  The followingtable sets forth approximate operating information on the largest home buildersin Mexico with which we compete based on public information and our estimates.

 

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| **Competitor**                   | ** ** | **2004 Home  Sales** | ** ** | **2004 Sales** | ** ** | **Location in Mexico**           | ** ** | **Sector** |
|----------------------------------|------------|----------------------|------------|----------------|------------|----------------------------------|------------|------------|
| **(thousands of  U.S. dollars)** |
| GEO                              |       | 33,228               |       | U.S.$          | 704,285    |                             | National   |       | AEL |
| URBI                             |       | 21,793               |       | 589,528        |       | North and border                 |       | AEL, M, R  |
| ARA                              |       | 17,104               |       | 518,038        |       | National                         |       | AEL, M, R  |
| SADASI*                          |       | 10,000               |       | —         |       | Center-Southeast                 |       | AEL        |
| SARE                             |       | 7,783                |       | 242,128        |       | Mexico City region               |       | AEL, M, R  |
| Pulte*                           |       | 7,332                |       | —         |       | North and Center                 |       | AEL, M     |
| Beta**                           |       | 11,055               |       | 220,329        |       | Mexico City region and Northwest |       | AEL, M, R  |
| Metta*                           |       | 5,000                |       | —         |       | Mexico City region and Northwest |       | AEL, M, R  |
| Ruba                             |       | 6,000                |       | 151,405        |       | North                            |       | AEL        |
| Hogar                            |       | 3,271                |       | 87,332         |       | West-Northwest                   |       | AEL        |
|                                  |            |                      |            |                |            |                                  |            |            |  |

 

*       SADASI, Pulte and Metta are privately held companies and their2004 sales information is not public.

 

**     We have entered into an agreement to acquire 100% of the capitalstock of Beta.  We expect the acquisitionto be completed within the third quarter of 2005.  See “—History and Development—RecentDevelopments”.

 

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

 

**Seasonality**

 

TheMexican affordable entry-level housing industry experiences significantseasonality during the year, principally due to the operational and lendingcycles of INFONAVIT and FOVISSSTE.  Theprograms, budgets, and changes in the authorized policies of these mortgagelenders are approved during the first quarter of the year.  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 build and deliver affordable entry-levelhomes based on the seasonality of this cycle because we do not beginconstruction of these homes until a mortgage provider commits mortgagefinancing to a qualified home buyer in a particular development.  Accordingly, we also tend to recognizesignificantly higher levels of revenue in the third and fourth quarters and ourdebt levels tend to be highest in the first and second quarters.  We budget the majority of our land purchasesfor the second half of the year to coincide with peak cash flows.  As a result, our total land reservesfluctuate between our targeted 18 to 24 months of future home deliveriesdepending upon the time of year.  Weanticipate that our quarterly results of operations and our level ofindebtedness will continue to experience variability from quarter to quarter inthe future.  Mortgage commitments fromcommercial banks and *sofoles* formiddle-income housing are generally not subject to significantseasonality.  We expect that as thepercentage of our sales from middle-income housing increases, the overallseasonality of our results of operations should diminish.

 

Weacquire land and plan the development of the homes we build through PICSA.  DECANO builds the developments that PICSAplans and promotes.  We also receiveexecutive and administrative services from Administradora PICSA, S.A. de C.V.and Altos Mandos de Negocios, S.A. de C.V. Homex Atizapán, S.A. de C.V., whichwe operate and control as a joint venture with strategic partners in theregion, owns one of our middle-income developments in the Mexico City area.AeroHomex, S.A. de C.V. provides transportation services to us.  Through AAA Homex Trust, a Mexican trust, weassist in arranging lines of credit for many of our suppliers.  See “Item 4. Information on the Company—Business Overview—Marketing — Materials andSuppliers.”

 

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***Marketing***

 

Wedevelop customer awareness through our marketing and promotion efforts andreferrals from satisfied customers. Through surveys we conduct through our marketing department and withsales agents, we gather demographic and market information to help us gauge thefeasibility of new developments.  We usethese surveys to target groups of customers who share common characteristics orhave common 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 withlocal employers and other groups to offer our homes to their employees ormembers and rely on positive word-of-mouth from satisfied customers for a largepercentage of our sales.  We also employspecially-trained salespeople to market our middle-income housing developments.

 

***Sales***

*** ***

Ingeneral, we make sales either at sales offices or model homes.  Using data we gather through our marketingefforts, we open sales offices in areas where we identify demand.  As of December 31, 2004, we operated 28sales offices, one in each of the cities where we have established a housingdevelopment.  Similarly, once we havepurchased land and planned a development in regions we have identified asunderserved, we build and furnish model homes to display to prospective customers.  We have sales offices in each of our brancheswhere trained corporate sales representatives are available to providecustomers with relevant information about our products, including financing,technical development characteristics, and information about our competitorsand their products.  We provide the sameinformation through trained corporate sales representatives at modelhomes.  We recently changed our method ofcompensating our sales agents to an exclusively performance-based commission method,typically 1.4% of the 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 on their new home.  We have specialized sales areas in each ofour offices that advise customers on financing options, collecting necessarydocumentation, and applying for a loan. We also help to design down payment plans tailored to each customer’seconomic situation.  Once houses are soldand delivered, our specialized teams are available to respond to technicalquestions or problems during the twelve-month warranty period following thedelivery.

 

***Customer Financing***

 

Weassist qualified homebuyers in obtaining mortgage financing by participating inall the stages of applying for and securing mortgage loans fromgovernment-sponsored mortgage lenders, commercial banks, and *sofoles*.

 

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

 

•                  a potential home buyer enters into apurchase agreement and furnishes the necessary documentation to us;

 

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

 

•                  we create an electronic credit file foreach home buyer and submit it to the relevant mortgage provider for approval;

 

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

 

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•                  the home buyer makes any required downpayment;

 

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

 

•                  we deliver the home to the buyer andregister the title.

 

Forsales of middle-income housing, the process of obtaining customer financingoccurs as above, except that we collect a down payment of between 10% to 25% ofa home’s total sales price immediately following the execution of the purchaseagreement, and the buyer signs the deed of transfer of title and the mortgageagreement when the home is 90% complete.

 

In allcases, the procedures and requirements for obtaining mortgage financing aredetermined by the mortgage provider.  Wegrant no direct financing to home buyers for the purchase of our homes.

 

Ingeneral, the purchase agreement we enter into with a potential buyer binds thebuyer to purchase the relevant home at the time that the home iscompleted.  We collect an origination feeat the time that a buyer enters into a purchase agreement, which is returned(less a processing fee) if the sale does not close as a result of a buyer’sbreach or if a lender declines a mortgage financing application.  We have not experienced and do not expect toexperience losses resulting from breaches of buyer purchase agreements becausewe generally have been able to locate other buyers immediately in these cases.

 

Thepurchase price of the homes we sell is denominated in pesos and is either fixedin the purchase agreement or is subject to an upward adjustment for the effectsof inflation.  In cases where the priceof a home is subject to adjustment and increases due to inflation, anydifference is payable by the buyer.

 

***Design***

*** ***

Weinternally develop all the construction designs that we use.  Our architects and engineers are trained todesign structures to maximize efficiency and minimize production costs.  Our standardized modular designs, which focuson quality and size of construction, allow us to build our homes quickly andefficiently.  By allowing our clients toupgrade finishing details on a custom basis after homes are delivered, weexperience savings that allow us to build larger homes than our competitors.

 

We useadvanced computer-assisted design systems and combine market research data inorder to plan potential developments.  Webelieve that our comprehensive design and planning systems, which are intendedto reduce costs, maintain competitive prices, and increase sales, constitute asignificant competitive advantage in the affordable entry-level housingmarket.  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 the development of design and planningconstruction systems to further reduce costs and continue to meet client needs.

 

***Construction***

*** ***

We managethe construction of each development directly, coordinate the activities of ourlaborers and suppliers, oversee quality and cost controls, and assurecompliance with zoning and building codes. We have developed efficient, durable, and low-cost constructiontechniques, based on standardized tasks, which we are able to replicate at allof our developments.  We pay each laboreraccording to the number of tasks completed. We generally subcontract preliminary site work and infrastructuredevelopment such as roads, sewage, and utilities.  Currently, we also subcontract theconstruction of a limited number of multi-unit middle-income apartmentbuildings in the Mexico City area.

 

Ourdesigns are based on modular forms with defined parameters at each stage ofconstruction, which are closely controlled by our central informationtechnology systems.  Our methods resultin low construction costs and

 

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high qualityproducts.  We use substantially similarmaterials to build our middle-income homes, with higher quality components forcertain finishing details and fixtures.

 

***Materialsand Suppliers***

*** ***

Wemaintain strict control over our building materials through use of asophisticated electronic barcode identification system that tracks deliveriesand monitors all uses of supplies.  Ingeneral, 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 ofeconomies of scale in contracting for materials and services in every situationand seek to establish excellent working 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 NAFIN, a Mexicangovernment-owned development bank, as well as certain additional financial institutions.  We guarantee a portion of the financingprovided to some of our suppliers for materials we buy from them duringconstruction and repay these lenders directly with funds received when homesare delivered, which allows us to ensure suppliers are paid on time whileminimizing our need to secure construction financing.

 

Substantiallyall of the materials that we use are manufactured in Mexico and are deliveredto our sites from suppliers’ local facilities on a time-efficient basis devisedto keep low levels of inventory on hand. Our principal materials and supplies are readily available from multiplesources and we have not experienced any shortages or supply interruptions.

 

***Labor***

*** ***

As of December 31,2004, we had approximately 7,911 employees, of which 2,247 were administrativeand managerial personnel.  We hire locallabor forces for specific housing developments in each region that we operatein addition to experienced in-house personnel for supervisory and highlyskilled work.  We have an efficientinformation technology system that controls payroll costs.  Our systems, using barcoded identificationcards, track the number of tasks completed by each employee according to theparameters of our modular construction designs, assign salaries according totasks and homes completed, and award incentives for each stage of thedevelopment based on team performance. We also streamline governmental and social security costs for ourworkforce using a strict attendance control system that captures information fedvia our system through laborers’ identification cards.

 

Wehave implemented programs throughout Homex to assist our employees in obtainingelementary and middle-school equivalency degrees.  We believe that these programs enhance ourability to attract and retain high quality employees.  In 2004 and 2003 we were named as one of thetop 50 “Great Places to Work” in Mexico by the Great Place to Work Institute,which is based in the United States.

 

As of December 31,2004, 90% of our employees were members of a national labor union ofconstruction workers.  The economic termsof our collective bargaining agreements are negotiated on an annual basis.  All other terms and conditions of theseagreements are negotiated every other year. We believe that we have an excellent working relationship with ourworkforce.  We have not experienced alabor strike or any significant labor-related delay to date.

 

***CustomerServices and Warranties***

*** ***

Ourquality control department oversees strict pre-delivery quality control inspectionsand responds to post-delivery customer needs. We respond to client requests during the construction phase andcoordinate every legal aspect that our clients must fulfill when purchasing ourproducts, including signing deeds, obtaining permits, and securingfunding.  We provide a twelve-monthwarranty following delivery of the home. Historically, we have spent immaterial amounts in warranty claims. Inthe past three years, we have spent an aggregate of less than 0.4% of our totalrevenues in warranty claims.

 

34

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***CommunityServices***

*** ***

Weseek to foster brand loyalty after construction is complete by strengtheningcommunity relations in the developments we build.  As part of agreements with potential clientsand governmental authorities, we donate land and build communityinfrastructures such as schools, day-care centers, churches, and greenareas, often amounting to 10% to 15% of the total land area of the developmentswe construct.  For a period of eighteenmonths, we also provide for community development specialists to assist inpromoting community relations in certain developments by organizingneighborhood events such as competitions for beautiful homes and gardens.

 

**Regulation**

 

***General***

 

Ouroperations are subject to Mexican federal, state, and local regulation as anyother corporation doing business in Mexico. Some of the most relevant statutes, regulations, and agencies thatgovern our operations include the following:

 

•                  The Mexican General Community Act (*Ley General de Asentamientos Humanos*)regulates urban development, planning, and zoning and delegates to the MexicoCity and state governments the authority to promulgate urban development lawsand regulations within their jurisdiction, including the Urban Development Act(*Ley de Desarrollo Urbano*) ofeach state where we operate, which regulates state urban development.

 

•                  The Mexican Federal Housing Act (*Ley Federal de Vivienda*) coordinates theactivities of states, municipalities, and the private sector within the contextof the housing industry.  As in effect,the Federal Housing Act seeks to encourage and promote the construction ofaffordable entry-level housing.

 

•                  Local Building Regulations (*Reglamentos de Construccion*) and urbandevelopment plans promulgated by the states, Mexico City, and localmunicipalities control building construction, establish the required licensesand permits, and define local zoning and land-use requirements.

 

•                  The Mexican INFONAVIT Act (*Ley del Instituto del Fondo Nacional de la Viviendapara los Trabajadores*) requires that construction financing providedby INFONAVIT be granted only to registered developers that participate inpublic INFONAVIT bidding processes.

 

•                  The Federal Mortgage SocietyOrganizational Act (*Ley Organica de SociedadHipotecaria Federal*) encourages the development of the primary andsecondary home mortgage markets by authorizing SHF to grant home mortgage loanspursuant to the Federal Mortgage Society General Financing Conditions (*Condiciones Generales de Financiamiento de SociedadHipotecaria Federal*), which regulate the general terms andconditions on which these loans may be granted.

 

•                  The Mexican Federal Consumer ProtectionAct (*Ley Federal de Proteccion al Consumidor*)promotes and protects consumer rights and seeks to establish equality and legalcertainty in relationships between consumers and commercial suppliers.

 

***Environmental***

 

Ouroperations are subject to the Mexican General Environmental Protection Act (*Ley General del Equilibrio Ecologico y la Proteccional Ambiente*), the Mexican General Waste Prevention and ManagementAct (*Ley General para la Prevencion yGestion Integral de los Residuos*), and the related regulations.  The Mexican Ministry of the Environment andNatural Resources (*Secretaria de MedioAmbiente y Recursos Naturales*) and the Mexican Federal EnvironmentalProtection Agency (Procuraduria Federal de Proteccion al Ambiente) are thegoverning authorities responsible for enforcing environmental regulations inMexico, including environmental impact studies, which are required forobtaining land-use permits, investigations, and audits, as well as to provide

 

35

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guidelines andprocedures regarding the generation, handling, disposal, and treatment ofhazardous and non-hazardous waste.

 

We arecommitted to conducting our business operations in a manner that minimizesenvironmental impact.  Our businessprocesses include procedures that are intended to ensure compliance with theMexican General Environmental Protection Act, the Mexican General WastePrevention and Management Act, and the related regulations.  In accordance with these laws, we build ourhomes with metal instead of wooden beams and treat waste water for use inirrigating common areas in our developments. We plant trees on the land of homes we sell and provide plantings onland that we donate to our communities. Our internal teams conduct environmental studies for each project andproduce environmental reports that are intended to identify environmentalissues and assist in project planning in order to minimize adverseenvironmental effects, such as limiting the felling of trees during the processof urbanizing rural land for use in our developments.  Our costs include the cost of complying withapplicable environmental regulations.  Todate, the cost of complying and monitoring compliance with environmentalregulations applicable to us has been immaterial.

 

***Corporate***

 

See “Item10.  Additional Information—Bylaws.”

 

**ORGANIZATIONAL STRUCTURE**

 

We are a holding company and conduct our operationsthrough subsidiaries.  The table belowsets forth our principal subsidiaries as of December 31, 2004.

 
| **Name of Company**                                      | ** ** | **Jurisdiction of  Incorporation** | ** ** | **Percentage  Owned** | ** ** | **Products/  Services**                                                                     |
|----------------------------------------------------------|------------|------------------------------------|------------|-----------------------|------------|---------------------------------------------------------------------------------------------|
|                                                     |       |                               |       |                  |       |                                                                                        |
| Proyectos Inmobiliarios de  Culiacán, S.A. de C.V.  |       | Mexico                             |       | 100.00                | %          | Construction and development of houses                                                      |
|                                                     |       |                               |       |                  |       |                                                                                        |
| Desarrolladora de Casas del  Noroeste, S.A. de C.V.      |       | Mexico                             |       | 95.80                 | %          | Construction and development of housing complexes                                           |
|                                                     |       |                               |       |                  |       |                                                                                        |
| Administradora Picsa, S.A. de  C.V.                      |       | Mexico                             |       | 100.00                | %          | Rendering of administrative services to and professional services for  affiliated companies |
|                                                     |       |                               |       |                  |       |                                                                                        |
| Altos Mandos de Negocios, S.A.  de C.V.                  |       | Mexico                             |       | 100.00                | %          | Rendering of administrative services to affiliated companies                                |
|                                                     |       |                               |       |                  |       |                                                                                        |
| Homex Atizapán, S.A. de C.V.                        |       | Mexico                             |       | 67.00                 | %          | Construction and development of houses                                                      |
|                                                     |       |                               |       |                  |       |                                                                                        |
| AeroHomex S.A. de C.V.                                   |       | Mexico                             |       | 100.00                | %          | Rendering of transportation services to Homex                                               |
|                                                     |       |                               |       |                  |       |                                                                                        |
| AAA Homex Trust, Nacional Financiera, S.N.C., as trustee |       | Mexico                             |       | 100.00                | %          | Rendering of financial services                                                             |

 

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## **ITEM5.  Operating and Financial Review andProspects.**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

*The following discussion should be read in conjunction withour consolidated financial statements and their accompanying notes includedelsewhere herein.  The consolidatedfinancial statements have been prepared in accordance with Mexican GAAP and, unlessotherwise specified, along with the other financial information included inthis Annual Report, are restated in constant pesos as of December 31,2004.  Mexican GAAP differs in certainrespects from U.S. GAAP as described in Notes 22 and 23 to our consolidatedfinancial statements.*

 

**Critical Accounting Estimates**

 

Ourconsolidated financial statements have been prepared in accordance with MexicanGAAP, which requires that we make certain estimates and use certain assumptionsthat affect the amounts reported in our consolidated financial statements andthe accompanying notes.  Although theseestimates are based on our best knowledge of current events, actual results maydiffer.  Our critical accountingestimates are as listed below.

 

***Revenueand Cost Recognition***

 

We usethe percentage-of-completion method of accounting to account for revenues andcosts, measuring progress towards completion in terms of actual costs incurredversus budgeted expenditures for each stage of a development.  Under the percentage-of-completion method ofaccounting, revenues for work completed are recognized prior to receipt ofactual cash proceeds.  We receive cashproceeds from the sale of a home at closing when the home is delivered to thebuyer.  We include revenues in excess ofbillings as accounts receivable on our balance sheet, and any cash proceeds wereceive as advance payments prior to completion of the actual work related tothe payments, including customer down payments, are included in currentliabilities as advances from customers. See Note 3 to the consolidated financial statements.

 

Thepercentage-of-completion method of accounting requires us to determine on amonthly basis the percentage of completion of each stage of a development basedon actual expenditures incurred to date versus budgeted expenditures.  To the extent that the estimated costs of adevelopment stage differ from the actual costs incurred, our recognizedrevenues could change.  In addition, tothe extent that estimated revenues derived from home sales per developmentstage differ from revenues derived from home deliveries per development stage,our recognized revenues could change.

 

Weapply the percentage-of-completion method of accounting to recognize revenuesfrom our housing developments subject to the following conditions:

 

•                  we establish that the home buyer willobtain the required financing from the mortgage lender;

 

•                  the home buyer has submitted all requireddocuments in order to obtain financing from the mortgage lender;

 

•                  the home buyer has signed a purchaseagreement; and

 

•                  the home buyer has made a down payment,where down payments are required.

 

***IncomeTaxes***

*** ***

Werecognize deferred tax assets and liabilities based on the differences betweenthe financial statements carrying amounts and the tax bases of assets andliabilities.  We regularly review ourdeferred tax assets for recoverability and, if necessary, establish a valuationallowance based on historical taxable income, projected future taxable incomeand the expected timing of the reversals of existing temporarydifferences.  If these estimates and

 

37

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relatedassumptions change in the future, we may be required to record a valuationallowance against deferred tax assets resulting in additional income taxexpense.  See Notes 3 and 18 to ourconsolidated financial statements.

 

38

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**OPERATING RESULTS**

 

Thefollowing table sets forth selected data for the periods indicated, restated inconstant pesos as of December 31, 2004 and also expressed as a percentageof our total revenues.

 
| ** **                                                        | ** ** | **2004**                                             | ** ** | **2003**                                             | ** ** | **2002**                                                  | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **(thousands of constant pesos)**                    | ** ** |
| **Mexican  GAAP:**                                                |       |                                                 |       |                                                 |       |                                                      |       |
| Revenues                                                          |       | Ps.    5,312,769                 |       | Ps.    2,911,022                 |       | Ps.   1,357,634                            |       |
| Costs                                                             |       | 3,699,266                                            |       | 2,082,202                                            |       | 951,437                                                   |       |
| Gross profit                                                      |       | 1,613,503                                            |       | 828,820                                              |       | 406,197                                                   |       |
| Selling and administrative expenses                               |       | 433,340                                              |       | 266,682                                              |       | 167,543                                                   |       |
| Income from operations                                            |       | 1,180,163                                            |       | 562,138                                              |       | 238,654                                                   |       |
| Other income (expense)                                            |       | 43,027                                               |       | 77,838                                               |       | (1,766                                                    | )          |
| Net comprehensive financing cost(1)                               |       | 159,584                                              |       | 127,547                                              |       | 149,288                                                   |       |
| Income tax expense                                                |       | 339,536                                              |       | 183,314                                              |       | 53,613                                                    |       |
| Employee statutory profit sharing expense                         |       | 8,520                                                |       | 276                                                  |       | 1,563                                                     |       |
| Net income                                                        |       | Ps.       715,550 |       | Ps.       328,839 |       | Ps.        32,424 |       |
| ** **                                                        | ** ** | **(as a percentage of sales)**                       | ** ** |
| **Mexican  GAAP:**                                                | ** ** | ** **                                           |       |
| Revenues                                                          |       | 100                                                  | %          | 100                                                  | %          | 100                                                       | %          |
| Costs                                                             |       | 69.6                                                 | %          | 71.5                                                 | %          | 70.1                                                      | %          |
| Gross profit                                                      |       | 30.4                                                 | %          | 28.5                                                 | %          | 29.9                                                      | %          |
| Selling and administrative expenses                               |       | 8.2                                                  | %          | 9.2                                                  | %          | 12.3                                                      | %          |
| Income from operations                                            |       | 22.2                                                 | %          | 19.3                                                 | %          | 17.6                                                      | %          |
| Other income (expense)                                            |       | 0.8                                                  | %          | 2.7                                                  | %          | (0.1                                                      | )%         |
| Net comprehensive financing cost                                  |       | 3.0                                                  | %          | 4.4                                                  | %          | 11.0                                                      | %          |
| Income tax expense and employee statutory  profit-sharing expense |       | 6.6                                                  | %          | 6.3                                                  | %          | 4.1                                                       | %          |
| Net income                                                        |       | 13.5                                                 | %          | 11.3                                                 | %          | 2.4                                                       | %          |

 

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(1)               Represents interest income, interestexpense, monetary position gains and losses, and foreign exchange gains andlosses.

 

***Resultsof Operations for the Year Ended December 31, 2004 Compared to the YearEnded December 31, 2003***

 

***Revenues***.  Totalrevenues increased by 83% to Ps. 5,312.7 million in 2004 fromPs. 2,911.0 million in 2003 primarily due to a 57.2% increase in thenumber of homes sold, an increase of 7.2% in the average price of our affordableentry-level homes due to inflationary increases, and additional revenuerecognized in connection with sales of middle-income housing, where the revenueper home sold is substantially greater than in the affordable entry-levelhousing market.  We sold 1,912middle-income homes in 2004, as compared to 463 middle-income homes sold in2003.

 

***Gross Profit***. Costs increased by 77.7% to Ps. 3,699.2 million in 2004 from Ps.2,082.2 million in 2003, almost exclusively as a result of increasedvolume, as described above.  Gross profitincreased by 94.7% to Ps. 1,613.5 million in 2004 fromPs. 828.8 million in 2003.  Ourgross profit margin improved to 30.4% in 2004 from 28.5% in 2003.

 

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***Selling and Administrative Expenses***. Selling and administrative expenses increased by 62.5% toPs. 433.3 million in 2004 from Ps. 266.6 million in2003.  This increase was due principallyto increases in aggregate sales commissions resulting from the increase in thenumber of homes sold and the increase in the number of administrative personnelrequired to support our expanding operations. As a percentage of sales, selling and administrative expenses improvedfrom 9.2% in 2003 to 8.2% in 2004.  Thedecrease in selling and administrative expenses as a percentage of sales isattributable to restrained growth in the number of our fixed-salary personnelin relation to our significantly increased sales.

 

***Net Comprehensive Financing Cost***. Net comprehensive financing cost (comprised of interest income, interestexpense, monetary position gains and losses, and foreign exchange gains andlosses) increased by 25.0% from Ps.** **127.5 millionin 2003 to Ps.** **159.6 million in2004.  Net comprehensive financing costas a percentage of sales decreased from 4.4% in 2003 to 3.0% in 2004.  Net interest expense decreased by 23.2% fromPs. 111.2 million in 2003 to Ps. 85.4 million in 2004.  This decrease was primarily due to asignificantly improved pricing for outstanding credit facilities, a reductionin amounts outstanding under our credit facilities and increased cash receivedin part from proceeds of the initial public offering.  Interest income increased by 618.2% to Ps.** **46.7 million in 2004 from Ps. 6.5 million in 2003due to higher cash balances throughout the year resulting from higher averageworking capital balances.  We had aforeign exchange gain of Ps.** **7.1 millionin 2004 as a result of a peso appreciation of approximately 0.8% against theU.S. dollar during 2004, compared to a foreign exchange gain of Ps.** **1.3 million in 2003 as a result of the dollarbalance that we held following capital contributions by our principalshareholders and a peso depreciation of approximately 7.0% against the U.S.dollar during the first two months of 2003. Monetary position loss increased from Ps.** **17.6 millionin 2003 to Ps.** **81.2 million in 2004 asa result of an increase in our net monetary asset position.

 

***Income Tax Expense and Employee StatutoryProfit-Sharing Expense***.  Income taxexpense increased****from Ps.** **183.5 millionin 2003 to Ps. 339.5 million in 2004 due to increased revenues.  However, the effective income tax ratedecreased from 36.0% in 2003 to 32.0% in 2004, primarily as a result of theeffects of inflation and the effect of the reduction in the statutory incometax rate on deferred income taxes. Employee statutory profit-sharing expense increased from Ps. 0.2million in 2003 to Ps. 8.5 million in 2004 as a result of changes inMexican income tax law.

 

***Net Income***. Net income increased by 117.6% to Ps.** **715.5 millionin 2004 from Ps.** **328.8 million in 2003as a result of the factors described above.

 

***Resultsof Operations for the Year Ended December 31, 2003 Compared to the YearEnded December 31, 2002***

 

***Revenues***.  Totalrevenues increased by 114.4% to Ps. 2,911.0 million in 2003 from Ps.** **1,357.6 million in 2002 primarily due to an 85.9%increase in the number of homes sold, an increase of 7.7% in the average priceof our affordable entry-level homes, and additional revenue recognized inconnection with sales of middle-income housing, where the revenue per home soldis substantially greater than in the affordable entry-level housingmarket.  We sold 13,396 homes in 2003, ascompared to 7,206 homes sold in 2002.

 

***Gross Profit***. Costs increased by 118.8% to Ps.** **2,082.2 millionin 2003 from Ps.** **951.4 million in 2002,almost exclusively as a result of increased volume, as described above.  Gross profit increased by 104.0% toPs. 828.8 million in 2003 from Ps.** **406.1 millionin 2002.  Our gross profit margin was28.5% in 2003 compared to 29.9% in 2002. Our gross profit margin decreased slightly in 2003 as a result ofPs. 16.5 million of expenses that we incurred during the year forrepairs on houses in Chiapas to repair damages caused by unauthorized home modificationsby homeowners.  Our gross profit marginalso decreased as a result of expenses related to the completion and closing ofoperations in two cities.

 

***Selling and Administrative Expenses***. Selling and administrative expenses increased by 59.1% to Ps. 266.6 millionin 2003 from Ps.** **167.5 million in2002.  This increase was due principallyto the increase in the number of administrative personnel required to supportour expanding operations, the opening of new offices in the cities of Tapachulaand Tijuana, pre-opening expenses in Estado de México and the cities ofAcapulco and Monterrey, and a rise in the aggregate amount of sales commissionsdue to the growth in the number of homes sold.

 

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As a percentage ofsales, selling and administrative expenses decreased from 12.3% in 2002 to 9.2%in 2003.  The decrease in selling andadministrative expenses as a percentage of sales is attributable to restrainedgrowth in the number of our fixed-salary personnel in relation to oursignificantly increased sales.

 

***Net Comprehensive Financing Cost***. Net comprehensive financing cost (comprised of interest income, interestexpense, monetary position gains and losses, and foreign exchange gains andlosses) decreased by 14.6% from Ps.** **149.2 millionin 2002 to Ps.** **127.5 million in2003.  Net comprehensive financing costas a percentage of sales decreased from 11.0% in 2002 to 4.4% in 2003.  Interest expense decreased by 10.7% from Ps.** **131.8 million in 2002 to Ps.** **117.7 millionin 2003.  This decrease was due to areduction of approximately Ps.** **57.9 millionin average debt during 2003 resulting from an increase in cash flow due to agreater number of home deliveries beginning during the last quarter of 2002 andcontinuing during 2003, as well as a reduction in interest rates and lendingcommissions due to the issuance of commercial paper used to retire moreexpensive bridge loans.  Averageoutstanding debt in the amount of Ps. 429.6 million during 2003 was lowerthan average debt outstanding during 2002 notwithstanding a substantialincrease in debt at the end of 2003 incurred to fund additional landpurchases.  Interest income increased by254.7% to Ps. 6.5 million in 2003 from Ps. 1.8 million in 2002 due tohigher cash balances throughout the year resulting from higher average workingcapital balances.  We had a foreignexchange gain of Ps. 1.3 million in 2003, compared to a foreign exchangeloss of Ps. 0.09 million in 2002 as a result of the dollar balance that weheld following capital contributions by our principal shareholders and a pesodepreciation of approximately 7.0% against the U.S. dollar during the first twomonths of 2003.  Monetary position lossdecreased from Ps. 19.1 million in 2002 to Ps. 17.6 million in 2003.

 

***Income Tax Expense and Employee StatutoryProfit-Sharing Expense***.  Income taxexpense increased from Ps. 53.6 million in 2002 to Ps. 183.3 millionin 2003 due to increased revenues. However, the effective income tax rate decreased from 61.2% in 2002 to36.0% in 2003 as a result of a smaller difference between the book and taxeffects of inflation due to lower inflation in 2003.  Substantially all of the income tax expenseis derived from the non-cash deferred tax provision resulting from an increasein taxable temporary differences primarily associated with unbilled revenues ondevelopments in progress and the cost of inventories deducted for taxpurposes.  See Note 18 to ourconsolidated financial statements. Employee statutory profit-sharing expense decreased from Ps. 1.5million in 2002 to Ps. 0.2 million in 2003 as a result of reduced earningsfor employee statutory profit-sharing purposes at the employee servicessubsidiaries level.

 

***Net Income***. Net income increased by 914.2% to Ps. 328.8 million in 2003 fromPs. 32.4 million in 2002 as a result of the factors described above.

 

***GovernmentPolicy and Available Financing***

 

***The size of the developer-builtmarket depends on the availability of mortgage financing.  Due to liquidity crises occurring in the lasttwenty years, Mexico has experienced fluctuations in the availability ofmortgage financing, particularly from private-sector sources.  As a result, the supply of affordableentry-level and middle-income housing has also remained low during this period.***

*** ***

Duringthe 1980s, Mexican government policy focused on encouraging investment by theprivate sector, reducing development costs, and stimulating construction.  Government-sponsored funds provided mortgageloan guarantees and direct payment and savings procedures.  In 1994, Mexico experienced an economiccrisis that led to the devaluation of the Mexican peso and a steep rise ininterest rates.  Smaller housingdevelopment companies went out of business, and the industry experienced asharp fall in home sales between 1995 and 1996 due to diminished commercialbank 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 government-sponsored funds in the affordable entry-levelsector.  Government funds no longerprovided development or sales activities and functioned instead as truesavings-and-loan programs.  Legislativereforms with regard to community-owned agricultural territories (ejidos), whichmade it possible to sell these formerly restricted properties, also increasedthe potential supply of land available for development.  During this period, the government authorized*sofoles* that underwrite mortgageswith funds and guarantees provided by government agencies, private investment,national, foreign or development bank loans, or through the Mexican

 

41

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capital markets.  Furthermore, the government encouragedindustry growth and private-sector lending by supporting consolidation in thehousing development industry.

 

Between1997 and 1998, home sales stabilized, growing slightly in 1997 due to improvingeconomic conditions.  During 1999 and2000, mortgage financing increased due to stabilizing economic conditions.  The level of available financing hascontinued to grow as a result of Mexican government policies implementedfollowing the crisis and the current Mexican presidential administration’s goalto provide 750,000 new mortgages per year by 2006 pursuant to its nationalhousing plan.  The administration setforth four objectives to achieve this growth:

 

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

 

•                  increase deregulation of the homebuilding industry;

 

•                  encourage consolidation within theindustry; and

 

•                  increase financing opportunitiesavailable to qualified home buyers.

 

In conjunction with these efforts, the Mexican legislature amendedexisting tax regulations in order to allow individuals to deduct a portion oftheir mortgage loan interest payments from their personal income taxesbeginning in 2003, which the administration expects will lead to increasedmortgage financing activity.

 

In thelast four years, the developer-built market has continued to expand due tohigher levels of available mortgage financing, especially throughgovernment-sponsored funds such as INFONAVIT, SHF and FOVISSSTE.  Between 1998 and 2000, the housing stock inMexico increased by 2.4 million homes, 37% of which (900,000 homes) werebuilt by developers, with the remainder being self-built.  Between 2001 and 2003, CONAPO estimates thatthe housing stock increased by another 2.5 million homes, 46% of which(1.1 million homes) were built by developers, with the remainder beingself-built.

 

Changesin the availability of mortgage financing from government agencies couldadversely affect us.  See “Item 3.  Key Information—Risk Factors—Risk FactorsRelated to our Business Generally—Decreases in the amount of mortgage financingprovided by agencies controlled by the Mexican government on which we depend,or disbursement delays, could result in a decrease in our sales and revenues.”

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Wehave experienced, and expect to continue to experience, substantial liquidityand capital resource requirements, principally to finance development andconstruction of homes and for land inventory purchases.

 

As of December 31,2004, we had Ps. 511.1 million of cash and cash equivalents and Ps.** **557.1 million of outstanding indebtedness formoney borrowed (none of which was construction financing provided by *sofoles* for developments underconstruction), as compared to Ps.** **220.1 millionof cash and cash equivalents and Ps. 671.9 million of outstandingindebtedness (of which Ps.** **144.2 millionwere construction financing provided by *sofoles*for developments under construction) as of December 31, 2003.

 

As of December 31,2003, we had Ps.220.1 million of cash and cash equivalents and Ps.671.9 millionof outstanding indebtedness for money borrowed (of which Ps. 144.2 millionwere construction financing provided by *sofoles*for developments under construction), as compared to Ps. 69.0 millionof cash and cash equivalents and Ps. 416.9 million of outstandingindebtedness (of which Ps.283.1** millionwere construction financing provided by *sofoles*for developments under construction) as of December 31, 2002.

 

Althoughwe do not commence construction of any development until the availability ofmortgage financing for qualified homebuyers is assured, we do acquire land andperform licensing, permitting, and certain infrastructure developmentactivities prior to receiving confirmation of the availability of mortgagefinancing.  Historically, we havefinanced our development and construction activities through internallygenerated funds, commercial paper programs, and bridge loans.

 

42

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Ourprimary sources of liquidity are:

 

•                  cash flow from operations;

 

•                  our domestic commercial paper programs;

 

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

 

•                  commercial banks, *sofoles*, and other financial institutions;and

 

•                  down payments from home buyers.

 

Thefollowing table sets forth information on our outstanding debt as of December 31,2004.

 
| ** **                                   | ** ** | **Aggregate Lender  Principal Amount** | ** ** | **Interest Rate**   | ** ** | **Maturity**          | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **(in constant pesos)**                | ** ** | ** **          | ** ** | ** **            | ** ** |
| ***Debt  Outstanding***                      | ** ** | ** **                             | ** ** | ** **          | ** ** | ** **            | ** ** |
| Lender                                       | ** ** | ** **                             | ** ** | ** **          | ** ** | ** **            | ** ** |
| GMAC Hipotecaria S.A. de C.V.                |       |                                   |       |                |       |                  |       |
| Secured loan                                 |       | 40,417                                 |       | TIIE(1) +2.5%  |       | June 15, 2006    |       |
| Secured loan                                 |       | 72,472                                 |       | TIIE(1) +2.5%  |       | April 15, 2006   |       |
| Secured loan                                 |       | 28,207                                 |       | TIIE(1) +2.5%  |       | June 25, 2006    |       |
| Commercial paper(2)                          |       | 114,900                                |       | TIIE(1) +3.25% |       | June 7, 2005     |       |
| Commercial paper(2)                          |       | 250,000                                |       | TIIE(1) +2.7%  |       | November 8, 2005 |       |
|                                         |       |                                   |       |                |       |                  |       |
| ***Capital Lease Obligations***              |       |                                   |       |                |       |                  |       |
| *** ***                                 |       |                                   |       |                |       |                  |       |
| Paccar Arrendadora Financiera, S.A. de C.V.  |       |                                   |       |                |       |                  |       |
| Capital lease obligation                     |       | 10,664                                 |       | N/A                 |       | July 1, 2006     |       |
| Arrendadora financiera Navistar S.A. de C.V. |       |                                   |       |                |       |                  |       |
| Capital lease obligation                     |       | 24,447                                 |       | N/A                 |       | July 10, 2006    |       |
| Capital lease obligation                     |       | 16,027                                 |       | N/A                 |       | July 10, 2006    |       |

 

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(1)               28-day Mexican interbank rate (*Tasa de Interés Interbancaria de Equilibrio*),8.80% as of December 31, 2004.

 

(2)               *Certificados bursátiles de corto plazo.*

 

As of December 31,2004, we had Ps. 364.9 million outstanding under our commercial paperprogram compared to Ps.** **452.5 millionas of December 31, 2003.  In 2004,we repaid Ps.** **135.1 million ofcommercial paper from internally generated cash and subsequently re-issued thisamount at a lower interest rate.  We useour commercial paper program as a lower-cost alternative to financing fromcommercial banks and *sofoles*.

 

Wefunded our cash needs for the years ended 2004 and 2003, including landacquisitions, debt service, and working capital requirements, through acombination of cash flow from operations, cash on hand, issuances of commercialpaper and a portion of the proceeds from our initial public offering.  Notes payable to financial institutionsdecreased by Ps. 114.8 million from Ps. 671.9 million at December 31,2003 to Ps. 557.1 million at December 31, 2004, largely due to asignificant reduction in bank debt. Notes payable to financial institutions increased by Ps. 255.0 millionfrom Ps. 416.9 million at December 31, 2002 to Ps. 671.9 million at December 31,2003, largely due to additional land purchases. We expect that cash from operations, our net proceeds from the offering,and, if necessary, additional debt financing (including issuances of commercialpaper) will be sufficient to

 

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fund our currentlyforeseeable liquidity requirements.  Thecash portion of the acquisition of Beta is expected to be financed principallythrough bank loans.

 

**Capital Expenditures**

 

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 2004 we spentPs. 218.3 million on capital expenditures, primarily to purchaseconstruction equipment.  In 2005, weexpect to spend approximately Ps.** **161 millionon capital expenditures primarily to purchase construction equipment to supportour growth.

 

**TRENDINFORMATION**

 

Other than as disclosed elsewhere in this Annual Report including in “Item3.  Key Information Risk Factors” and “Item 4.  Informationon the Company—Business Overview—TheMexican Housing Market”, we are not aware of any trends, uncertainties,demands, commitments or events which are reasonably likely to have a materialeffect upon our net sales or revenues, income from continuing operations,profitability, liquidity or capital resources, or that would cause reportedfinancial information to not necessarily be indicative of future operatingresults or financial condition.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

Wehave no off-balance sheet arrangements as of December 31, 2004.

 

***CONTRACTUAL OBLIGATIONS***

*** ***

The followingtable sets forth information on our contractual obligations as of December 31,2004.

 
| ** **                                                                     | ** ** | **Payment Due by Period**        | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Contractual  Obligations**                                                   | ** ** | **Total**                        | ** ** | **Less than  1 Year** | ** ** | **1-3 Year** | ** ** | **3-5  Years** | ** ** | **More  than  5  Years** | ** ** |
| ** **                                                                     | ** ** | **(Millions of constant pesos)** | ** ** |
| Short-Term Debt Obligations                                                    |       | Ps.                              | 364,900    |   | Ps. | 364,900 |   | Ps. | — |   | Ps. | — |   | Ps. | — |   |
| Long-Term Debt Obligations                                                     |       | 141,096                          |       | — |   | 141,096 |   | — |   | — |   |
| Estimated Interest                                                             |       | 45,236                           |       | 13,094 |   | 32,142 |   | — |   | — |   |
| Capital (Finance) Lease                                                        |       | 51,138                           |       | 32,142 |   | 18,996 |   | — |   | — |   |
| Operating Lease                                                                |       | 9,904                            |       | 9,904 |   | — |   | — |   | — |   |
| Purchase Obligations                                                           |       | 750,505                          |       | 730,419 |   | 20,086 |   | — |   | — |   |
| Other Long-Term Liabilities Reflected on  our Balance Sheet under Mexican GAAP |       | —                           |       | — |   | — |   | — |   | — |   |
| Total                                                                          |       | Ps.                              | 1,362,779  |   | Ps. | 1,150,459 |   | Ps. | 212,320 |   | Ps. | — |   | Ps. | — |   |

 

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**New Accounting Pronouncements**

 

***MexicanGAAP***

 

In May 2004, the Mexican Institute of Public Accountants, or IMCP (*Instituto Mexicano de Contadores Públicos*) issued Bulletin B-7, “Business Acquisitions”,whose application is mandatory for fiscal years beginning on or after January 1,2005, although early adoption is encouraged. Bulletin B-7 provides updated rules for the accounting treatment ofbusiness acquisitions and investments in associated entities.  Bulletin B-7 establishes that the purchasemethod shall be applied in accounting method for business combinations;eliminates the amortization of goodwill, which is currently subject to theimpairment rules; establishes rules for the accounting treatment of assettransfers or share exchanges among entities under common control as well as forthe acquisition of minority interests based on the provisions of Bulletin B-8, “Consolidatedand combined financial statements and valuation of permanent investments inshares”.  Management beleives that theadoption of Bulletin B-7 as of January 1, 2005 will not have significanteffects on our financial position or results of operations.

 

In April 2004, the IMCPissued Bulletin C-10, “Derivative instruments and hedging activities”, whoseapplication is mandatory for fiscal years beginning on or after January 1,2005, although early adoption is encouraged. Bulletin C-10 establishes that any variances in the fair value, both ofthe derivative and the underlying, for fair value hedges must be reflected incurrent earnings when such variances occur; for cash flow hedges, the effectiveportion of fair value variances must be recognized in other comprehensiveincome in stockholders’ equity, while the ineffective portion must affectcurrent earnings.

 

Bulletin C-10 establishesthe conditions that must be met for an instrument to be considered as aderivative financial instrument. Bulletin C-10 also provides for regulation of hedging activities,including, among others, the formal documentation at the inception of eachhedge and a measurement of its effectiveness during its term.  In addition,, Bulletin C-10 classifies hedgesinto three categories: a) fair value hedges, b) cash flow hedges and c) foreigncurrency hedges, and provides for specific regulation with respect tovaluation, recognition, presentation and disclosure for each category of hedge,Management believes that the adoption of Bulletin C-10 as of January 1,2005, will not have significant effects on our financial position or results ofoperations.

 

In April 2004, theIMCP issued Amendment to Bulletin C-2, “Financial instruments”, whoseapplication is mandatory for fiscal years beginning on or after January 1,2005, although early adoption is encouraged.  Amendment to Bulleting C-2 establishes thatany variance in the fair value of financial instruments classified as availablefor sale must be recognized in other comprehensive income and reclassified tocurrent earnings upon sale of such instruments. In addition, Amendment to Bulletin C-2 provides for the reclassificationof certain financial instruments by category, provided that conditions and rules fortheir accounting recognition are met, and that impairment rules areapplicable to financial instruments available for sale, establishing rules fortheir recognition. Management believes that the adoption of Amendment toBulletin C-2 as of January 1, 2005, will not have significant effects onour financial position or results of operations.

 

In January 2004, theIMCP issued revised Bulletin D-3, “Labor obligations”, which replaces theconcept of unforeseen severance payments that are recognized as earning in theperiod in which the payment decision is made, with that of “Severance paymentsat the end of the work relationship”, defined as payments granted to employeesupon termination of the labor relationship prior to retirement age, for whichthe valuation and disclosure rules applicable to pension and senioritypremium payments must be followed.

 

Bulletin D-3 is mandatory asof January 1, 2005, but allows for provides that earnings from atransition asset or liability may be immediately recognized or amortized overthe average remaining labor life of employees. Management believes that theadoption of this Bulletin D-3 as of January 1, 2005, will not havesignificant effects on our financial position or results of operations.

 

***U.S.GAAP***

*** ***

InDecember 2004, the Financial Accounting Standards Board, or FASB, issuedSFAS No. 123 (revised 2004), Share-Based Payments, or SFAS No. 123R.  SFAS No. 123R eliminates the optionalapplication of intrinsic

 

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value measurementprovisions pursuant to Accounting Principles Board, or APB, Opinion No. 25,Accounting for Stock Issued to Employees to stock compensation awards issued toemployees.  Rather, SFAS No. 123Rrequires companies to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award.  Such cost will berecognized over the period during which an employee is required to provideservices in exchange for the award, or the requisite service period (usuallythe vesting period).  SFAS No. 123Rapplies to all awards granted after the required effective date and to awardsmodified, repurchased, or cancelled after that date.  SFAS No. 123R is effective for fiscalyears beginning on or after January 1, 2006.  We do not believe the future adoption of SFASNo. 123R will have a material impact on its financial position, results ofoperations or cash flows.

 

InDecember 2004, the FASB issued SFAS No. 153, Exchange of NonmonetaryAssets, which amends APB Opinion No. 29, Accounting for Non-monetaryTransactions to eliminate the exception for non-monetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnon-monetary assets that do not have commercial substance.  SFAS No. 153 is effective fornon-monetary asset exchanges is occurring in fiscal years beginning on or afterJanuary 1, 2006.  We do notanticipate that the adoption of SFAS No. 153 will have a material effecton its financial position, results of operations or cash flows.

 

In January 2003, FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities, FIN 46.  In December 2003, FIN 46 was replaced byFASB Interpretation No. 46 (revised December 2003), Consolidation ofVariable Interest Entities, or FIN 46(R). FIN 46R clarifies the application of Accounting Research Bulletin No. 51,Consolidated Financial Statements, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  FIN 46(R) requires anenterprise to consolidate a variable interest entity if that enterprise willabsorb a majority of the entity’s expected losses, is entitled to receive amajority of the entity’s expected residual returns, or both.  We have applied FIN 46 and FIN 46(R) as of January 1,2004 to analyze investments in potential variable interest entities formedafter January 31, 2003 and potential variable interests in variableinterest entities previously defined as Special Purpose Entities, or SPEs,created before February 1, 2003.  Wehave also applied FIN 46 and FIN 46(R) to determine whether we hold potentialinterests in variable interest entities not previously defined as SPEs for theperiod ending December 31, 2004. The adoption of FIN 46(R) did not have a material impact on ourfinancial position, results of operations or cash flows.

 

On January 1, 2004, we adopted SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilitiesand Equity.  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with both liability and equity characteristics andrequires that certain financial instruments be classified as liabilities thatwere previously considered equity.   SFASNo. 150 were effective for financial instruments entered into or modifiedafter May 31, 2003.  Forpre-existing instruments, we adopted SFAS No. 150 on January 1,2004.  The adoption of SFAS No. 150did not have a material impact on our financial position, results of operationsor cash flows.

 

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

 

**DIRECTORS AND EXECUTIVE OFFICERS**

 

Ourboard of directors is responsible for managing our business.  Our board of directors, which was re-electedat the annual shareholders’ meeting held on April 29, 2005, currentlyconsists of nine members.  Each directoris elected for a term of one year or until a successor has been appointed.  Our board of directors meets quarterly.  Pursuant to Mexican law, at least 25% of themembers of the board of directors must be independent.   As required by New York Stock Exchangeregulations, a majority of the members of our board of directors areindependent.

 

As ofthe date of this Annual Report, the members of our board of directors are asfollows:

 
| **Name**                                             | ** ** | **Born** | ** ** | **Position**            | ** ** | **Alternate**                              | ** ** |
|------------------------------------------------------|------------|----------|------------|-------------------------|------------|--------------------------------------------|------------|
| Eustaquio Tomás de Nicolás  Gutiérrez |       | 1961     |       | Chairman                |       | Ana Luz de Nicolás Gutiérrez     |       |
| Gerardo de Nicolás Gutiérrez               |       | 1968     |       | Chief Executive Officer |       | Juan Carlos Torres Cisneros                |       |
| José Ignacio de Nicolás  Gutiérrez    |       | 1964     |       | Director                |       | Julián de Nicolás Gutiérrez |       |
| Luis Alberto Harvey McKissack*                       |       | 1960     |       | Director                |       | Arturo J. Saval Pérez                 |       |
| Gary R. Garrabrant*                                  |       | 1957     |       | Vice Chairman           |       | Thomas J. McDonald                         |       |
| Matthew M. Zell*                                     |       | 1966     |       | Director                |       | Jeffrey D. Klein                           |       |
| Z. Jamie Behar*                                      |       | 1957     |       | Director                |       | Ira Chaplik                                |       |
| Wilfrido Castillo Sánchez-Mejorada*             |       | 1941     |       | Director                |       | Samuel Campos Velarde                      |       |
| Edward Lowenthal*                                    |       | 1944     |       | Director                |       | Christopher J. Fiegen                      |       |

 

----

*Independent directors.

 

**Eustaquio Tomás de Nicolás Gutiérrez** is chairman of our board ofdirectors.  Before co-founding ourpredecessor in 1989, Mr. de Nicolás founded and managed DENIVE, a clothingmanufacturing company.  He has served asregional chairman and regional vice chairman of the Mexican Homebuilders’Association, or PROVIVAC (Asociacion Nacional de Promotores de Vivienda), andas a member of the regional advisory board of financial institutions such asBBVA Bancomer and HSBC (formerly BITAL). Currently, Mr. de Nicolás oversees our main operations, focusing onland acquisition and developing new geographical markets.

 

**Gerardo de Nicolás Gutierrez** has served as CEO since 1997.  Prior to becoming CEO, Mr. de Nicolásserved as regional manager, systems manager, and construction managersupervisor.  Currently, Mr. deNicolás participates in overseeing our main operations, focusing on sales andconstruction.

 

**Jose Ignacio de Nicolás Gutiérrez** is founder and chairman of the board ofdirectors of Hipotecaria Crédito y Casa, S.A. de C.V., a *sofol*that has become the third largest mortgage bank in Mexico. Mr. de Nicolásalso co-founded our company and served as our CEO from 1989 to 1997. Mr. deNicolás is a regional director of Fianzas Monterrey and a state director ofNAFIN.

 

**Luis Alberto Harvey McKissack** is co-founder and managing principal of ZN MexicoCapital Management, L.L.C. and managing principal of ZN Mexico CapitalManagement II, LLC, which both sponsor private equity funds. He is also themanaging director of Nexxus Capital, S.C., an investment banking boutique basedin Mexico City. Mr. Harvey is a member of the board of directors ofIndustrias Innopack, S.A. de C.V., Aerobal, S.A. de C.V., Distribuidora Ybarra,S.A. de C.V., Grupo Mantenimiento de Giros Comerciales Internacional, S.A. deC.V. (Grupo Mágico), Crédito Inmobiliario, S.A. de C.V., and Nexxus Capital,S.C.

 

**Gary R. Garrabrant**is vice chairman of ourboard of directors and CEO of Equity International Properties, Ltd. which investsin real estate-related companies outside of the United States.  He has been associated with EquityInternational since inception in 1999 and oversees all of the company’sactivities and investment

 

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portfolio.  Mr. Garrabrant isalso executive vice president of Equity Group Investments, L.L.C. (EGI), theprivately-held investment company founded and led by Samuel Zell.  Mr. Garrabrant joined EGI in 1996.  He is a member of the board of directors ofFondo de Valores Inmobiliarios S.A.C.A., a Latin American real estate company,Equity International and various portfolio companies.  Mr. Garrabrant is also a member of theReal Estate Advisory Board at Cambridge University.

 

**Matthew M. Zell** is managingdirector of EGI.  Previously, he servedas president of Prometheus Technologies, Inc., an information technologyconsulting firm.  Mr. Zell is amember of the board of directors of Anixter Inc., a global distributor of wire,cable and communications connectivity products as well as of GP Strategies, aglobal performance improvement company providing corporate educationstrategies, training, engineering, consulting, and technical services toleading organizations in the automotive, steel, power, chemical, energy, pharmaceuticaland food & beverage industries, as well as the government sector.  Mr. Zell is the son of Samuel Zell.

 

**Z. Jamie Behar** is a portfolio manager withGeneral Motors Investment Management Corporation, or GMIMCo.  She manages GMIMCo clients’ real estateinvestment portfolios, including both privately-negotiated and publicly-tradedsecurity investments, as well as their alternative investment portfolios.  Ms. Behar is a member of the board ofdirectors of Sunstone Hotel Investors, Inc., a publicly listed hotelcompany operating in the United States, Hospitality Europe BV, a privateEuropean hotel company, and FountainGlen Properties, LLC, a private seniorhousing company.  She also serves on theadvisory committees of several domestic and international private real estateinvestment entities.

 

**Wilfrido Castillo Sánchez-Mejorada** is CFO of Qualitas Cía. de Seguros, S.A.de C.V., or Qualitas, a Mexican insurance company. Previously he served as CEOof Castillo Miranda, Contadores Públicos, a public accounting firm, and he hasheld senior positions in several brokerage firms. Mr. Castillo is a memberof the board of directors of Qualitas, Actinver, S.A. de C.V., SociedadOperadora de Sociedades de Inversión, Ficsac, Unión de Esfuerzo para el Campo,Fundacion Mexicana de Psicoanálisis, I. A. P., and Industrias Innopack, S.A. deC.V., where he also serves as chairman of the audit committee.

 

**Edward Lowenthal** is president of Ackerman Management LLC, aninvestment management and advisory company with particular focus on real estateand other asset-based investments. Previously, Mr. Lowenthal founded and was president of WellsfordReal Properties, Inc., or WRP, a publicly-owned real estate merchantbanking 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 WRP, Reis, Inc., a real estatemarket information and analytics provider, and Omega Healthcare Investors, Inc.,a healthcare real estate investment trust. American Campus Communities, a publicly traded Real Estate InvestmentTrust which focuses solely on student housing in the United States, and ArkRestaurants Corp., a company that engages in the ownership and operation ofrestaurants, fast food concepts, catering operations, and wholesale and retailbakeries.

 

EustaquioTomás de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, and José Ignacio deNicolás Gutiérrez are brothers.

 

**Secretary**

 

Since 1999, the secretary of the board of directorshas been Gerardo Gaxiola Díaz.  He is nota member of the board of directors.

 

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***ShareholderExaminer***

 

Ourshareholder examiner is William Biese, a partner of Galaz, Yamazaki, RuizUrquiza, S.C., a member of Deloitte Touche Tohmatsu and an independentregistered public accounting firm, with offices at Paseo de la Reforma 505,Colonia Cuauhtémoc, 06500, México, D.F., México.

 

Pursuantto our bylaws and Mexican law, our shareholders elect our shareholder examinerat an annual general shareholders’ meeting. The shareholder examiner is primarily responsible for reviewing ouraffairs and reporting to the shareholders with regard to the adequacy andaccuracy of the financial information presented to shareholders by the board ofdirectors.  Shareholder examiners may,among other things:

 

•                  request a monthly report from the boardof directors, including a statement of financial condition and income;

 

•                  audit our operations, documents, records,and other supporting evidence, and oversee our operations in accordance withtheir obligations;

 

•                  call ordinary or extraordinaryshareholders’ meetings and place items on the agenda and attend these meetings(although a statutory auditor does not have the right to vote); and

 

•                  attend meetings of our board of directorsand audit committee (although a statutory auditor does not have the right tovote).

 

***AuditCommittee***

*** ***

Ouraudit committee consists of Wilfrido Castillo Sánchez-Mejorada (Chairman), Z.Jamie Behar, and Edward Lowenthal.  Ouraudit committee was re-elected at the shareholders meeting on April 29,2004.** **Ourboard of directors has determined that Mr. Castillo has the attributes ofan “audit committee financial expert” as defined by the SEC and that eachmember of the audit committee satisfies the financial literacy requirements ofthe New York Stock Exchange.  Ourstatutory auditor may attend audit committee meetings, although he does nothave the right to vote.  Among otherduties and responsibilities, the committee: issues opinions to the board ofdirectors regarding related party transactions; recommends that independentexperts be retained to render fairness opinions in connection with relatedparty transactions and tender offers, where it deems appropriate; reviews thecritical accounting policies adopted by us and advises the board of directorson changes to such policies; assists the board of directors with planning andconducting internal audits; and prepares a yearly activity report forsubmission to the board of directors. The committee is also responsible for the appointment, retention, andoversight of any accounting firm engaged for the purpose of preparing orissuing an audit report or performing other audit review or attestationservices, as well as for the establishment of procedures for the receipt,retention, and treatment of complaints received with respect to accounting,internal controls, or auditing matters and the confidential, anonymoussubmission by employees with regard to these complaints.

 

***CompensationCommittee***

*** ***

Ourcompensation committee consists of Edward Lowenthal, Luis Alberto HarveyMcKissack, and Gary R. Garrabrant.  Amongother duties and responsibilities, the committee reviews and approves corporategoals and objectives relevant to CEO compensation; evaluates the CEO’sperformance in light of those goals and objectives; determines and approves theCEO’s compensation level based on this evaluation; and makes recommendations tothe board with respect to non-CEO compensation, incentive-compensation plansand equity-based plans.

 

***ExecutiveCommittee***

*** ***

Ourexecutive committee consists of Eustaquio Tomás de Nicolás Gutiérrez, Gerardode Nicolás Gutiérrez, Luis Alberto Harvey McKissack, and Gary R.Garrabrant.  Among other duties andresponsibilities, the committee acts on general planning and financial mattersnot reserved exclusively for action by the board of directors,

 

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includingappointing and removing our CEO, members of management, and any of ouremployees; entering into credit agreements on our behalf; and conveningshareholders’ meetings.

 

***CorporateGovernance and Nominating Committee***

*** ***

Ourcorporate governance and nominating committee consists of Luis Alberto HarveyMcKissack, Gary R. Garrabrant, and Edward Lowenthal.  Among other duties and responsibilities, thecommittee identifies individuals qualified to become board members and makesrecommendations to the board of directors and shareholders regarding directornominees; develops and recommends to the board of directors a set of corporategovernance principles applicable to us; and oversees the evaluation of theboard and management.

 

***CorporateGovernance***

*** ***

As a foreignprivate issuer with shares listed on the NYSE, we are subject to differentcorporate governance requirements than a U.S. company under the NYSE listingstandards. Pursuant to Rule 303.A11 of the NYSE listed company manual, weare required to provide a summary of the significant ways in which ourcorporate governance practices differ from those required for U.S. companiesunder the NYSE listing standard.

 

It is ourintention, however, to follow NYSE corporate governance standards to the extentwe deem appropriate given the different regulatory framework to which we aresubject in Mexico and in the United States and the different businessenvironment in which we operate. Compliance with these higher standards of governance is not mandatoryfor us, however, we believe we are in substantial compliance with the majorityof these requirements demonstrating our commitment to high standards ofgovernance.

 

We are aMexican corporation with shares listed on the *BolsaMexicana de Valores*, or Mexican Stock Exchange. Our corporategovernance practices are governed by our bylaws, the Mexican Securities MarketLaw, and the regulations 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*), which was created in January 1999by a group of Mexican business leaders and was endorsed by the Mexican Bankingand Securities Commission.

 

The tablebelow sets forth a description of the significant differences between corporategovernance practices required for U.S. companies under the NYSE listingstandards and our practices.

 
| **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. |       | While not required under 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 not customary. |
|                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                     |
| Listed companies must have an audit committee with a minimum of three  members and must be                          |       | Under Mexican law, we are obligated to have an audit committee with independent  members within the meaning of Mexican law.                                                                                                                                                                                                                              |

 

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| independent.                                                                                                                                                                                              |   | Nevertheless,  we have an audit committee with three 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. In other regards, we are subject  to applicable Mexican law. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                          |
| Audit  committees are required to prepare an audit committee report as required by  the SEC to be include 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 corporate law  requirements. We have chosen to follow Mexican corporate law and practice in  this regard.                                                                                                       |
|                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                          |
| Non-management directors must meet at executive sessions without  management.                                                                                                                             |   | Our non-management directors meet at executive sessions. This is not  required by either Mexican law or the Mexican Code of Best Corporate  Practices.                                                                                                                                                                                                        |
|                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                          |
| Listed companies must adopt and disclose a code of business conduct  and ethics for directors, officers and employees, and promptly discuss 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.                                                                                                                                                                                                                        |

 

***SeniorManagement***

 

As ofthe date of this Annual Report, our senior management is as follows: 

 
| **Name**                                            | ** ** | **Born** | ** ** | **Position**                                               | ** ** |
|-----------------------------------------------------|------------|----------|------------|------------------------------------------------------------|------------|
| Eustaquio Tomás de Nicolás Gutiérrez |       | 1961     |       | Chairman                                                   |       |
| Gerardo de  Nicolás Gutiérrez             |       | 1968     |       | Chief  Executive Officer                                   |       |
| Cleofas  Hinojosa Saenz                             |       | 1953     |       | Chief  Financial Officer                                   |       |
| Rubén Izábal  González               |       | 1968     |       | Vice  President—Construction                          |       |
| Alberto  Menchaca Valenzuela                        |       | 1969     |       | Vice  President—Operations                            |       |
| Josemaria Antón Vlasich de la Rosa             |       | 1978     |       | Vice  President—Sales, Marketing and Regional Offices |       |
| Monica Lafaire Cruz                                 |       | 1964     |       | Vice  President—Regional Offices                      |       |

 

**Cleofas Hinojosa Saenz** has served as CFO since 2002.  Prior to joining Homex he served at differentcompanies and financial institutions such as Fraccionadora Jalisco, GE CapitalBank, Grupo Financiero GBM Atlántico, Citibank, N.A., and Bank of America NT &S.A. Mr. Hinojosa holds an undergraduate degree in business administrationfrom Instituto Tecnologico Autónomo de México (ITAM), Mexico City.

 

**Alberto Menchaca Valenzuela** has served as Vice President—Operations since2000.  Prior to becoming COO, Mr. Menchacaserved as finance manager.  His priorexperience includes work at Banco Mexicano, Invermexico, and Banca Confia.  Currently, Mr. Menchaca oversees ourmain operations, with a focus on home deliveries. Mr. Menchaca earned anundergraduate degree in agricultural engineering from Universidad AutónomaAgraria Antonio Narro, Saltillo, Coahuila.

 

**Rubén Izábal González** has served as Vice President—Construction since1997.  Prior to joining Homex, Mr. Izábalserved at different construction companies as Gómez y Gonzales Constructores,Provisur, S.A. de C.V., Promotoria de Vivienda del Pacifico, S.A. de C.V., andConstructor Giza, S.A. de C.V. Currently, Mr. Izabal

 

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oversees ourconstruction operation, with a focus on the home-building process. Mr. Izabalearned an undergraduate degree in Architecture from Instituto Tecnologico y deEstudios Superiores del Occidente (ITESO), Guadalajara, Jalisco.

 

**Josemaria Antón Vlasich de la Rosa** has served as Vice President— Sales andMarketing since March 2004. From 2002 to March 2004, he served asVice President—Regional Offices.  Hisprior experience includes work at CEMEX, S.A. de C.V., Banco Nacional deMéxico, S.A., American Express, and Universidad Panamericana.  Currently, he coordinates our sales andmarketing activities.  He holds a master’sdegree in business administration and an undergraduate degree in marketing andmanagement, both from Universidad Panamericana, Mexico City.

 

**Monica Lafaire Cruz** has served as VicePresident— Regional Offices since February 2005.  Miss Lafaire joined Homex in 2001 andprior to her current position she served as Director of Strategic Planning anddiverse managing positions in the Finance division.  Her prior experience includes work asfull-time professor at *Universidad Panamericana*.  Currently, she coordinates the activities ofour branch offices and their directors.  Miss Lafaireholds a master’s degree in business administration from *UniversidadLa Salle* in Mexico City and an undergraduate degree in economics from*Universidad de Monterrey*.

 

**COMPENSATION**

 

**Compensation of Directorsand Senior Management**

 

Each member of the board of directors is paid a fee ofUS$12,500 for each board meeting that he or she attends, subject to an annualcap of US$50,000 per member of the board of directors.

 

For 2004, the aggregate amount of compensation paid toall directors, alternate directors, executive officers and audit committeemembers was approximately U.S$650,000  (in nominal terms).

 

We offer a bonus plan to our directors and seniormanagement that is based on individual performance and on the results of ouroperations.  This variable compensationcan range from 30% to 50% of annual base compensation, depending upon theemployee’s level.

 

**EMPLOYEES**

 

As of December 31, 2004, we had a total ofapproximately 7,911 employees, including unionized (5,664) and non-unionized(2,247) full- and part-time employees. All of these employees were employed in Mexico.  Total employees for 2003 and 2002 were 1,286and 856, respectively.  Of our totalemployees as of December 31, 2004, approximately 28% were white-collar and72% were blue-collar.

 

**SHAREOWNERSHIP**

 

The following table sets forth the beneficialownership of our capital stock by our directors and senior management as of April 29,2005.

*** ***
| **Name**                                             | ** ** | **Number of Common  Shares Owned** | ** ** | **Percentage of Common  Shares Outstanding** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| Eustaquio  Tomás de Nicolás Gutiérrez |       | 34,348,250                         |       | 10.9                                         | %          |
| Gerardo de Nicolás Gutiérrez               |       | 20,608,950                         |       | 6.6                                          | %          |
| Cleofas Hinojosa Saenz                               |       |                               | *          |                                         | *          |
| Rubén Izábal González                 |       |                               | *          |                                         | *          |
| Alberto Menchaca Valenzuela                          |       |                               | *          |                                         | *          |
| Josemaria  Antón Vlasich de la Rosa             |       |                               | *          |                                         | *          |
| José Ignacio  de Nicolás Gutiérrez    |       | 34,348,250                         |       | 10.9                                         | %          |
| Luis Alberto Harvey McKissack                        |       |                               | *          |                                         | *          |
| Gary R. Garrabrant                                   |       |                               | *          |                                         | *          |
| Matthew M. Zell                                      |       |                               | *          |                                         | *          |
| Z. Jamie Behar                                       |       |                               | *          |                                         | *          |
| Wilfrido Castillo Sánchez-Mejorada              |       |                               | *          |                                         | *          |
| Edward Lowenthal                                     |       |                               | *          |                                         | *          |
| Monica Lafaire Cruz                                  |       |                               | *          |                                         | *          |

 

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*      Beneficiallyowns less than one percent of the outstanding shares of Homex’s capital stock.

 

## **ITEM7.  Major Shareholders And Related PartyTransactions.**

 

**MAJOR SHAREHOLDERS**

 

**As of April 29,2005, there were 313,856,490 Common Shares issued and outstanding.  As of April 29, 2005,**64,912,278 shares were held in the United Statesin the form of American Depositary Shares by 6record holders.  The remaining shareswere held in Mexico.  Because certain ofthe shares are held by nominees, the number of record holders may not berepresentative of the number of beneficial holders.  See “Item 9. The Offer and Listing” for fuller discussion of our capital stock.

 

**Thetable below sets forth information concerning the percentage of our capitalstock owned by any person known to us to be the owner of 5% or more of anyclass of our voting securities, our directors and officers as a group and ourother shareholders as of April 29, 2005. The company’s major shareholders do not have different or preferentialvoting rights with respect to the shares they own.**

 
| ** **                               | ** ** | **As of April 29, 2005** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| **Identity of Shareholder**              | ** ** | **Number of  Shares**         | ** ** | **% of Share  Capital** | ** ** |
| de Nicolás family(1)(2)             |       | 137,393,001                   |       | 43.8 | % |
| Equity International Properties, Ltd.(3) |       | 68,142,301                    |       | 21.7 | % |
| Total(4)                                 |       | 313,856,490                   |       | 100.0 | % |

 

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(1)               Held by Ixe Banco, S.A. as trustee ofTrust No. F/466, for the benefit of the de Nicolás family, includingEustaquio de Nicolás Vera, Eustaquio Tomás de Nicolás Gutiérrez, José Ignaciode Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, and Julián de NicolásGutiérrez.  Voting and dispositivecontrol over these shares is directed by a Technical Committee comprised ofEustaquio de Nicolás Vera, Eustaquio Tomás de Nicolás Gutiérrez, José Ignaciode Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, and Julián de NicolásGutiérrez.

 

(2)               Includes 8,481,673 Common Shares issuedto the members of the de Nicolás family effective May 14, 2004 inconnection with our acquisition of Econoblock.

 

(3)               Held by EIP Investment Holdings LLC BVBA,an indirect subsidiary of Equity International Properties, Ltd.  Voting control over these shares is shared byEIP’s senior management team, headed by Samuel Zell, chairman of EIP, and GaryR. Garrabrant, CEO of EIP and one of our directors.  Equity International Properties, Ltd. islocated at Two North Riverside Plaza, Chicago, IL, 60606.

 

(4)               Includes public shareholders that inaggregate hold 34.5% or our share capital. No single shareholder in this group of public shareholders holds 5% ormore of our capital stock.

 

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**RELATEDPARTY TRANSACTIONS**

** **

Wehave engaged, and in the future may engage, in transactions with ourshareholders and companies affiliated with our shareholders.  We believe that these transactions have beenmade on terms that are no less favorable to us than those that could beobtained from unrelated third parties. Recently, we began requiring that transactions with our shareholders andcompanies affiliated with our shareholders be approved by the board ofdirectors after considering the recommendation of our audit committee and, insome cases, after an independent fairness opinion.

 

**Financing from Related Parties**

 

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

*** ***

EustaquioTomás de Nicolás Gutiérrez, our chairman, and José Ignacio de NicolásGutiérrez, brother of Eustaquio Tomás de Nicolás Gutiérrez and chairman of HipotecariaCrédito y Casa, S.A. de C.V, or Crédito y Casa, collectively own a 29.4%ownership interest in this *sofol*,the principal business of which is providing mortgage financing and bridge loanfinancing.  Eustaquio Tomás de NicolásGutiérrez and José Ignacio de Nicolás Gutiérrez are both members of the deNicolás family, which collectively owns 43.8% of our share capital.  Crédito y Casa has provided bridge loanfinancing to us and mortgages under SHF-sponsored programs to our clients.  During 2002, 2003 and 2004, Crédito y Casaprovided mortgages with respect to certain of the homes sold by us.  We expect to continue to sell homes to buyerswho obtain mortgages from Crédito y Casa.

 

During2004, the largest aggregate outstanding balances owed to Crédito y Casa werePs. 61.8 million and UDI 5.1 million.  The were no amounts outstanding as of December 31,2004.  These loans bore interest atvarying rates and matured at various dates through 2005.  During 2004, we made aggregate interestpayments of Ps. 2.7 million and UDI 322,122.

 

During2003, the largest aggregate outstanding balances owed to Crédito y Casa werePs. 132.2 million and UDI 55.1 million.  The aggregate amounts outstanding as of December 31,2003 were Ps. 92.7 million and UDI 7.3 million.  These loans bore interest at varying ratesand matured at various dates through 2004. During 2003, we made aggregate interest payments ofPs. 4.0 million and UDI 3.6 million.

 

During2002, the largest aggregate outstanding balances owed to Crédito y Casa werePs.** **60.1 million and UDI 47.3 million.  The aggregate amount outstanding as of December 31,2002 was Ps.** **45.1 million andUDI 45.1 million.  These loansbore interest at varying rates and matured at various dates through 2003.  During 2002, we made aggregate interestpayments of Ps.** **3.1 million andUDI 3.7 million.

 

Werepaid the amounts outstanding to Crédito y Casa with the proceeds of theoffering, but may receive additional financing from Crédito y Casa in thefuture.

 

***Crédito Inmobiliario, S.A. de C.V.***

*** ***

EquityInternational Properties, Ltd. acquired a 24.64% interest in this *sofol* on December 1, 2003.  Also on December 1, 2003, CréditoInmobiliario, S.A. de C.V., or Crédito Inmobiliario, acquired the entirety ofthe loan portfolio of Terras Hipotecaria, S.A. de C.V., or TerrasHipotecaria.  Prior to this acquisition,Terras Hipotecaria provided construction financing to us via bridge loans andmortgage financing to our clients via SHF-sponsored programs.

 

As of December 31,2004, no amounts were outstanding under these lines of credit.

 

Werepaid the amounts outstanding to Crédito Inmobiliario with the proceeds of theoffering, but may receive additional financing from Crédito Inmobiliario in thefuture.  Crédito Inmobiliario providedmortgages with

 

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respect to certainof the homes sold by us and we expect to continue to sell homes to buyers whoobtain mortgages from Crédito Inmobiliario.

 

**Financing to Related Parties**

 

In1997, we formed a joint venture with Dynámica de Desarrollos Sustentables, S.A.de C.V., or Dynámica, a company owned by Diego Valenzuela Cadena and CarlosFederico Valenzuela Cadena, brothers-in-law of Eustaquio Tomás de NicolásGutiérrez, our chairman.  The jointventure was created to build housing developments in the cities of Leon andPuerto Vallarta.  We dissolved the jointventure in April 2002.

 

Someaccounts payable to us by Dynámica in consideration for services providedpursuant to the joint venture remain outstanding.  The maximum aggregate amount outstanding inconnection with these accounts was Ps.** **12.4 millionduring 2004.  These accounts were paid infull by March 31, 2005.

 

**Econoblock**

 

Priorto June 1, 2004, we purchased cement block, concrete, and asphalt fromEconoblock, S.A. de C.V., or Econoblock, in the cities of Culiacán, Mazatlán,Guadalajara, Ciudad Juárez, and Laredo. Gerardo de Nicolás Gutiérrez, our CEO, Josefina Gutiérrez Pando de deNicolás, his mother, and José Ignacio de Nicolás, his brother, collectivelyowned a 100% interest in Econoblock prior to June 1, 2004, when Econoblockmerged with and into DECANO.

 

Priorto June 1, 2004, we purchased materials from Econoblock in an aggregateamount of Ps.** **31.0 million in 2004,Ps.** **63.0 million in 2003 and Ps.** **27.7 million in 2002.  These purchases represented 3.7% of our totalpurchases of construction materials and services during 2004, and 7.1% during2003 and 5.7% during 2002.

 

EffectiveMay 14, 2004, our subsidiary DECANO entered into an agreement with Gerardode Nicolás Gutiérrez, our CEO, Josefina Gutiérrez Pando de de Nicolás, hismother, and José Ignacio de Nicolás, his brother, to merge Econoblock withDECANO.

 

Econoblockhad revenues of Ps. 40.0 million for the six months ended June 1,2004, of which approximately three-fourthsof which came from sales to us.  As of June 1,2004, Econoblock had a net loss of Ps. 1 million.  For the six months ended June 1, 2004,Econoblock had net assets of Ps. 50.8 million.  We believe that for the near future, ouroperations will utilize all of the products that Econoblock can supply.

 

Inconsideration for their shares of Econoblock, the former shareholders ofEconoblock received Common Shares of DECANO representing 4.1% of DECANO’soutstanding share capital.  We continueto own the remaining 95.9% of the shares of DECANO.  We have an option to purchase the shares ofDECANO owned by the former shareholders of Econoblock at book value.  As of December 31, 2004, the book valueof these remaining shares was Ps. 6.7 million.  We intend to exercise this purchase right,although we cannot assure you of the timing of this exercise.

 

Concurrentwith the DECANO merger and as additional consideration for their sale of theEconoblock shares to DECANO, certain members of the de Nicolás family wereissued 8,481,673 of our Common Shares and made a capital contribution ofPs. 4.3 million in our company. These Common Shares have a value of approximately U.S.$393,443.

 

Thesevalues were arrived at by negotiations between Homex, Equity InternationalProperties, Ltd., ZN Mexico Trust, on one hand, and the shareholders ofEconoblock, on the other hand.

 

Aftergiving effect to the transactions described above, we will own all of the sharecapital of Econoblock, and the members of the de Nicolás family will own anadditional 8,481,673 of our Common Shares.

 

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**Land Purchases from Related Parties**

 

On November 5,2004, Proyectos Inmobiliarios de Culiacán, S.A. de C.V., our wholly ownedsubsidiary, purchased from Anixter de México, S.A. de C.V., a wholly ownedsubsidiary of Anixter Internacional, whose main shareholder is EquityInvestment Properties, parent company of Equity International Properties, Ltd.,50,664,759 square meters of land located in Xalapa, Veracuz., for a purchaseprice of approximately US$438,000.00.

 

On June 15, 2005, PICSAsold to Corporaciones de Servicios de Construcción y Desarrollo, S. de R.L. deC.V., a wholly owned subsidiary of MRP-EIP Retail Holding GP, which is asubsidiary of Equity Investment Properties, 7,928.88 squared meters of acommercial land located in Santa Fe, Culiacán Sinaloa, for the total amount ofUS$497,599.

 

These transactions were duly authorized by our audit committee and ourboard of directors.

 

In April 2005, our board of directors approved the purchase byProyectos Inmobiliarios de Culiacán, S.A. de C.V., or PICSA, our wholly ownedsubsidiary, of approximately 416,267square meters of unimproved land,located in Zapopan, Jalisco, from Corporate Properties of the Americas, a wholly owned subsidiary ofEquity Investment Properties, for a total approximate amount of US$21.7million.  This sale is expected to closeby the end of 2005.

 

**Service Companies**

 

Wepreviously compensated certain of our senior management through payments tocertain limited partnerships in which they owned partnership interests.  We paid an aggregate amount ofPs. 34.4 million during 2004, Ps. 31.7 million during 2003and Ps.** **9.6 million during 2002 tothese partnerships.  This arrangement wasterminated effective March 31, 2004 in respect of compensation to oursenior management.

 

**Registration Rights Agreement**

 

Inconnection with the offering, we and our existing shareholders entered into aregistration rights agreement which provides our existing shareholders withregistration rights relating to our Common Shares held by them immediatelyprior to the offering and any Common Shares or ADSs they may acquire after theoffering.  Pursuant to the registrationrights agreement, at any time beginning 180 days after the effective dateof the registration statement relating to the offering, subject to customaryexceptions, these shareholders may request that we file a registrationstatement under the Securities Act covering their Common Shares or ADSsrepresenting the Common Shares.  Theseshareholders (with the de Nicolás family being treated as one shareholder forthis purpose) may each request two demand registrations.  In addition, at any time that we are eligibleto use the SEC’s short-form registration statement on Form F-3 (or anysuccessor form), these shareholders may request that we register their CommonShares or ADSs for resale from time to time on a delayed or continuousbasis.  These shareholders also havecertain “piggyback” registration rights with respect to their Common Shares andADSs.  Accordingly, if we propose toregister any of our securities, either for our own account or for the accountof other shareholders, with certain exceptions, we are required to notify theseshareholders and to include in such registration all the Common Shares or ADSsrequested to be included by these shareholders, subject to rejection of suchshares under certain circumstances by an underwriter.

 

Theregistration rights agreement sets forth customary registration procedures,including an agreement by us to make available our senior management forroadshow presentations.  All registrationexpenses incurred in connection with any registration, other than underwritingcommissions, will be paid by us.  Inaddition, we are required to reimburse the selling shareholders for the feesand disbursements of one outside counsel retained in connection with any suchregistration.  The registration rightsagreement also imposes customary indemnification and contribution obligationson us for the benefit of these shareholders and any underwriters, althoughthese shareholders must indemnify us for any liabilities resulting frominformation provided by them.

 

Theshareholders’ rights under the registration rights agreement remain in effectwith respect to the Common Shares and ADSs covered by the agreement until:

 

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•                  those securities have been sold under aneffective registration statement under the Securities Act;

 

•                  those securities have been sold to thepublic under Rule 144 under the Securities Act; or

 

•                  those securities have been transferred ina transaction where a subsequent public distribution of those securities wouldnot require registration under the Securities Act.

 

## **ITEM 8.  Financial Information.**

## ** **

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

 

**LEGAL PROCEEDINGS**

** **

As ofthe date of this Annual Report, we are involved in certain legal proceedingsincidental to the normal operation of our business.  We do not believe that liabilities resultingfrom these proceedings are likely to have a material adverse effect on ourfinancial condition, cash flows, or results of operation.

 

## **ITEM 9.  The Offer And Listing.**

## ** **

Our Common Shares have been traded on the *Bolsa Mexicana de Valores, S.A. de C.V.*, or Mexican StockExchange, since June 29, 2004.  TheADSs, each representing six Common Shares, have been trading on the New YorkStock Exchange since June 29, 2004. On December 31, 2004, there were 313,856,490 outstanding CommonShares, (of which 64,912,278****Common Shareswere represented by 10,818,713****ADSs held by 6record holders in the United States).

 

**PriceHistory**

** **

The following table sets forth, for the periodsindicated, the quarterly and monthly high and low closing sale prices for theCommon Shares and the ADSs as reported by the Mexican Stock Exchange and theNew York Stock Exchange, respectively.

 
| ** **                   | ** ** | **Mexican Stock Exchange**     | ** ** | **NYSE**                 | ** ** |
|------------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                   | ** ** | **Common Stock**               | ** ** | **ADS****(2)**           | ** ** |
| ** **                   | ** ** | **High**                       | ** ** | **Low**                  | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                   | ** ** | **(Ps. per share****(1)****)** | ** ** | **(U.S.$ per ADS)** | ** ** |
| **Quarterly  Price History** |       |                           |       |                     |       |   |   |   |   |
| **2004**                     |       |                           |       |                     |       |   |   |   |   |
| 3rd Quarter                  |       | 40.05                          |       | 30.99                    |       | 21.18 |   | 16.35 |   |
| 4th Quarter                  |       | 44.51                          |       | 35.00                    |       | 24.00 |   | 18.00 |   |
| **2005**                     |       |                           |       |                     |       |   |   |   |   |
| 1st Quarter                  |       | 66.80                          |       | 43.30                    |       | 35.78 |   | 22.79 |   |
| 2nd Quarter(3)               |       | 47.05                          |       | 39.15                    |       | 25.79 |   | 21.45 |   |
| **Monthly Price History**    |       |                           |       |                     |       |   |   |   |   |
| December 2004           |       | 44.51                          |       | 36.30                    |       | 24.00 |   | 19.32 |   |
| January 2005            |       | 50.24                          |       | 43.30                    |       | 26.95 |   | 22.79 |   |
| February 2005           |       | 66.80                          |       | 49.95                    |       | 35.78 |   | 27.00 |   |
| March 2005              |       | 51.80                          |       | 44.80                    |       | 28.29 |   | 24.01 |   |
| April 2005              |       | 47.05                          |       | 40.90                    |       | 25.79 |   | 22.00 |   |
| May 2005                |       | 46.50                          |       | 39.15                    |       | 25.30 |   | 21.45 |   |
| June 2005(3)            |       | 49.70                          |       | 43.20                    |       | 27.56 |   | 23.81 |   |

 

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(1)   Pesos per share reflect nominal price attrade date.

(2)   Price per ADS in U.S.$; one ADS representssix Common Shares.

(3)   Through June 23, 2005.

 

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On June 23, 2005, the reported last sale price ofthe Common Shares on the Mexican Stock Exchange was Ps.46.85****per Common Share and the reported last sale price of theADSs on the New York Stock Exchange was U.S.$26.06****perADS.

 

**MEXICAN STOCKEXCHANGE**

 

TheMexican Stock Exchange, located in Mexico City, is the only stock exchange inMexico.  Operating continuously since1907, the Mexican Stock Exchange is organized as a corporation (*sociedad anónima de capital variable*).  Securities trading on the Mexican StockExchange occurs each business day from 8:30 a.m. to 3:00 p.m., MexicoCity time.

 

Since January 1999,all trading on the Mexican Stock Exchange has been effectedelectronically.  The Mexican StockExchange may impose a number of measures to promote an orderly and transparenttrading price of securities, including the operation of a system of automaticsuspension of trading in shares of a particular issuer when price fluctuationexceeds certain limits.  The MexicanStock Exchange may also suspend trading in shares of a particular issuer as aresult of:

 

•                  non-disclosure of material events; or

 

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

 

TheMexican Stock Exchange may reinstate trading in suspended shares when it deemsthat the material events have been adequately disclosed to public investors orwhen it deems that the issuer has adequately explained the reasons for thechanges in offer and demand, volume traded, or prevailing share price.  Under current regulations, the Mexican StockExchange may consider the measures adopted by the other stock exchanges inorder to suspend and/or resume trading in an issuer’s shares in cases where therelevant securities are simultaneously traded on a stock exchange outside ofMexico.

 

Settlementon the Mexican Stock Exchange is effected two business days after a sharetransaction.  Deferred settlement is not permittedwithout the approval of the CNBV, even where mutually agreed.  Most securities traded on the Mexican StockExchange are on deposit with the Mexican Securities Depository, or INDEVAL (*S.D. Indeval, S.A. de C.V., Institución para el Depósito de Valores,S.A. de C.V.*), a privately owned securities depositary that acts asa clearinghouse, depositary, and custodian, as well as a settlement, transfer,and registration agent for Mexican Stock Exchange transactions, eliminating theneed for physical transfer of securities.

 

Althoughthe Mexican Securities Market Act (*Ley delMercado de Valores*) provides for the existence of anover-the-counter market, no such market for securities in Mexico has developed.

 

***Market Regulationand Registration Standards***

*** ***

In1925, the Mexican Banking Commission (*ComisiónNacional Bancaria*) was established to regulate banking activity andin 1946, the Mexican Securities Commission (*ComisiónNacional de Valores*) was established to regulate stock marketactivity.  In 1995, these two entitieswere merged to form the CNBV.  TheMexican Securities Market Act, which took effect in 1975, introduced importantstructural changes to the Mexican financial system, including the organizationof brokerage firms as corporations (*sociedadesanónimas*).  The MexicanSecurities Market Act sets standards for authorizing companies to operate asbrokerage firms, which authorization is granted at the discretion of theMexican Ministry of Finance and Public Credit (*Secretaríade Hacienda y Crédito Público*), upon the recommendation of theCNBV.  In addition to setting standardsfor brokerage firms, the Mexican Securities Market Act authorizes the CNBV,among other things, to regulate the public offering and trading of securitiesand to impose sanctions for the illegal use of insider information and otherviolations of the Mexican Securities Market Act.  The CNBV regulates the Mexican securitiesmarket, the Mexican Stock Exchange, and brokerage firms through a board ofgovernors composed of thirteen members.

 

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As of June 1,2001, the Mexican Securities Market Act requires issuers to increase theprotections offered to minority shareholders and to bring corporate governancepractices in line with international standards. See “Item 3.  Key Information—RiskFactors — Risks Relating to Mexico — Minority shareholders may be less able toenforce their rights against us, our directors, or our controlling shareholdersin Mexico.”

 

Tooffer securities to the public in Mexico, an issuer must meet specificqualitative and quantitative requirements. In addition, only securities that have been registered with the MexicanSecurities Registry pursuant to CNBV approval may be listed on the MexicanStock Exchange.  The CNBV’s approval forregistration does not imply any kind of certification or assurance related tothe investment quality of the securities, the solvency of the issuer, or theaccuracy or completeness of any information delivered to the CNBV.

 

In March 2003,the CNBV issued certain general regulations applicable to issuers and othersecurities market participants.  Thegeneral regulations, which repealed several previously enacted CNBVregulations (circulares), now provide a single set of rules governingissuers and issuer activity, among other things.

 

Thegeneral regulations state that the Mexican Stock Exchange must adopt minimumrequirements for issuers to list their securities in Mexico.  These requirements relate to matters such asoperating history, financial and capital structure, and distribution.  The general regulations also state that theMexican Stock Exchange must implement minimum requirements for issuers tomaintain their listing in Mexico.  Theserequirements relate to matters such as financial condition, trading minimums,and capital structure, among others.  TheCNBV may waive some of these requirements in certain circumstances.  In addition, some of the requirements areapplicable for each series of shares of the relevant issuer.

 

TheMexican Stock Exchange will review compliance with the foregoing requirementsand 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 issuerfails to comply with any of the foregoing requirements, the Mexican StockExchange will request that the issuer propose a plan to cure theviolation.  If the issuer fails topropose a plan, if the plan is not satisfactory to the Mexican Stock Exchange,or if an issuer does not make substantial progress with respect to thecorrective measures, trading of the relevant series of shares on the MexicanStock Exchange will be temporarily suspended. In addition, if an issuer fails to propose a plan or ceases to followthe plan once proposed, the CNBV may suspend or cancel the registration of theshares.

 

Issuersof listed securities are required to file unaudited quarterly financialstatements and audited annual financial statements as well as various periodicreports with the CNBV and the Mexican Stock Exchange.  Mexican issuers must file the followingreports with the CNBV:

 

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

 

•                  quarterly reports, within 20 daysfollowing the end of each of the first three quarters and 40 daysfollowing the end of the fourth quarter (analogous to reports filed with theSEC by U.S. issuers on Form 10-Q); and

 

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

 

Pursuantto the CNBV’s general regulations, the internal rules of the Mexican StockExchange were amended to implement an automated electronic information transfersystem, or SEDI (*Sistema Electrónico deEnvío y Difusión de Informacion*), for information required to befiled with the Mexican Stock Exchange. Issuers of listed securities must prepare and disclose their financialinformation via a Mexican Stock Exchange-approved electronic financialinformation system, or SIFIC (*Sistema deInformación Financiera Computarizada*).  Immediately upon its receipt, the MexicanStock Exchange makes financial information prepared via SIFIC available to thepublic.

 

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TheCNBV’s general regulations and the rules of the Mexican Stock Exchangerequire issuers of listed securities to file information through SEDI thatrelates to any act, event, or circumstance that could influence issuers’ shareprice.  If listed securities experienceunusual price volatility, the Mexican Stock Exchange must immediately requestthat an issuer inform the public as to the causes of the volatility or, if theissuer is unaware of the causes, that an issuer make a statement to thateffect.  In addition, the Mexican StockExchange must immediately request that issuers disclose any information relatingto relevant material events, when it deems the information currently disclosedto be insufficient, as well as instruct issuers to clarify the information whennecessary.  The Mexican Stock Exchangemay request issuers to confirm or deny any material events that have beendisclosed to the public by third parties when it deems that the material eventmay affect or influence the securities being traded.  The Mexican Stock Exchange must immediatelyinform the CNBV of any such requests.  Inaddition, the CNBV may also make any of these requests directly toissuers.  An issuer may defer thedisclosure of material events under some circumstances, as long as:

 

•                  the issuer implements adequateconfidentiality measures;

 

•                  the information is related to incompletetransactions;

 

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

 

•                  no unusual price or volume fluctuationoccurs.

 

TheCNBV and the Mexican Stock Exchange may suspend trading in an issuer’ssecurities:

 

•                  if the issuer does not disclose amaterial event; or

 

•                  upon price or volume volatility orchanges in the offer or demand in respect of the relevant securities that arenot consistent with the historic performance of the securities and cannot beexplained solely through information made publicly available pursuant to theCNBV’s general regulations.

 

TheMexican Stock Exchange must immediately inform the CNBV and the general publicof any such suspension.  An issuer mayrequest that the CNBV or the Mexican Stock Exchange resume trading, provided itdemonstrates that the causes triggering the suspension have been resolved andthat it is in full compliance with the periodic reporting requirements underthe applicable law.  If its request hasbeen granted, the Mexican Stock Exchange will determine the appropriatemechanism to resume trading.  If tradingin an issuer’s securities is suspended for more than twenty business days andthe issuer is authorized to resume trading without conducting a publicoffering, the issuer must disclose via SEDI a description of the causes thatresulted in the suspension and reasons why it is now authorized to resumetrading before trading may resume.

 

Similarly,if an issuer’s securities are traded on both the Mexican Stock Exchange and aforeign securities exchange, the issuer must simultaneously file theinformation that it is required to file pursuant to the laws and regulations ofthe foreign jurisdiction with the CNBV and the Mexican Stock Exchange.

 

Pursuantto the Mexican Securities Market Act,

 

•                  members of a listed issuer’s board ofdirectors,

 

•                  shareholders controlling 10% or more of alisted issuer’s outstanding share capital,

 

•                  advisors,

 

•                  groups controlling 25% or more of alisted issuer’s outstanding share capital, and

 

•                  other insiders

 

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must inform the CNBV of any transactions undertaken with securities ofa listed issuer.  In addition, insidersmust abstain from purchasing or selling securities of the issuer within90 days from the last sale or purchase, respectively.  Shareholders of issuers listed on the MexicanStock Exchange must notify the CNBV before effecting transactions outside ofthe Mexican Stock Exchange that result in a transfer of 10% or more of anissuer’s share capital.  Transferringshareholders must also inform the CNBV of the effect of the transactions withinthree days following their completion, or, alternatively, that the transactionshave not been consummated.  The CNBV willnotify the Mexican Stock Exchange of these transactions on a no-namesbasis.  In addition, the MexicanSecurities Market Act provides that the CNBV may require purchasers that are orbecome insiders to effect the transactions through a tender offer, as well asthe minimum and maximum percentages of share capital that may be purchasedthrough any such tender offer.

 

TheCNBV has issued general regulations to control public tender offers and shareacquisitions above certain thresholds, as well as public company shareacquisitions by related parties.  Subjectto certain exceptions, any acquisition of a public company’s shares whichresults in the acquiror owning 10% or more, but less than 30%, of an issuer’soutstanding share capital must be publicly disclosed to the CNBV and theMexican Stock Exchange by no later than the day following the acquisition.  Any acquisition by an insider that results inthe insider holding an additional 5% or more of a public company’s outstandingshare capital must also be publicly disclosed to the CNBV and the Mexican StockExchange no later than the day following the acquisition.  Some insiders must also notify the CNBV ofshare purchases or sales that occur within a three-month or five-day term andthat exceed certain value thresholds.

 

Anyintended acquisition of a public company’s shares that results in the acquirorowning 30% or more, but less than 50%, of a company’s voting shares requiresthe acquiror to make a tender offer for the greater of the percentage of theshare capital intended to be acquired or 10% of the company’s outstanding sharecapital stock.  Finally, any intendedacquisition of a public company’s shares that results in the acquiror owningmore than 50% of a company’s voting shares requires the potential acquiror tomake a tender offer for 100% of the company’s outstanding share capital.  This offer must be made at the same price forall tendering shareholders and remain open for no less than fifteen businessdays.  The board of directors mustapprove any tender offer resulting in a change of control, which approval musttake minority shareholder rights into account.

 

Inaddition, the Mexican Securities Market Act requires shareholders holding 10%or more of a listed issuers’ share capital to notify the CNBV of any sharetransfer.

 

***MexicanSecurities Market Act***

*** ***

TheMexican legislature amended the Mexican Securities Market Act effective June 2,2001.  The amendments provide, amongother things, that:

 

•                  issuers must have a board of directorswith at least five and not more than twenty members and alternates, of which25% must qualify as “independent directors” under Mexican law;

 

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

 

•                  issuers must appoint and maintain anaudit committee; and

 

•                  issuers must provide additionalprotections for minority shareholders.

 

TheMexican Securities Market Act permits issuers to include anti-takeover defensesin their bylaws, provided that the bylaws also include specified minorityrights and protections, among other things.

 

TheMexican Securities Market Act does not permit issuers to implement mechanismswhere common shares and limited or non-voting shares are jointly traded oroffered to public investors, unless the limited or non-voting shares areconvertible into common shares within a term of up to five years, or when as aresult of the nationality of a given holder, the shares or the securitiesrepresenting the shares limit the right to vote in order to comply withapplicable foreign investment regulations.  In addition, the aggregate amount of shareswith limited or

 

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non-voting rightsmay not exceed 25% of the aggregate amount of publicly held shares, unlessapproved by the CNBV.

 

## **ITEM10.       Additional Information.**

## ** **

**BYLAWS**

 

Set forth below is a brief summary of certainsignificant provisions of (1) our bylaws, as amended by our shareholdersin accordance with the applicable Mexican Securities laws and regulations, and (2) Mexicanlaw.  This description does not purportto be complete and is qualified by reference to our bylaws, which havepreviously been filed with the Securities and Exchange Commission.

 

**Organization and Register**

 

We are a *sociedad anónima de capital variable*(acorporation) organized in Mexico under the *Ley General de SociedadesMercantiles*, or the Mexican Companies Law.  We were incorporated on March 30, 1998and the duration of our corporate life is indefinite.  Our corporate purpose, as fully described in Article 2of our bylaws, is to act as a holding company. As such, our bylaws grant us the power to engage in various activities,which allow us to function as a holding company.  These powers include, but are not limited to,the ability to (1) promote, establish, organize and administrate all typesof companies, mercantile or civil, (2) acquire or dispose of stock orinterests in other mercantile or civil companies, either by taking part in itsformation or acquiring shares or interests in companies that already are inexistence, (3) receive from third parties and give to the companies ofwhich it is a shareholder or partner or to any other third party, guidance ortechnical consulting services, including services in the fields ofadministration, accounting, merchandising or financing, (4) obtain,acquire, utilize or dispose of any patent, brand or commercial name, franchiseor rights in industrial property in Mexico or abroad., (5) 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, (6) 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, (7) issue, subscribe, draw, accept and endorse all types ofcredit instruments, including obligations with or without a guarantee, (8) acquire,rent, administrate, sell, mortgage, pledge, encumber or dispose of goods, inwhatever form, being movable or immovable, as well as rights over the same, (9) executeany kind of act and formalize any kind of labor, civil, mercantile or administrativeagreement or contract permitted by Mexican legislation, with real and corporatepersonalities that are either public or private, obtaining from these,concessions, permits and authorizations relating directly or indirectly to thecompany’s objectives as set forth in its bylaws, including, actively orpassively contracting any type of services, consulting work, supervisory workand technical direction that would be necessary or proper for theaforementioned goals, (10) issue treasury stock in accord with Article 81of the Mexican Securities Market Act, (11) establish agencies orrepresentatives and act as broker, agent, representative, mercantile mediatoror distributor, and (12) perform any acts necessary to accomplish theforegoing.

 

***Directors***

*** ***

Our bylawsprovide that our board of directors will consist of a minimum of five and amaximum of twenty members, as resolved by the relevant shareholders’meeting.  At least 25% of the members ofour board of directors must be independent pursuant to Mexican law.  At each shareholders’ meeting for theelection of directors, holders of at least 10% of our outstanding share capitalare entitled to appoint one member of the board of directors and one alternateand one statutory auditor and one alternate.

 

Pursuantto Mexican law, any director who has a conflict of interest with us relating toa proposed transaction must disclose the conflict and refrain from voting onthe transaction or may be liable for damages. Directors receive compensation as determined at the ordinaryshareholders’ meetings.

 

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**Authority of the Board of Directors**

 

Theboard of directors is our legal representative and is authorized to take anyaction in connection with our operations not expressly reserved to ourshareholders.  Pursuant to the MexicanSecurities Market Act, the board of directors must approve, among other things:

 

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

 

•                  significant asset transfers oracquisitions;

 

•                  granting material guarantees orcollateral; and

 

•                  other important transactions.

 

Meetingsof the board of directors are validly convened and held if a majority of itsmembers are present.  Resolutions passedat these meetings will be valid if approved by a majority of the disinterestedmembers of the board of directors present at the meeting.  If required, the chairman of the board ofdirectors may cast a tie-breaking vote.

 

**Voting Rights and Shareholders’ Meetings**

 

EachCommon Share entitles its holder to one vote at any meeting of ourshareholders.

 

UnderMexican law and our bylaws, we may hold two types of shareholders’ meetings:ordinary and extraordinary.

 

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

 

•                  approving or modifying the report of theboard of directors referred to in Article 172 of the Mexican GeneralBusiness Corporations Act;

 

•                  allocating profits, if applicable;

 

•                  appointing or ratifying the appointmentof members of the board of directors, the secretary and alternate secretary,the statutory examiners and their alternates, members of the executivecommittee and other committees, if applicable, and determining theircompensation;

 

•                  designating the maximum amount that maybe allocated to share repurchases; and

 

•                  discussing the audit committee’s annualreport to the board of directors.

 

Extraordinaryshareholders’ meetings may be called to consider any of the following matters,among other things:

 

•                  extending the corporate duration of thecompany;

 

•                  dissolution;

 

•                  increases or reductions of our fixedshare capital;

 

•                  changes in the company’s corporatepurpose or nationality;

 

•                  transformation, spin-off, or merger;

 

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•                  issues of preferred shares;

 

•                  share redemptions;

 

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

 

•                  any amendments to our bylaws; and

 

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

 

Theboard of directors, the chairman of the board of directors, or the statutoryauditors may call any shareholders’ meeting. Any shareholder or group of shareholders with voting rights representingat least 10% of our share capital may request that the board of directors orthe statutory auditors call a shareholders’ meeting to discuss the mattersindicated in the written request.  If theboard of directors or the statutory auditors fail to call a meeting within 15calendar days following date of the written request, the shareholder or groupof shareholders may request that a competent court call the meeting.  A single shareholder may call a shareholders’meeting if no meeting has been held for two consecutive years or if matters tobe dealt with at an ordinary shareholders’ meeting have not been considered.

 

Holdersof 20% of our outstanding shares may oppose any resolution adopted at ashareholders’ meeting and file a petition for a court order to suspend theresolution temporarily within 15 days following the adjournment of themeeting at which the action was taken, provided that the challenged resolutionviolates Mexican law or our bylaws and the opposing shareholders neitherattended the meeting nor voted in favor of the challenged resolution.  In order to obtain such a court order, theopposing 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.  Shareholdersrepresenting at least 10% of the shares present at a shareholders’ meeting mayrequest to postpone a vote on a specific matter on which they considerthemselves to be insufficiently informed.

 

Noticesof shareholders’ meetings must be published in the official gazette of Sinaloaor in one newspaper of general circulation in Culiacán, Sinaloa at least 15calendar days prior to the date of the meeting. Each notice must set forth the place, date, and time of the meeting andthe matters to be addressed and must be signed by whomever convenes themeeting.  Shareholders’ meetings will bedeemed validly held and convened without a prior notice or publication wheneverall the shares representing our capital are duly represented.  All relevant information relating to theshareholders’ meeting must be made available to shareholders starting on thedate the notice is published.

 

To beadmitted to any shareholders’ meeting, shareholders must be registered in ourshare registry or provide evidence of their status as shareholders as providedin our bylaws (including through certificates provided by INDEVAL and INDEVALparticipants).  Shareholders may appointone or more attorneys-in fact to represent them pursuant to general or specialpowers of attorney or by a proxy. Attorneys-in-fact may not be directors or statutory auditors of Homex.

 

At orprior to the time of the publication of any notice of a shareholders’ meeting,we will provide copies of the notice to the depositary for distribution to theADS holders.  ADS holders are entitled toinstruct the depositary as to the exercise of voting rights pertaining to theCommon Shares.

 

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**Quorum**

 

Ordinarymeetings are legally convened pursuant to a first notice when a majority of ourshare capital is present or duly represented. Any number of shares present or duly represented at an ordinary meetingof shareholders convened pursuant to a second or subsequent notice constitutes aquorum.  Resolutions at ordinary shareholders’meetings are valid when approved by a majority of the shares present at themeeting.

 

Extraordinarymeetings 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.  A majority of shares must be present or dulyrepresented at an extraordinary shareholders’ meeting called pursuant to asecond or subsequent notice to be considered legally convened.  Resolutions at extraordinary shareholders’meetings are valid when approved by the majority of our share capital.

 

**Registration and Transfer**

 

Wehave applied to register the Common Shares with the Special Section andthe Securities Section of the Mexican Securities Registry maintained bythe CNBV, as required under the Mexican Securities Market Act and regulationsissued by the CNBV.  If we wish to cancelour registration, or if it is cancelled by the CNBV, our shareholders who aredeemed to have “control” at that time will be required to make a public offerto purchase all outstanding shares, prior to the cancellation.

 

Ourshareholders may hold our Common Shares as physical certificates or, uponregistration, through institutions having accounts at INDEVAL.  These accounts may be maintained by brokers,banks, and other entities approved by the CNBV. In accordance with Mexican law, only holders listed in our shareregistry and those holding ownership certificates issued by INDEVAL and INDEVALparticipants are recognized as our shareholders.

 

**Changes in Share Capital and PreemptiveRights**

 

Ourminimum fixed share capital may be reduced or increased by resolution of anextraordinary shareholders’ meeting, subject to the provisions of our bylaws,the Mexican General Business Corporations Act, and the Mexican Securities MarketAct and regulations issued thereunder. Our variable share capital may be reduced or increased by resolution ofan ordinary shareholders’ meeting in compliance with the voting requirements ofour bylaws.

 

Sharesissued under Article 81 of the Securities Market Act (which are those heldin treasury to be delivered upon their subscription) may be offered forsubscription and payment by the board of directors (without preemptive rightsbeing applicable), provided that:

 

•                  the issuance is made to effect a publicoffering in accordance with the Securities Market Act;

 

•                  an express waiver of preemptive rights ismade at the extraordinary shareholders’ meeting where the issuance ofnon-subscribed shares is approved to facilitate the public offer;

 

•                  the CNBV has given its express approval;and

 

•                  the notice of shareholders’ meetingspecifies the Article 81 issuance in the meeting agenda.

 

If theholders of at least 25% of our share capital vote against the issuance ofnon-subscribed shares, the issuance may not take place.  If the issuance takes place, any objectingshareholders are entitled to require us to offer their shares, prior to theoffer and sale of newly issued shares, under the same terms and conditions.

 

In theevent of a share capital increase, our shareholders will have a preemptiveright to subscribe and pay for new stock issued as a result of the increase inproportion to their shareholder interest at that time.  This preemptive right must be exercised bysubscribing and paying for the relevant shares within the time period set forthin the resolution authorizing the increase, which will be no less than fifteencalendar days following the date of

 

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publication of thecorresponding notice to our shareholders in the official gazette of Sinaloa andin one of the newspapers of greater circulation in Culiacán, Sinaloa.

 

**Share Repurchases**

 

Pursuantto Mexican law, our bylaws provide that we may repurchase our shares on theMexican Stock Exchange at the prevailing market price.  Repurchased shares cannot be represented atany shareholders’ meeting.  We are notrequired to create a special reserve for the repurchase of shares and we do notneed the approval of our board of directors to effect share repurchases.  However, we are required to obtainshareholder approval as described below. In addition, our board of directors must appoint an individual or groupof individuals responsible for effecting share repurchases.  These repurchases must be made subject to theprovisions of applicable law, including the Securities Market Act, and carriedout, reported, and disclosed in the manner established by the CNBV.

 

Repurchaseof our Common Shares on the Mexican Stock Exchange must be conducted atprevailing market prices.  If we intendto repurchase more than 1% of our outstanding Common Shares at a single tradingsession, we must inform the public of this intention at least ten minutesbefore submitting our bid.  If we intendto repurchase 3% or more of our outstanding Common Shares during a period oftwenty trading days, we must conduct a public tender offer for these CommonShares.

 

We maynot submit bids for repurchase during the first and the last 30 minutes of eachtrading session and we must inform the Mexican Stock Exchange of the results ofany share repurchase no later than the following business day.

 

Theamount allocated to share repurchases is determined annually by ourshareholders at a general ordinary shareholders’ meeting and cannot exceed theaggregate amount of our net profits, including retained profits.

 

**Delisting**

 

In theevent that the we decide to cancel the registration of our shares with theMexican Securities Registry or if the CNBV orders this deregistration, ourshareholders who are deemed to have “control” will be required to make a tenderoffer to purchase the shares held by minority shareholders prior to suchcancellation.  Shareholders deemed tohave “control” are those that own a majority of our common shares, have theability to control our shareholders’ meetings, or have the ability to appoint amajority of the members of our board of directors.  The price of the offer to purchase willgenerally be the higher of:

 

•                  the average trading price on the MexicanStock Exchange during the last 30 days on which the shares were quotedprior to the date on which the tender offer is made; and

 

•                  the book value of the shares as reflectedin our latest quarterly financial information filed with the CNBV and theMexican Stock Exchange.

 

Inaccordance with the applicable regulations and our bylaws, in the event thatour controlling shareholders are unable to purchase all of our outstandingshares pursuant to a tender offer, they must form a trust and contribute to itthe amount required to secure payment of the purchase price offered pursuant tothe tender offer to all of our shareholders that did not sell their sharespursuant to the tender offer.  The trustmay not exist for a period longer than six months.

 

Controllingshareholders are not required to make a tender offer if the deregistration isapproved by 95% of our shareholders and the aggregate consideration payable forpublicly-traded shares does not exceed UDI 300,000.  Nonetheless, the trust mechanism described inthe previous paragraph still must be implemented.

 

Fivebusiness days prior to the commencement of an offering, our board of directorsmust make a determination with respect to the fairness of the offering, takinginto account the rights of our minority shareholders, and disclose its opinion,which must refer to the justifications for the offer price.  If the board of directors is

 

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precluded frommaking this determination as a result of a conflict of interest, the board’sresolution must be based on a fairness opinion issued by an expert selected bythe audit committee.

 

**Ownership of Share Capital by Subsidiaries**

 

Oursubsidiaries, may not, directly or indirectly, purchase our shares.

 

**Redemption**

 

UnderMexican law, a shareholder is entitled to the redemption of its variable CommonShares (if we offer variable Common Shares in the future) at any time bywritten notice to us at a redemption price generally equal to the lower of:

 

•                  95% of the average market value of thevariable Common Shares on the Mexican Stock Exchange for 30 trading days onwhich the variable Common Shares were quoted preceding the date on which theredemption is effective; and

 

•                  the book value of the variable CommonShares based on the financial statements as of the fiscal year immediatelypreceding the year in which the redemption is effective.

 

If theredemption right is exercised during the first three quarters of a fiscal year,the redemption will be effective at the end of that fiscal year.  If the redemption right is exercised duringthe last quarter of the fiscal year, the redemption will be effective at theend of the following fiscal year.  Theredemption price will be payable following the annual ordinary shareholders’meeting at which the annual financial statements as of the fiscal year in whichthe redemption will be effective are approved.

 

As ofthe date of this Annual Report, we have no variable Common Shares outstanding.

 

**Liquidation**

 

Uponour dissolution, one or more liquidators must be appointed at an extraordinaryshareholders’ meeting to wind up our affairs. All shares will be entitled to participate equally in any distributionupon liquidation.

 

***AppraisalRights and Other Minority Protections***

*** ***

Ifshareholders approve a change in our corporate purpose, nationality, orcorporate form, any voting shareholder who voted against these matters isentitled to the redemption of its Common Shares at book value pursuant to thelast financial statements approved by our shareholders at a shareholders’meeting.  These appraisal rights must beexercised within fifteen days after the shareholders’ meeting at which thematter was approved.

 

Pursuantto the Mexican Securities Market Act and the Mexican General BusinessCorporations Act, our bylaws include a number of minority shareholderprotections.  These minority protectionsinclude provisions that permit:

 

•                  holders of at least 10% of ouroutstanding share capital entitled to vote (including in a limited orrestricted manner) to call a shareholders’ meeting;

 

•                  holders of at least 15% of ouroutstanding share capital to bring an action for civil liabilities against ourdirectors, members of the audit committee, and the statutory auditors, if

 

•                  the shareholders have not voted against exercising this action at therelevant shareholders’ meeting,

 

•                  the claim covers all of the damage alleged to have been caused by usand not merely the damage suffered by the plaintiff, and

 

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•                  any recovery is for our benefit and not the benefit of the plaintiffs;

 

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

 

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

 

•                  holders of at least 10% of ouroutstanding share capital are entitled to appoint one member of our board ofdirectors and one alternate; and

 

•                  holders of at least 10% of ouroutstanding share capital are entitled to appoint one statutory auditor and analternate.

 

Inaddition, pursuant to the Mexican Securities Market Act, we are also subject tocertain corporate governance requirements, including the requirement tomaintain an audit committee and to elect independent directors.

 

Theprotections afforded to minority shareholders under Mexican law are generallydifferent from those in the United States and other jurisdictions.  Substantive Mexican law concerning directorfiduciary duties has not been interpreted by Mexican courts, unlike many statesin the United States where duties of care and loyalty established by courtdecisions have helped to shape the rights of minority shareholders and theobligations of directors.  Mexican civilprocedure does not contemplate class action lawsuits or shareholder derivativeactions, which allow shareholders in the United States to bring actions onbehalf of other shareholders or to enforce rights of the corporationitself.  Shareholders cannot challengecorporate actions taken at shareholders’ meetings unless they meet stringentprocedural requirements.

 

As aresult of these factors, it is generally more difficult for our minorityshareholders to enforce rights against us or our directors or principalshareholders than it is for shareholders of a U.S. issuer.

 

***Informationto Shareholders***

 

TheMexican General Business Corporations Act establishes that companies, actingthrough their boards of directors, must annually present a report toshareholders at a shareholders’ meeting that includes:

 

•                  a report of the directors on theoperations of the company during the preceding year, as well as on the policiesfollowed by the directors;

 

•                  a report explaining the principalaccounting and information policies and criteria followed in the preparation ofthe financial information;

 

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

 

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

 

•                  the notes which are required to completeor clarify the above mentioned information; and

 

•                  the report prepared by the statutoryauditors with respect to the fairness of the information specified above aspresented by the board of directors.

 

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Inaddition, the Mexican Securities Market Act requires that information relatingto matters to be discussed at shareholders’ meetings be made available toshareholders from the date on which the notice for the relevant meeting ispublished.

 

**Restrictions AffectingNon-Mexican Shareholders**

 

Foreign investment in capital stock of Mexicancorporations is regulated by the 1993 Foreign Investment Law and by the 1998Foreign Investment Regulations to the extent they are not inconsistent with theForeign Investment Law.  The Ministry ofEconomy and the National Commission on Foreign Investment are responsible forthe administration of the Foreign Investment Law and the Foreign InvestmentRegulations.

 

Our bylaws do not restrict the participation ofnon-Mexican investors in our capital stock. However, approval of the National Foreign Investment Commission must beobtained for foreign investors to acquire a direct or indirect participation inexcess of 49% of the capital stock of a Mexican company that has an aggregateasset value that exceeds, at the time of filing the corresponding notice ofacquisition, an amount determined annually by the National Foreign InvestmentCommission.

 

Asrequired by Mexican law, our bylaws provide that non-Mexican shareholders agreeto e considered Mexican citizens with respect to:

 

•                  shares held by them;

 

•                  property rights;

 

•                  concessions;

 

•                  participations or interests we own; and

 

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

 

Asrequired by Mexican law, our bylaws also provide that non-Mexican shareholdersagree to refrain from invoking the protection of their governments in mattersrelating to their ownership of our shares. Therefore, a non-Mexican shareholder may not ask its government tointroduce a diplomatic claim against the government of Mexico with respect toits rights as a shareholder.  If the shareholderinvokes such governmental protection in violation of the agreement, its sharescould be forfeited to the Mexican government. Notwithstanding these provisions, shareholders do not forfeit any rightsthey may have under U.S. securities laws.

 

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

 

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

 

***Duties of Directors***

*** ***

UnderMexican law, directors have general agency duties.  However, specific standards of conduct arenot established under Mexican law and have not been interpreted by Mexicancourts.  The duties of directors ofpublic companies are more extensive than the duties of directors of privatecompanies.  Actions against directors maybe initiated by holders of at least 15% of our outstanding share capital,although any damages recovered from directors are awarded solely to thecompany.

 

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UnderDelaware law, the business and affairs of a corporation are managed by or underthe direction of its board of directors. In exercising their powers, directors are charged with a fiduciary dutyof care to protect the interests of the corporation and a fiduciary duty ofloyalty to act in the best interests of its shareholders.

 

Theduty of care requires that directors act in an informed and deliberate manner,and inform themselves, prior to making a business decision, of all relevantmaterial information reasonably 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 besummarized as the duty to act in good faith, not out of self-interest, and in amanner which the director reasonably believes to be in the best interests ofthe shareholders.

 

Underthe “business judgment rule,” courts generally do not question the businessjudgment of directors and officers.  Aparty challenging the propriety of a decision of a board of directors bears theburden of rebutting the presumption afforded to directors by the businessjudgment rule.  If the presumption is notrebutted, the business judgment rule attaches to protect the directorsfrom liability for their decisions. Where, however, the presumption is rebutted, the directors bear theburden of demonstrating the fairness of the relevant transaction.  However, when the board of directors takesdefensive actions in response to a threat to corporate control and approves atransaction resulting in a sale of control of the corporation, Delaware courtssubject directors’ conduct to enhanced scrutiny.

 

***Interested Directors***

*** ***

TheMexican Securities Market Act requires that our audit committee issue anopinion with regard to transactions and arrangements with related parties,including directors.  These transactionsand arrangements must be approved by our board of directors.  Mexican law provides that a member of the boardof directors can be liable for failing to disclose a conflict of interest andfor voting on a transaction in which he or she has a conflict of interest.

 

UnderDelaware law, a transaction entered into with regard to which a director has aninterest would not be voidable if:

 

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

 

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

 

•                  the transaction is fair to thecorporation as of the time it is authorized, approved or ratified.  Under Delaware law, an interested directorcould be held liable for a transaction in which the director derived animproper personal benefit.

 

***Dividends***

 

UnderMexican law, prior to paying dividends a company must reserve at least 5% ofits profits every year until it establishes a legal reserve equal to 20% of itscapital share.  Dividends may only bepaid from retained earnings and if losses for prior fiscal years have beenpaid, and they may be subject to additional restrictions contained in a company’sbylaws.  The payment of dividends must beapproved at an annual general shareholders’ meeting.  We do not currently expect to pay dividends.

 

UnderDelaware law, subject to any restrictions contained in the company’scertificate of incorporation, a company may pay dividends out of surplus or, ifthere is no surplus, out of net profits for the fiscal year in which thedividend is declared and for the preceding fiscal year.  Delaware law also provides that dividends maynot be paid out of net profits at any time when capital is less than thecapital represented by the outstanding stock of all classes having a preferenceupon the distribution of assets.

 

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***Mergers, Consolidations, and Similar Arrangements***

 

AMexican company may merge with another company only if a majority of the sharesrepresenting its outstanding share capital approve the merger at a dulyconvened general extraordinary shareholders’ meeting, unless the company’sbylaws impose a higher threshold. Dissenting shareholders are not entitled to appraisal rights.  Creditors have ninety days to oppose a mergerjudicially, provided they have a legal interest to oppose the merger.

 

UnderDelaware law, with certain exceptions, a merger, consolidation, or sale of allor substantially all the assets of a corporation must be approved by the boardof directors and a majority of the outstanding shares entitled to votethereon.  Under Delaware law, ashareholder 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 providesthat a parent corporation, by resolution of its board of directors and withoutany shareholder vote, may merge with any subsidiary of which it owns at least90% of each class of capital share.  Uponany such merger, dissenting shareholders of the subsidiary would have appraisalrights.

 

***Anti-Takeover Provisions***

 

Ourbylaws do not include anti-takeover provisions. Subject to the approval of the CNBV, the Mexican Securities Market Actpermits public companies to include anti-takeover provisions in their bylawsthat restrict the ability of third parties to acquire control of the companywithout obtaining approval of the company’s board of directors.

 

UnderDelaware law, corporations can implement shareholder rights plans and othermeasures, including staggered terms for directors and super-majority votingrequirements, to prevent takeover attempts. Delaware law also prohibits a publicly-held Delaware corporation fromengaging in a business combination with an interested shareholder for a periodof three years after the date of the transaction in which the shareholderbecame an interested shareholder unless:

 

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

 

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

 

•                  at or after the date of the transactionin which 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 votingstock which is not owned by the interested shareholder.

 

***Transactions with Significant Shareholders***

*** ***

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 directors must take therecommendation of the audit committee into consideration in granting itsapproval and may also require an independent fairness opinion.  In addition, pursuant to the Mexican GeneralBusiness Corporations Act, any shareholder who votes on a transaction in whichit has a conflict of interest may be liable for damages if the transactionwould not have been approved without the shareholder’s vote.

 

As aMexican company, we may enter into business transactions with our significantshareholders, including asset sales, in which the transacting shareholderreceives a greater financial benefit than other shareholders with priorapproval from our board of directors. Prior approval from our shareholders is not required for this kind oftransaction.

 

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

 

***Shareholders’ Suits***

*** ***

Asmentioned above, holders of at least 15% of our outstanding share capital maybring derivative actions for civil liabilities against our directors, membersof the audit committee, and the statutory auditors.  However, the grounds for shareholder derivativeactions under Mexican law are extremely limited, which effectively bars most ofthese kinds of suits in Mexico.  Inaddition, subject to certain requirements, holders of at least 20% of a company’soutstanding share capital may contest and suspend any shareholder resolutionthat violates Mexican law or our 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 courtgenerally has discretion to permit the winning party to recover attorneys’ feesincurred in connection with the action.

 

***Indemnification of Directors and Officers***

*** ***

UnderMexican law, a company may indemnify directors, statutory auditors, or membersof any committee of the board of directors, for actions taken within the scopeof their duties, against expenses (including attorneys’ fees), judgments, finesand settlement amounts, reasonably incurred in defense of an action, suit, orproceeding.

 

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 or officer’s position if:

 

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

 

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

 

***Inspection of Corporate Records***

*** ***

UnderMexican law, action by the company’s statutory auditor is required forinspection of corporate records.  At thetime that a notice of shareholders’ meeting is published, shareholders may alsorequest information about the company related to the matters to be discussed atthe 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.

 

***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 and his orher alternate.  Holders of at least 10%of the outstanding share capital are entitled to appoint one statutory auditorand his or her alternate.

 

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 Special Shareholders’ Meetings***

*** ***

UnderMexican law and our bylaws, a shareholders’ meeting may be called by the boardof directors, the chairman of the board of directors, or the statutoryauditors.  Any shareholder or group of shareholderswith voting rights representing at least 10% of our share capital may requestthat the board of directors or the statutory auditors

 

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call ashareholders’ meeting to discuss the matters indicated in the writtenrequest.  If the board of directors orthe statutory auditors fail to call a meeting within 15 calendar days followingdate of the written request, the shareholder or group of shareholders may requestthat a competent court call the meeting. A single shareholder may call a shareholders’ meeting if no meeting hasbeen held for two consecutive years or if matters to be dealt with at anordinary 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 Matters by 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 legal effect as those adopted in ageneral or special shareholders’ meeting. The board of directors may also approve matters by unanimous writtenconsent.

 

Delawarelaw permits shareholders to take action by written consent of holders ofoutstanding shares having more than the minimum number of votes necessary totake the action at a shareholders’ meeting at which all voting shares werepresent and voted.

 

***Amendment of Certificate of Incorporation***

*** ***

UnderMexican law, it is not possible to amend a company’s certificate ofincorporation (*acta constitutiva*).  However, the provisions that govern a Mexicancompany are contained in its bylaws, 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 ordirecting that the amendment proposed be considered at the next annual meetingof the shareholders.  Delaware lawrequires that, unless a different percentage is provided for in the certificateof incorporation, a majority of the outstanding shares entitled to vote thereonis required to approve the amendment of the certificate of incorporation at theshareholders 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 ofany class may be increased or decreased, to the extent not falling below thenumber of shares then outstanding, by the affirmative vote of the holders of amajority of the stock entitled to vote, if so provided in the company’scertificate of incorporation or any amendment that created such class or wasadopted prior to the issuance of such class or that was authorized by theaffirmative vote of the holders of a majority of such class of stock.

 

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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% of the shares representing acompany’s outstanding capital share be present at the meeting (unless thebylaws require a higher threshold) and that the resolutions be approved by amajority of the shares representing a company’s outstanding capital share.

 

UnderDelaware law, holders of a majority of the voting power 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 a corporation.

 

***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.

 

*SecuritiesBill*

 

Thereis a bill currently pending before the Mexican national congress that would, ifpassed, amend certain Mexican securities laws and would require certainamendments to our bylaws, including provisions of our bylaws with respect tocorporate governance standards and the rights of minority shareholders.

 

**MATERIAL CONTRACTS**

** **

**Acquisition of Controladora Casas Beta, S.A.**

 

On April 21, 2005, we signed an agreement to acquire 100% of thecapital stock of Controladora Casas Beta, S.A. de C.V., or Beta, the seventhlargest homebuilder in Mexico, in a transaction valued at approximately Ps.2,040million (or approximately US$188.9 million). The transaction will require that we purchase approximately 53.0% ofBeta’s stock for approximately Ps.1,163.0****million (orapproximately US$98.4 million) in cash and 47.0% of Beta’s stock forapproximately 22.0 million of our common shares valued at approximatelyPs.977.6 million (or approximately US$90.5 million).  Beta will then be merged into us.  Beta shareholders are expected to ownapproximately 6.6% of Homex after the merger. We expect to finance the cash portion of the purchase price principallywith bank financing.

 

For further discussion of our material contracts, see “Item 7.  Major Shareholders and Related PartyTransactions.”

 

**EXCHANGE CONTROLS**

 

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

 

**TAXATION**

** **

Thefollowing summary contains a description of:

 

•                  the material anticipated Mexican federal incometax consequences of the purchase, ownership and disposition of the ADSs orCommon Shares by non-resident holders, or holders that

 

•                  are not residents of Mexico for tax purposes and

 

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•                  will not hold the ADSs or Common Shares or a beneficial interesttherein in connection with the conduct of a trade or business through apermanent establishment, for tax purposes, in Mexico; and

 

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

 

•                  are citizens or residents of the United States,

 

•                  are U.S. domestic corporations, or

 

•                  that otherwise will be subject to U.S. federal income tax on a netincome basis in respect of the ADSs or Common Shares.

 

Forpurposes of Mexican taxation:

 

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

 

•                  at least 50% of the individuals’ aggregate annual income derives fromMexican sources or

 

•                  the individuals’ principal center of professional activities is locatedin Mexico;

 

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

 

•                  legal entities are residents of Mexico ifthey were established under Mexican law or if they maintain their principalplace of business or their place of effective management 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.

 

However,the following summary does not purport to be a comprehensive description of allof the tax considerations that may be relevant to a decision to purchase theADSs or Common Shares.  In particular,the summary of U.S. Federal income tax consequences deals only with U.S.holders that will hold the ADSs or Common Shares as capital assets and does notaddress the tax treatment of U.S. holders that own or are treated as owning 10%or more of our outstanding voting shares. In addition, the summary does not address any U.S. or Mexican state orlocal tax considerations that may be relevant to non-resident holders and toU.S. holders.  The discussion of U.S.federal income tax considerations below assumes that we are not a passiveforeign investment company, or PFIC.  Weare not and do not expect to become a PFIC, but this determination is madeannually and it is possible that our status could change.

 

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Thesummary is based upon the federal income tax laws of the United States andMexico as in effect on the date of this Annual Report, including the provisionsof the income tax treaty between the United States and Mexico and protocolthereto, or the Tax Treaty, all of which are subject to change, possibly withretroactive effect in the case of U.S. federal income tax law.  However, this summary does not address allaspects of the federal income tax laws of the United States and Mexico.  Prospective investors in the ADSs or CommonShares should consult their own tax advisors as to the U.S., Mexican, or othertax consequences of the purchase, ownership, and disposition of the ADSs orCommon Shares, including, in particular, the effect of any foreign, state, orlocal tax laws and their entitlement to the benefits, if any, afforded by theTax Treaty.

 

**Taxation of 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 49.25% for theyear ended December 31, 2004.  Thecorporate-level dividend tax on the distribution of earnings is not final andmay be credited against income tax payable during the fiscal year in which thedividend tax was paid and for the following two years.  Dividends paid from distributable earnings,after corporate income tax has been paid with respect to these earnings, arenot subject to this corporate-level dividend tax.

 

***U.S. Federal Income Tax Considerations***

*** ***

Thegross amount of any distributions (before reduction for Mexican withholdingtax) paid with respect to the Common Shares represented by the ADSs, to theextent paid out of our current or accumulated earnings and profits, asdetermined for U.S. federal income tax purposes, generally will be includiblein the gross income of a U.S. holder as ordinary income on the date on whichthe distributions are received by the depositary and will not be eligible forthe dividends received deduction allowed to certain corporations under the U.S.Internal Revenue Code of 1986, as amended. To the extent that a distribution exceeds our current and accumulatedearnings and profits, it will be treated as a non-taxable return of basis tothe extent thereof, and thereafter as capital gain from the sale of ADSs orCommon 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 toreceipt.  Dividend income generally willconstitute foreign source “passive income” or, in the case of certain U.S.holders for taxable years beginning before January 1, 2007, “financialservices 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, finance,or similar business) in each case which is treated separately from other typesof income for U.S. foreign tax credit purposes.

 

Mexicantax withheld from dividend distributions will be treated as foreign income taxthat, subject to generally applicable limitations under U.S. federal income taxregulations, is eligible for credit against U.S. holders’ federal income taxliability or, for those U.S. holders who elect to treat foreign taxes as such,may be deducted in computing taxable income. The calculation of foreign tax credits and, in the case of U.S. holdersthat elect to deduct foreign taxes, the availability of deductions involve theapplication of rules that depend on U.S. holders’ particularcircumstances. U.S. holders should consult their own tax advisors regarding theavailability of foreign tax credits and deductions.

 

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Under rules enactedby the United States Congress as part of the U.S. Taxpayer Relief Act of 1997,foreign tax credits will not be allowed for withholding taxes imposed inrespect of certain short-term or hedged positions. U.S. holders should consulttheir own advisors concerning the implications of these rules in light oftheir particular circumstances.

 

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.

 

TheU.S. Jobs and Growth Tax Relief Reconciliation Act of 2003, or the Tax ReliefAct, enacted on May 28, 2003, reduces the maximum rate of tax imposed oncertain dividends received by U.S. shareholders that are individuals to 15%,provided that certain holding period requirements are met.  These reduced rates apply to dividends receivedafter December 31, 2002 and before January 1, 2009.  In order for dividends paid by a foreigncorporation to be eligible for the reduced rates, the foreign corporation mustbe a “qualified foreign corporation” within the meaning of the Tax ReliefAct.  We believe that we will beconsidered a “qualified foreign corporation” within the meaning of the TaxRelief Act because our ADSs will be listed on the New York Stock Exchange andthus any distributions we make that are treated as taxable dividends, whetherin cash, shares, or other property, should qualify for reduced rates.  It is possible, however, that we will notcontinue to be considered a “qualified foreign corporation” and that ourdividends will not continue to be eligible for reduced rates under the TaxRelief Act.

 

**Taxation of 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 Common Shares in exchange for ADSs will notgive rise to Mexican tax or transfer duties.

 

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 of the Common Shares made in othercircumstances generally would be subject to Mexican tax at a rate of 25% basedon the total amount of the transaction or, subject to certain requirementsapplicable to the seller, at a rate of 33% for the year ended December 31,2004 of gains realized from the disposition, regardless of the nationality orresidence of the transferor, provided that the transferor is not a resident ofa country with 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 years have elapsed since the initialpublic offering of the Common Shares;

 

•                  our shares have a public float of atleast 35% on the authorized stock exchanges or markets on which they wereinitially listed;

 

•                  the offer is for all shares representingour share capital and at the same price for all shareholders; and

 

•                  all shareholders are permitted to acceptmore competitive offers than those received prior to or during the tender offerperiod, 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 holder did not own, directly or indirectly, 25% or more of ourshare capital (including ADSs) during the twelve-month period preceding thesale or other disposition.

 

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***U.S. Tax Considerations***

*** ***

Uponthe sale or other disposition of the ADSs or Common Shares, a U.S. holdergenerally will recognize capital gain or loss in an amount equal to thedifference between the amount realized on the sale or other disposition andsuch U.S. holder’s tax basis in the ADSs or Common Shares.  Gain or loss recognized by a U.S. holder onsuch sale or other disposition generally will be long-term capital gain or lossif, at the time of the sale or other disposition, the ADSs or Common Shareshave been held for more than one year. Under the Tax Relief Act, the top individual tax rate on adjusted netcapital gains for sales and exchanges of capital assets on or after May 6,2003 and before January 1, 2009 is 15%. The deduction of a capital loss is subject to limitations for U.S.federal income tax purposes.  Gain orloss generally will be treated as U.S. source gain or loss and a U.S. holdermay be unable to credit any Mexican taxes imposed on these gains unless it hascertain other income from foreign sources. Deposits and withdrawals of Common Shares by U.S. holders in exchangefor ADSs will not result in the realization of gain or loss for U.S. federalincome tax purposes.  The deductibilityof capital losses is subject to limitations.

 

**Other Mexican Taxes**

 

Thereare no Mexican inheritance, gift, succession, or value added taxes applicableto the purchase, ownership, or disposition of the ADSs or Common Shares bynon-resident holders.  However,gratuitous transfers of the ADSs or Common Shares may result in a Mexicanfederal tax obligation for the recipient in certain circumstances.

 

Thereare no Mexican stamp, issue, registration, or similar taxes or duties payableby non-resident holders of the ADSs or Common Shares.

 

**U.S. Backup Withholding Tax and InformationReporting Requirements**

 

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

 

•                  is a corporation or comes within certainexempt categories, and demonstrates this fact when so required; or

 

•                  provides a correct taxpayeridentification number, certifies that it is not subject to backup withholdingand otherwise complies with applicable requirements of the backup withholdingrules.

 

Any amount withheld under these rules will becreditable against the U.S. shareholder’s federal income tax liability.

 

**DOCUMENTS ONDISPLAY**

 

We are subject to the information requirements of theExchange Act and, in accordance therewith, we are required to file reports andother information with the SEC.  Thesematerials, including this Form 20-F and the exhibits thereto, may beinspected and copied at the SEC’s Public Reference Room at 450 FifthStreet, NW, Washington, D.C. 20549.  Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.

 

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## **ITEM11.       Quantitative And QualitativeDisclosures About Market Risk.**

 

**Interest Rate Risk**

 

In connection with our business activities, we haveissued and hold financial instruments that currently expose us to market risksrelated to changes in interest rates. Interest rate risk exists principally with respect to our indebtednessthat bears interest at floating rates. At December 31, 2004, we had outstanding indebtedness ofPs.577.2 million, the majority of which bore interest at variable interestrates.  The interest rate on our variablerate debt is determined primarily by reference to the 28-day Mexican InterbankRate, or TIIE (Tasa de Interés Interbancaria de Equilibrio).  TIIE increases would, consequently, increaseour interest payments.

 

A hypothetical, instantaneous, and unfavorable changeof 1.5% (150 basis points) in the average interest rate applicable tofloating-rate liabilities held at December 31, 2004 would have increasedour interest expense in 2004 by approximately Ps.15.7 million, or 26.5%,over a twelve-month period.

 

We manage our exposure to changes in interest rates byefficiently timing construction and delivery of our homes and payments to oursuppliers, thereby allowing us to reduce our borrowing needs.  We have also reduced our interest expense andlending commissions through the issuance of commercial paper with morefavorable interest rates.

 

**Exchange Rate Risk**

 

We generally do not have any material foreign currencydenominated assets or liabilities and therefore are not exposed to significantlosses resulting from exchange rate fluctuations.

 

## **ITEM12.       Description Of Securities OtherThan Equity Securities.**

## ** **

Notapplicable.

 

# **PART II**

#  

## **ITEM13.       Defaults, Dividend ArrearagesAnd Delinquencies.**

## ** **

  None.

 

## **ITEM14.       Material Modifications To TheRights Of Security Holders And Use Of Proceeds.**

## ** **

**USE OF PROCEEDS**

 

Weoffered 57,090,000 Common Shares and the selling shareholders offered12,600,000 Common Shares in the combined offering, in the form of CommonShares or ADSs.  The offering price forthe ADSs was US$15.80 per ADS and the offering price for the Common Shares wasU.S.$2.63 per Common Share.  We completedour initial public offering on June 29, 2004.

 

All ofthe ADSs offered were sold.  Theaggregate price of the offering amount registered and sold was US$150.4million.  The effective date of ourSecurities Act registration statement on Form F-1 (file number:  333-116257), under which the Common Sharesand ADSs were registered under the Securities Act, was June 8, 2004.  Citigroup Global Markets Inc. and MerrillLynch, Pierce, Fenner & Smith Incorporated were the joint globalcoordinators and book-running managers of the combined offering of CommonShares in Mexico and ADSs outside of Mexico and acted as representatives of theinternational underwriters in the offering outside of Mexico.  Acciones y Valores de México, S.A. de C.V.,Casa de Bolsa, Grupo Financiero Banamex and IXE Casa de Bolsa, S.A. de C.V.,IXE Grupo Financiero acted as representatives of the Mexican underwriters inthe Mexican offering.

 

Wereceived net proceeds of US$141.0****million fromour initial public offering (after underwriting discounts and commissions ofUS$6.5 million and transaction expenses of US$2.8 million).  None of the discounts, commissions orexpenses were paid as direct or indirect payments to our directors or officersor to their associates,

 

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topersons owning 10% or more of our Common Shares or to our affiliates nor toothers except as indicated above.  Noneof our net proceeds were paid as direct or indirect payments to our directorsor officers or to their associates, to persons owning 10% or more of our CommonShares or to our affiliates.  We did notreceive any net proceeds from the sale of ADSs or Common Shares by the sellingshareholders.  However, the sellingshareholders including a trust, in which our Chief Executive Officer andChairman have interests, received the net proceeds from their sale of ADSs andCommon Shares.

 

Fromthe effective date of our Securities Act registration statement to December 31,2004, we used our net proceeds to acquire approximately Ps. 1,047 million(U.S.$93.9 million) of land and to repay approximatelyPs. 417.6 million (U.S.$37.4 million) of indebtedness(calculated as of December 31, 2004). In addition, we used approximately Ps. 108.2million (U.S.$9.7 million) of our net proceeds for other generalcorporate purposes.  As of December 31,2004, we have used all the net proceeds from our initial public offering.

 

## **ITEM15.       Controls and Procedures.**

## ** **

**EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES**

 

The conclusions of our Chief Executive Officer andChief Financial Officer****about theeffectiveness of our disclosure controls and procedures, based on theirevaluation of these controls and procedures as of December 31, 2004, areas follows:

 

We are responsible for establishing and maintainingadequate internal control over the financial reporting of the company.  Our disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us is recorded,processed, summarized and reported within required timeframes.  Our disclosure controls and proceduresinclude controls and procedures designed to ensure that information required tobe disclosed is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure. Based on our assessments of our disclosure controls and procedures, ourChief Executive Officer and Chief Financial Officer have concluded that thedisclosure controls and procedures have functioned effectively.

 

**CHANGES IN INTERNAL CONTROLS**

 

There has been no change in our internal control overfinancial reporting during 2004 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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

###  

Ouraudit committee consists of Wilfrido Castillo Sánchez-Mejorada (Chairman), Z.Jamie Behar, and Edward Lowenthal.  Ourboard of directors has determined that Mr. Castillo has the attributes ofan “audit committee financial expert” as defined by the SEC and that eachmember of the audit committee satisfies the financial literacy requirements ofthe New York Stock Exchange. Our board of directors have also determined that Mr. Castillois independent as that term is defined in the listing rules of the NewYork Stock Exchange.

 

### **ITEM 16B.****                                    **Code of Ethics

###  

We have adopted a code of ethics, as defined in Item16B of Form 20-F under the Securities Exchange Act of 1934, asamended.  Our code of ethics applies toour Chief Executive Officer, Chief Financial Officer and persons performingsimilar functions as well as to our directors and other officers andemployees.  Our code of ethics isavailable on our web site at www.homex.com.mx. If we amend the provisions of our code of ethics that apply to our ChiefExecutive Officer, Chief Financial Officer and persons performing similar functions,or if we grant any waiver of such provisions, we will disclose such amendmentor waiver on our web site at the same address.

 

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### **ITEM 16C.****                                    **Principal Accountant Fees and Services

###  

**Audit and Non-Audit Fees**

 

The following table summarizes the aggregate feesbilled to us by Galaz, Yamazaki, Ruiz Urquiza, S.C., a member of DeloitteTouche Tohmatsu and an independent registered public accounting firm, duringthe fiscal years ended December 31, 2003 and 2004:

 
| ** **         | ** ** | **Year ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(thousands of Mexican pesos)** | ** ** |
| Audit fees         |       | Ps.                              | 4,521      |   | Ps. | 769 |   |
| Audit-related fees |       | 533                              |       |   |   |
| Tax fees           |       | 6,000                            |       | 4,178 |   |
| All other fees     |       | 21                               |       | 14 |   |
| Total fees         |       | Ps.                              | 11,075     |   | Ps. | 4,961 |   |

 

*Audit fees*.  Audit fees in the above table are theaggregate fees billed by Galaz, Yamazaki, Ruiz Urquiza, S.C., a member ofDeloitte Touche Tohmatsu and an independent public registered public accountingfirm, in connection with the audit of our annual financial statements andstatutory and regulatory audits.

 

*Audit-related Fees*.  Audit-related fees in the above table are theaggregate fees billed by Galaz, Yamazaki, Ruiz Urquiza, S.C., a member ofDeloitte Touche Tohmatsu and an independent registered public accounting firm,for financial accounting, reporting consultations and assistance in connectionwith our initial public offering.

 

*Tax Fees*.  Tax fees in the above table are fees billedby Galaz, Yamazaki, Ruiz Urquiza, S.C., a member of Deloitte Touche Tohmatsuand an independent registered public accounting firm, for services based uponexisting facts and prior transactions in order to document, compute, and obtaingovernment approval for amounts included in tax filings such as value-added taxreturn assistance, transfer pricing documentation and requests for technicaladvice from taxing authorities.

 

*Other Fees*.  Other fees in the above table are fees billedby Galaz, Yamazaki, Ruiz Urquiza, S.C., a member of Deloitte Touche Tohmatsuand an independent registered public accounting firm, for non-auditservices.  As a percentage of total feesbilled to us, other fees represent 0.2% and 0.3% for 2004 and 2003,respectively.

 

**Audit Committee Pre-Approval Policies andProcedures**

 

We have adopted pre-approval policies and procedures under which allaudit and non-audit services provided by our external auditors must bepre-approved by the audit committee.  Anyservice proposals submitted by external auditors need to be discussed and approvedby the audit committee during its meetings, which take place at least fourtimes a year.  Once the proposed serviceis approved, we or our subsidiaries formalize the engagement of services.  The approval of any audit and non-auditservices to be provided by our external auditors is specified in the minutes ofour audit committee.  In addition, themembers of our board of directors are briefed on matters discussed in themeetings of the audit committee.

 

### **ITEM 16D.****                                    **Exemptions from the Listing Standards forAudit Committees.

###  

Not applicable.

 

### **ITEM 16E.****                                      **Purchases of Equity Securities by the Issuerand Affiliated Purchasers.

 

Not applicable.

 

81

----

 

# **PART III**

#  

## **ITEM 17.       Financial Statements.**

 

Notapplicable.

 

## **ITEM 18.       Financial Statements.**

## ** **

See pages F-1through F-30, 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 February 18, 2005, together with an English  translation.                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                      |
| 2(a)(1)              |       | Form of Deposit Agreement 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)(3)              |       | Form of Registration Rights Agreement by and among us, Banco  Santander Mexicano, S.A., as trustee of Trust No. F/10289, for the benefit  of the de Nicolás Family, Bermuda Trust Company Limited, as trustee of ZN  Mexico Trust, and EIP Investment Holdings, LLC.*      |
|                 |       |                                                                                                                                                                                                                                                                                      |
| 8                    |       | List of Principal Subsidiaries.***                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                      |
| 12(a)(1)             |       | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, dated June 28, 2005.                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                      |
| 12(a)(2)             |       | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, dated June 28, 2005.                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                      |
| 13                   |       | Officer Certifications pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, dated June 28, 2005.                                                                                                                                                                         |

 

----

*                       Previously filed in RegistrationStatement on Form F-1/A (File No. 333-116257), originally filed withthe SEC on June 23, 2004. Incorporated herein by reference.

 

**                Previously filed in Registration Statement on Form F-6(No. 333-116278), originally filed with the SEC on June 8, 2004.  Incorporate herein by reference.

 

***         Previously filed in Registration Statement on Form F-1(File No. 333-116257), originally filed with the SEC on June 8,2004.  Incorporated herein by reference.

 

82

----

 

**SIGNATURE**

 

The registrant, Desarrolladora Homex, S.A. de C.V.,hereby certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|   | DESARROLLADORA HOMEX, S.A.  de C.V.             |
|--------|-------------------------------------------------|
|   |                                            |
|   | /s/ Cleofas Hinojosa Saenz                      |   |
|   | Name: Cleofas Hinojosa Saenz               |
|   | Title:   Chief Financial Officer |

 

Dated: June 28, 2005

 

83

----

 

**DesarrolladoraHomex, S.A. de C.V. and Subsidiaries**

 

Consolidated Financial Statements as of December 31,2004 and 2003, and for each of the three years in the period ended December 31,2004, and Report of Independent Registered Public Accounting Firm Dated April6, 2005

 

----

 

**DesarrolladoraHomex, S.A. de C.V. and Subsidiaries**

** **

**Independent Auditors’ Report and Consolidated FinancialStatements 2004 and 2003**

** **

**Table of contents**

 
| Report of Independent Registered Public  Accounting Firm                                                              |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                  |   |
| Consolidated balance sheets as of December 31, 2004 and 2003                                                          |   |
|                                                                                                                  |   |
| Consolidated statements of income for the  years ended December 31, 2004, 2003 and 2002                               |   |
|                                                                                                                  |   |
| Consolidated statements of changes in  stockholder’s equity for the years ended December 31, 2004, 2003 and 2002 |   |
|                                                                                                                  |   |
| Consolidated statements of changes in  financial position for the years ended December 31, 2004, 2003 and 2002        |   |
|                                                                                                                  |   |
| Notes to consolidated financial statements  for the years ended December 31, 2004, 2003 and 2002                      |   |

 

F-1

----

 

**Report of Independent Registered Public****Accounting Firm**

**To the Board of Directors and Stockholders of**

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

** **

We have audited the accompanying consolidated balancesheets of Desarrolladora Homex, S.A. de C.V. and subsidiaries (the “Company”)as of December 31, 2004 and 2003, and the related consolidated statements ofincome, changes in stockholders’ equity and changes in financial position foreach of the three years in the period ended December 31, 2004, all expressed inthousands of Mexican pesos of purchasing power of December 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with theauditing standards generally accepted in Mexico and with the standards of thePublic Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofDesarrolladora Homex, S.A. de C.V. and subsidiaries as of December 31, 2004 and2003, and the results of their operations, changes in their stockholders’equity and changes in their financial position for each of the three years inthe period ended December 31, 2004, in conformity with accounting principlesgenerally accepted in Mexico.

 

As described in Note 2, on May 16, 2004, Econoblock,S.A. de C.V. (affiliated company) merged with Desarrolladora de Casas del Noroeste, S.A. de C.V. (subsidiary company) with the latter assuming all the rights andobligations of the merged company. As the companies were under common control,the merger was recorded by recognizing the assets and liabilities transferredat their carrying amounts in the accounts of the transferring entity at thedate of transfer, based on the guidance incorporated in Statement of FinancialAccounting Standards No. 141, “Business Combinations”, issued by the FinancialAccounting Standards Board, and in accordance with Bulletin A-8, “SupplementalApplication of International Accounting Standards” issued by the MexicanInstitute of Public Accountants. Therefore, the accompanying financialstatements include those of the merged company as if the merger had taken placeas of the beginning of the earliest period presented.

 

F-2

----

 

Accountingprinciples generally accepted in Mexico vary in certain significant respectsfrom accounting principles generally accepted in the United States of America.The application of the latter would have affected the determination ofconsolidated net income for each of the three years in the period endedDecember 31, 2004, and the determination of consolidated stockholders’ equityat December 31, 2004 and 2003, and 2002 to the extent summarized in Note 23.

 

Our audits also comprehended the translation of theMexican peso amounts into U.S. dollar amounts and, in our opinion,such translation has been made in conformity with the basis stated in Note2.  The translation of the financialstatement amounts into U.S. dollars and the translation of the financialstatements into English have been made solely for the convenience of readers inthe United States of America.

 

Galaz, Yamazaki, Ruiz Urquiza, S.C.

Member of Deloitte Touche Tohmatsu

 
| /s/ Pedro Luis Castañeda Herrera         |   |
|-----------------------------------------------|--------|
| C.P.C. Pedro Luis Castañeda Herrera      |
| Mexico City, Mexico                           |
| April 6, 2005                                 |
| (June 21, 2005 as to Notes 22, 23, 24 and 25) |

 

F-3

----

 

**Desarrolladora Homex, S.A. de C.V. and Subsidiaries**

** **

**Consolidated balance sheets**

**As of December 31, 2004 and 2003**

**(In thousands of U.S. dollars ($) andthousands of Mexican pesos (Ps.) of purchasing power of December 31, 2004)**

** **
| ** **                                                             | ** ** | **2004**         | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------------------------|------------|------------------|------------|------------|------------|----------------|------------|
| ** **                                                             | ** ** | **(Convenience** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                                                             | ** ** | **translation;** | ** ** | ** ** | ** ** | **2003**       | ** ** |
| ** **                                                             | ** ** | **Note 2)**      | ** ** | **2004**   | ** ** | **(Note 2.c)** | ** ** |
| **Assets**                                                             | ** ** | ** **       | ** ** | ** ** | ** ** | ** **     | ** ** |
|                                                                   |       |             |       |       |       |           |       |
| Current assets:                                                        |       |             |       |       |       |           |       |
| Cash and temporary investments  (Note 4)                               |       | $                | 45,818     |       | Ps.        | 511,050        |       | Ps. | 220,111 |   |
| Restricted cash (Note 20)                                              |       | 1,836            |       | 20,474     |       | —         |       |
| Trade accounts receivable –  net (Note 5)                         |       | 284,198          |       | 3,169,945  |       | 1,844,577      |       |
| Inventories (Notes 6 and 10)                                           |       | 186,920          |       | 2,084,904  |       | 1,014,489      |       |
| Other current assets (Note 7)                                          |       | 9,342            |       | 104,205    |       | 30,111         |       |
| Total current assets                                                   |       | 528,114          |       | 5,890,578  |       | 3,109,288      |       |
|                                                                   |       |             |       |       |       |           |       |
| Land held for future  development (Note 6)                             |       | 45,178           |       | 503,920    |       | 239,885        |       |
|                                                                   |       |             |       |       |       |           |       |
| Restricted investments (Note  19)                                      |       | 3,849            |       | 42,931     |       | 35,126         |       |
|                                                                   |       |             |       |       |       |           |       |
| Property and equipment – net  (Notes 8 and 10)                    |       | 22,538           |       | 251,391    |       | 57,252         |       |
|                                                                   |       |             |       |       |       |           |       |
| Other assets (Note 9)                                                  |       | 7,586            |       | 84,616     |       | 9,959          |       |
|                                                                   |       |             |       |       |       |           |       |
| Total                                                                  |       | $                | 607,265    |       | Ps.        | 6,773,436      |       | Ps. | 3,451,510 |   |
|                                                                   |       |             |       |       |       |           |       |
| **Liabilities and stockholders’  equity**                         |       |             |       |       |       |           |       |
|                                                                   |       |             |       |       |       |           |       |
| Current liabilities:                                                   |       |             |       |       |       |           |       |
| Notes payable to financial  institutions (Note 10):                    |       |             |       |       |       |           |       |
| Due to related parties                                                 |       | $                | —     |       | Ps.        | —         |       | Ps. | 144,249 |   |
| Other                                                                  |       | 35,596           |       | 397,042    |       | 527,664        |       |
| Trade accounts payable (Note  11)                                      |       | 148,704          |       | 1,658,641  |       | 1,004,110      |       |
| Advances from customers                                                |       | 5,361            |       | 59,794     |       | 13,506         |       |
| Accrued expenses and taxes,  other than income taxes                   |       | 5,943            |       | 66,304     |       | 35,890         |       |
| Income tax payable                                                     |       | 31               |       | 347        |       | 4,557          |       |
| Employee statutory profit  sharing                                     |       | 178              |       | 1,981      |       | 926            |       |
| Total current liabilities                                              |       | 195,813          |       | 2,184,109  |       | 1,730,902      |       |
|                                                                   |       |             |       |       |       |           |       |
| Long-term notes payable to  financial institutions (Notes 10 and 11)   |       | 16,154           |       | 180,178    |       | —         |       |
|                                                                   |       |             |       |       |       |           |       |
| Deferred income taxes and  employee statutory profit sharing (Note 18) |       | 56,764           |       | 633,144    |       | 355,386        |       |
| Total liabilities                                                      |       | 268,731          |       | 2,997,431  |       | 2,086,288      |       |
|                                                                   |       |             |       |       |       |           |       |
| Commitments and contingencies  (Notes 19 and 20)                       |       |             |       |       |       |           |       |
|                                                                   |       |             |       |       |       |           |       |
| Stockholders’ equity (Note  12):                                  |       |             |       |       |       |           |       |
| Common stock                                                           |       | 19,462           |       | 217,083    |       | 173,248        |       |
| Additional paid-in capital                                             |       | 199,772          |       | 2,228,254  |       | 582,198        |       |
| Retained earnings                                                      |       | 99,663           |       | 1,111,637  |       | 394,557        |       |
| Excess in restated  stockholders’ equity                          |       | 27,850           |       | 310,635    |       | 310,635        |       |
| Cumulative initial effect of  deferred income taxes                    |       | (12,680          |       | (141,432   | )          | (141,432       | )          |
| Majority stockholder’s equity                                     |       | 334,067          |       | 3,726,177  |       | 1,319,206      |       |
| Minority interest in  consolidated subsidiaries                        |       | 4,467            |       | 49,828     |       | 46,016         |       |
| Total stockholders’ equity                                        |       | 338,534          |       | 3,776,005  |       | 1,365,222      |       |
|                                                                   |       |             |       |       |       |           |       |
| Total                                                                  |       | $                | 607,265    |       | Ps.        | 6,773,436      |       | Ps. | 3,451,510 |   |

 

See accompanying notes to consolidated financialstatements.

 

F-4

----

 

**Desarrolladora Homex, S.A. de C.V. and Subsidiaries**

** **

**Consolidated statements of income**

**For the years ended December 31,2004, 2003 and 2002**

**(In thousands of U.S.dollars ($) and thousands of Mexican pesos (Ps.) of purchasing power ofDecember 31, 2004, except share and per share data)**

** **
| ** **                                                        | ** ** | **2004**         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|------------|------------|----------------|------------|----------------|------------|
| ** **                                                        | ** ** | **(Convenience** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                                                        | ** ** | **translation;** | ** ** | ** ** | ** ** | **2003**       | ** ** | **2002**       | ** ** |
| ** **                                                        | ** ** | **Note 2)**      | ** ** | **2004**   | ** ** | **(Note 2.c)** | ** ** | **(Note 2.c)** | ** ** |
|                                                              |       |             |       |       |       |           |       |           |       |
| Revenues                                                          |       | $                | 476,311    |       | Ps.        | 5,312,769      |       | Ps.            | 2,911,022  |   | Ps. | 1,357,634 |   |
| Costs                                                             |       | 331,654          |       | 3,699,266  |       | 2,082,202      |       | 951,437        |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Gross profit                                                      |       | 144,657          |       | 1,613,503  |       | 828,820        |       | 406,197        |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Selling and administrative  expenses (Note 14 and 15)             |       | 38,851           |       | 433,340    |       | 266,682        |       | 167,543        |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Income from operations                                            |       | 105,806          |       | 1,180,163  |       | 562,138        |       | 238,654        |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Other income (expense) – net  (Note 16)                      |       | 3,859            |       | 43,027     |       | 77,838         |       | (1,766         | )          |
|                                                              |       |             |       |       |       |           |       |           |       |
| Net comprehensive financing  cost:                                |       |             |       |       |       |           |       |           |       |
| Interest expense (Note 14 and  17)                                |       | 11,852           |       | 132,191    |       | 117,722        |       | 131,837        |       |
| Interest income                                                   |       | (4,193           | )          | (46,776    | )          | (6,513         | )          | (1,836         | )          |
| Exchange (gain) loss -net                                         |       | (638             | )          | (7,115     | )          | (1,305         | )          | 93             |       |
| Monetary position loss                                            |       | 7,287            |       | 81,284     |       | 17,643         |       | 19,195         |       |
|                                                              |       | 14,308           |       | 159,584    |       | 127,547        |       | 149,288        |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Income before income taxes and  employee statutory profit sharing |       | 95,357           |       | 1,063,606  |       | 512,429        |       | 87,600         |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Income tax expense (Note 18)                                      |       | 30,441           |       | 339,536    |       | 183,314        |       | 53,613         |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Employee statutory profit  sharing expense (Note 18)              |       | 764              |       | 8,520      |       | 276            |       | 1,563          |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Consolidated net income                                           |       | $                | 64,152     |       | Ps.        | 715,550        |       | Ps.            | 328,839    |   | Ps. | 32,424 |   |
|                                                              |       |             |       |       |       |           |       |           |       |
| Net income of majority  stockholders                              |       | $                | 63,339     |       | Ps.        | 706,487        |       | Ps.            | 323,537    |   | Ps. | 31,059 |   |
| Net income of minority  stockholders                              |       | 813              |       | 9,063      |       | 5,302          |       | 1,365          |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Consolidated net income                                           |       | $                | 64,152     |       | Ps.        | 715,550        |       | Ps.            | 328,839    |   | Ps. | 32,424 |   |
|                                                              |       |             |       |       |       |           |       |           |       |
| Weighted average shares  outstanding (in thousands)               |       | 281,997          |       | 281,997    |       | 241,521        |       | 191,896        |       |
|                                                              |       |             |       |       |       |           |       |           |       |
| Earnings per share (basic and  diluted)                           |       | $                | 0.22       |       | Ps         | 2.51           |       | Ps             | 1.34       |   | Ps. | 0.16 |   |

 

See accompanying notes to consolidated financialstatements.

 

F-5

----

 

**Desarrolladora Homex, S.A. de C.V. and Subsidiaries**

** **

**Consolidated statements of changes instockholders’ equity**

**For the years ended December 31,2004, 2003 and 2002**

**(In thousands of U.S. dollars ($) andthousands of Mexican pesos (Ps.) of purchasing power of December 31, 2004)**

** **
| ** **                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Excess**             | ** ** | **Cumulative**        | ** ** | **Minority**     | ** ** | **Total**              | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **in restated**        | ** ** | **initial effect of** | ** ** | **interest in**  | ** ** | **stockholders’** | ** ** |
| ** **                                                          | ** ** | **Common** | ** ** | **paid in**    | ** ** | **Retained** | ** ** | **stockholders’** | ** ** | **deferred income**   | ** ** | **consolidated** | ** ** | **equity**             | ** ** |
| ** **                                                          | ** ** | **stock**  | ** ** | **capital**    | ** ** | **earnings** | ** ** | **equity**             | ** ** | **taxes**             | ** ** | **subsidiaries** | ** ** | **(Note 12)**          | ** ** |
| ** **                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **             | ** ** | ** **            | ** ** | ** **       | ** ** | ** **             | ** ** |
| Balances as of January 1, 2002  (Note 2.c)                          |       | Ps.        | 132,621    |           | Ps.        | 239,636      |       | Ps.                    | 39,961     |                  | Ps.        | 310,635          |       | Ps.                    | (141,432   | ) | Ps. | 3,839 |   | Ps. | 585,260 |   |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Issuance of common stock                                            |       | 34,744     |       | 284,059        |       | —       |       | —                 |       | —                |       | 18               |       | 318,821                |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Comprehensive income                                                |       | —     |       | —         |       | 31,059       |       | —                 |       | —                |       | 1,365            |       | 32,424                 |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Balances as of December 31, 2002 (Note 2.c)                         |       | 167,365    |       | 523,695        |       | 71,020       |       | 310,635                |       | (141,432              | )          | 5,222            |       | 936,505                |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Issuance of common stock (Note 12.g)                                |       | 5,883      |       | 58,503         |       | —       |       | —                 |       | —                |       | 35,492           |       | 99,878                 |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Comprehensive income                                                |       | —     |       | —         |       | 323,537      |       | —                 |       | —                |       | 5,302            |       | 328,839                |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Balances as of December 31, 2003 (Note 2.c)                         |       | 173,248    |       | 582,198        |       | 394,557      |       | 310,635                |       | (141,432              | )          | 46,016           |       | 1,365,222              |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Issuance of common stock  (Note 12. c and f)                        |       | 43,835     |       | 1,646,056      |       | —       |       | —                 |       | —                |       | 5,342            |       | 1,695,233              |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Comprehensive income                                                |       | —     |       | —         |       | 717,080      |       | —                 |       | —                |       | (1,530           | )          | 715,550                |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Balances as of December 31, 2004                                    |       | Ps.        | 217,083    |           | Ps.        | 2,228,254    |       | Ps.                    | 1,111,637  |                  | Ps.        | 310,635          |       | Ps.                    | (141,432   | ) | Ps. | 49,828 |   | Ps. | 3,776,005 |   |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Balances as of December 31, 2003  (Convenience translation; Note 2) |       | $          | 15,532     |           | $          | 52,196       |       | $                      | 35,374     |                  | $          | 27,850           |       | $                      | (12,680    | ) | $ | 4,125 |   | $ | 122,397 |   |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Issuance of common stock  (Note 12. c and f)                        |       | 3,930      |       | 147,576        |       | —       |       | —                 |       | —                |       | 479              |       | 151,985                |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Comprehensive income                                                |       | —     |       | —         |       | 64,289       |       | —                 |       | —                |       | (137             | )          | 64,152                 |       |
|                                                                |       |       |       |           |       |         |       |                   |       |                  |       |             |       |                   |       |
| Balances as of December 31, 2004                                    |       | $          | 19,462     |           | $          | 199,772      |       | $                      | 99,663     |                  | $          | 27,850           |       | $                      | (12,680    | ) | $ | 4,467 |   | $ | 338,534 |   |
|                                                                     |            |            |            |                |            |              |            |                        |            |                       |            |                  |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financialstatements.

 

F-6

----

 

**Desarrolladora Homex, S.A. de C.V. and Subsidiaries**

** **

**Consolidated statements of changes infinancial position**

**For the years ended December 31,2004, 2003 and 2002**

**(In thousands of U.S. dollars ($) andthousands of Mexican pesos (Ps.) of purchasing power of December 31, 2004)**

 
| ** **                                                   | ** ** | **2004**         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|------------|------------|----------------|------------|----------------|------------|
| ** **                                                   | ** ** | **(Convenience** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                                                   | ** ** | **translation;** | ** ** | ** ** | ** ** | **2003**       | ** ** | **2002**       | ** ** |
| ** **                                                   | ** ** | **Note 2)**      | ** ** | **2004**   | ** ** | **(Note 2.c)** | ** ** | **(Note 2.c)** | ** ** |
| Operating activities:                                        |       |             |       |       |       |           |       |           |       |
| Net income                                                   |       | $                | 64,152     |       | Ps.        | 715,550        |       | Ps.            | 328,839    |   | Ps. | 32,424 |   |
| Items that did not require resources:                        |       |             |       |       |       |           |       |           |       |
| Depreciation                                                 |       | 2,173            |       | 24,239     |       | 11,064         |       | 6,771          |       |
| Loss on sale of subsidiary                                   |       | 102              |       | 1,142      |       | —         |       | —         |       |
| Deferred income taxes and  employee statutory profit sharing |       | 24,902           |       | 277,758    |       | 156,873        |       | 28,379         |       |
|                                                         |       | 91,329           |       | 1,018,689  |       | 496,776        |       | 67,574         |       |
|                                                         |       |             |       |       |       |           |       |           |       |
| Changes in operating assets  and liabilities:                |       |             |       |       |       |           |       |           |       |
| (Increase) decrease in:                                      |       |             |       |       |       |           |       |           |       |
| Trade accounts receivable                                    |       | (118,823         | )          | (1,325,367 | )          | (575,071       | )          | (175,098       | )          |
| Inventories                                                  |       | (124,091         | )          | (1,384,117 | )          | (835,262       | )          | (193,601       | )          |
| Other current assets                                         |       | (6,643           | )          | (74,094    | )          | (544           | )          | (6,454         | )          |
| Increase (decrease) in:                                      |       |             |       |       |       |           |       |           |       |
| Trade accounts payable                                       |       | 60,520           |       | 675,040    |       | 782,520        |       | 65,310         |       |
| Due to related parties                                       |       | —           |       | —     |       | 2,921          |       | 2,959          |       |
| Other, net                                                   |       | (99              | )          | (1,109     | )          | (22,097        | )          | 17,110         |       |
| Net resources used in  operating activities                  |       | (97,807          | )          | (1,090,958 | )          | (150,757       | )          | (222,200       | )          |
|                                                         |       |             |       |       |       |           |       |           |       |
| Financing activities:                                        |       |             |       |       |       |           |       |           |       |
| Notes payable to financial  institutions:                    |       |             |       |       |       |           |       |           |       |
| Proceeds from new borrowings                                 |       | 36,257           |       | 404,416    |       | 507,853        |       | 431,687        |       |
| Payments of notes payable to  financial institutions         |       | (33,615          | )          | (374,946   | )          | (220,495       | )          | (567,784       | )          |
| Related parties:                                             |       |             |       |       |       |           |       |           |       |
| Loans from related parties                                   |       | 2,690            |       | 30,000     |       | 408,238        |       | 405,900        |       |
| Payments of related party  loans                             |       | (15,622          | )          | (174,249   | )          | (417,138       | )          | (335,825       | )          |
| Proceeds from issuance of  common stock                      |       | 151,984          |       | 1,695,233  |       | 99,878         |       | 318,821        |       |
| Net resources generated by  financing activities             |       | 141,694          |       | 1,580,454  |       | 378,336        |       | 252,799        |       |
|                                                         |       |             |       |       |       |           |       |           |       |
| Investing activities:                                        |       |             |       |       |       |           |       |           |       |
| Restricted investments                                       |       | (700             | )          | (7,805     | )          | (35,126        | )          | —         |       |
| Proceeds from sale of  machinery and equipment               |       | 4,312            |       | 48,100     |       | —         |       | —         |       |
| Acquisition of property and  equipment                       |       | (19,578          | )          | (218,378   | )          | (41,229        | )          | (9,128         | )          |
| Net resources used in  investing activities                  |       | (15,966          | )          | (178,083   | )          | (76,355        | )          | (9,128         | )          |
|                                                         |       |             |       |       |       |           |       |           |       |
| Cash, temporary investments  and restricted cash:            |       |             |       |       |       |           |       |           |       |
| Net increase                                                 |       | 27,920           |       | 311,413    |       | 151,224        |       | 21471          |       |
| Balance at beginning of year                                 |       | 19,734           |       | 220,111    |       | 68,887         |       | 47,416         |       |
|                                                         |       |             |       |       |       |           |       |           |       |
| Balance at end of year                                       |       | $                | 47,654     |       | Ps.        | 531,524        |       | Ps.            | 220,111    |   | Ps. | 68,887 |   |

 

See accompanying notes to consolidated financialstatements.

 

F-7

----

 

**Desarrolladora Homex, S.A. de C.V. and Subsidiaries**

** **

**Notes to consolidated financialstatements**

**For the years ended December 31,2004, 2003 and 2002**

**(In thousands of U.S. dollars ($) andthousands of Mexican pesos (Ps.) of purchasing power of December 31, 2004)**

** **

**1.****                                    ****Natureof business**

** **

Desarrolladora Homex, S.A. de C.V. (the “Company”) isa vertically integrated company engaged in the development, construction andsale of affordable entry level and middle income housing in Mexico. The Companyengages in land acquisition, constructing, marketing and selling homes,obtaining individual financing for its clients and developing communities tosatisfy housing needs in Mexico.

 

The Company was incorporated on March 30, 1998 as aMexican variable capital corporation (S.A. de C.V.).  During 1999 ZN Mexico Trust, a private equityfund specializing in investing in private companies in Mexico,became a shareholder of the Company.  In2002 Equity International Properties, Ltd., a Samuel Zell affiliated companywith significant experience in the real estate sector, became a shareholder ofthe Company.

 

The Company participates in housing supply offers fromthe main housing funds in Mexico, such as the national Workers’ Housing Fund,or INFONAVIT (Instituto Nacional del Fondo de Ahorro para la Vivienda de losTrabajadores), the Social Security and Services Institute Public-Sector Workers’Housing Fund, or FOVISSSTE (Fondo de la Vivienda del Instituto de Seguridad yServicios Sociales de los Trabajadores del Estado) and the public mortgageproviders such as the Federal Mortgage Society, or SHF (Sociedad HipotecariaFederal). Additionally, the Company participates in the middle-income housingmarket, where mortgage financing is provided by commercial banks and sofoles,special purpose financing entities that provide a substantial majority ofmortgage financing for the middle-income sector.

 

**2.****                                    ****Basisof presentation**

** **

a.               ***Explanation for translation into English and conveniencetranslation*** - The accompanying consolidated financial statements havebeen translated from Spanish into English for use outside of Mexico.  These consolidated financial statements arepresented on the basis of accounting principles generally accepted in Mexico(Mexican GAAP).  Certain accountingpractices applied by the Company vary in certain significant respects fromaccounting principles generally accepted in the United States of America (U.S.GAAP), as explained in Notes 22 and 23. See Note 22 for a discussion of such differences and Note 23 for areconciliation of the Company’s financial statements between Mexican GAAP andU.S. GAAP.

 

The financial statements are stated inMexican pesos, the currency of the country in which the Company is incorporatedand operates. The translations of Mexican pesos amounts into U.S. dollaramounts are included solely for the convenience of readers in the UnitedStates of America and havebeen made atthe rate of Ps.11.154 per one U.S. dollar, the noon buying rate of the FederalReserve Bank of New York on December 31, 2004. Such translation should not beconstrued as representations that the Mexican peso amounts have been, couldhave been, or could in the future, be converted into U.S. dollars at this orany other exchange rate. 

 

b.              ***Consolidation of financial statements***- The consolidatedfinancial statements include those of DesarrolladoraHomex, S.A. de C.V. (“Homex”) and its consolidated subsidiaries (collectivelythe “Company”). A description of Homex’s consolidated subsidiaries and itsdirect and indirect ownership interest in each is set forth below.  Intercompany balances and transactions havebeen eliminated in these consolidated financial statements. Equity interests ofunaffiliated shareholders in consolidated subsidiaries are reflected asminority interest. 

 

F-8

----

 
| ** **                                                | ** ** | **Ownership**  | ** ** | ** **                                                                               |
|-----------------------------------------------------------|------------|----------------|------------|------------------------------------------------------------------------------------------|
| **Company**                                               | ** ** | **percentage** | ** ** | **Activity**                                                                             |
|                                                      |       |           |       |                                                                                     |
| Proyectos Inmobiliarios de Culiacán, S.A. de C.V.    |       | 100.00%        |       | Construction and development of housing complexes                                        |
|                                                      |       |           |       |                                                                                     |
| AAA Homex Trust, Nacional Financiera, S.N.C., as  Trustee |       | 100.00%        |       | Rendering of financial services                                                          |
|                                                      |       |           |       |                                                                                     |
| Administradora Picsa, S.A. de C.V.                        |       | 100.00%        |       | Rendering of administrative services and  professional services for affiliated companies |
|                                                      |       |           |       |                                                                                     |
| Altos Mandos de Negocios, S.A. de C.V.                    |       | 100.00%        |       | Rendering of administrative services to affiliated  companies                            |
|                                                      |       |           |       |                                                                                     |
| Aerohomex, S.A. de C.V.                                   |       | 100.00%        |       | Rendering of transportation services                                                     |
|                                                      |       |           |       |                                                                                     |
| Desarrolladora de Casas del Noroeste, S.A. de C.V.        |       | 95.86%         |       | Construction and development of housing complexes                                        |
|                                                      |       |           |       |                                                                                     |
| Homex Atizapán, S.A. de C.V.                         |       | 67.00%         |       | Construction and development of houses                                                   |

 

c.               ***Merger*******- On May 16, 2004, Econoblock, S.A. deC.V. (affiliated company) mergedwith Desarrolladorade Casas del Noroeste, S.A. de C.V. (subsidiarycompany) with the latter assumingall the rights and obligations of the merged company. As the companies wereunder common control, the merger was recorded by recognizing the assets andliabilities transferred at their carrying amounts in the accounts of thetransferring entity at the date of transfer, based on the guidance incorporatedin Statement of Financial Accounting Standards No. 141, “Business Combinations”,issued by the Financial Accounting Standards Board, and in accordance withBulletin A-8, “Supplemental Application of International Accounting Standards”issued by the Mexican Institute of Public Accountants. Therefore, theaccompanying financial statements include those of the merged company as if themerger had taken place as of the beginning of the earliest period presented.This transaction resulted in a gain of Ps.10,593,which was accounted for as an increase in retained earnings. Condensedfinancial information of Econoblock, S.A. de C.V. at May 16, 2004, and for the period fromJanuary 1, 2004 to May 16, 2004, and at December 31, 2003 and 2002, and for theyears then ended, all expressed in Mexican pesos of purchasing power ofDecember 31, 2004, is summarized below: 

 
| ** **                    | ** ** | **May 16,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------|------------|------------------|------------|
| ** **                    | ** ** | **2004**    | ** ** | **2003**         | ** ** | **2002** | ** ** |
|                          |       |        |       |             |       |   |   |
| **Condensed balance sheets:** |       |        |       |             |       |   |   |
| Current assets                |       | Ps.         | 14,087     |             | Ps.        | 16,902 |   | Ps. | 10,087 |   |
| Property and equipment        |       | 36,767      |       | 30,122           |       | 9,073 |   |
| Deferred taxes                |       | 369         |       | (225             | )          | (82 | ) |
| Current liabilities           |       | (36,411     | )          | (35,974          | )          | (13,906 | ) |
|                          |       |        |       |             |       |   |   |
| Stockholders’ equity     |       | Ps.         | 14,812     |             | Ps.        | 10,825 |   | Ps. | 5,171 |   |
|                               |            |             |            |                  |            |  |  |  |  |  |  |  |

 

F-9

----

 
| ** **                                         | ** ** | **For the period**  | ** ** | ** **                            | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **January 1**       | ** ** | **For the years ended December  31,** | ** ** |
| ** **                                         | ** ** | **to May 31, 2004** | ** ** | **2003**                              | ** ** | **2002**   | ** ** |
|                                               |       |                |       |                                  |       |       |       |
| **Condensed statements of  operations:**           |       |                |       |                                  |       |       |       |
| Revenues                                           |       | Ps.                 | 39,807     |                                  | Ps.        | 68,788     |       | Ps. | 29,990 |   |
| Cost and expenses                                  |       | (38,747             | )          | (61,108                               | )          | (27,310    | )          |
| Other income and net  comprehensive financing cost |       | 289                 |       | (1,209                                | )          | (472       | )          |
| Income tax expense                                 |       | 2,527               |       | 817                                   |       | 843        |       |
|                                               |       |                |       |                                  |       |       |       |
| Net (loss) income                                  |       | Ps.                 | (1,178     | )                                     | Ps.        | 5,654      |       | Ps. | 1,365 |   |

 

d.              ***Sale of subsidiary***- On May 13, 2004, Homex Cuatitlán, S. A. de C.V., a subsidiary, was sold. Condensed financial information of this subsidiaryat May 13, 2004, and for the period from January 1, 2004 to May 13, 2004, andat December 31, 2003, and for the year then ended, all expressed in Mexicanpesos of purchasing power of December 31, 2004, is summarized below: 

 
| ** **                    | ** ** | **May 13,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------|------------|------------------|------------|
| ** **                    | ** ** | **2004**    | ** ** | **2003**         | ** ** |
|                          |       |        |       |             |       |
| **Condensed balance sheets:** |       |        |       |             |       |
| Current assets                |       | Ps.         | 49,652     |             | Ps.        | 39,486 |   |
| Deferred taxes                |       | 13          |       | 13               |       |
| Current liabilities           |       | (423        | )          | (552             | )          |
|                          |       |        |       |             |       |
| Stockholders ́ equity     |       | Ps.         | 49,242     |             | Ps.        | 38,947 |   |

 
| ** **                               | ** ** | **For the period** | ** ** | **For the year**      | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **January 1 to**   | ** ** | **ended**             | ** ** |
| ** **                               | ** ** | **May 13, 2004**   | ** ** | **December 31, 2003** | ** ** |
|                                     |       |               |       |                  |       |
| **Condensed statements of  operations:** |       |               |       |                  |       |
| Cost and expenses                        |       | Ps.                | (400       | )                     | Ps.        | (416 | ) |
| Income tax expense                       |       | —             |       | 13                    |       |
|                                     |       |               |       |                  |       |
| Net loss                                 |       | Ps.                | (400       | )                     | Ps.        | (403 | ) |

 

e.               ***Comprehensive income***- Represents changes in stockholders’ equity duringthe year, for concepts other than distributions and activity in contributedcommon stock, and is comprised of the net income of the year, plus othercomprehensive income (loss) items of the same period, which are presenteddirectly in stockholders’ equity without affecting the consolidated statementsof income. In 2004, other comprehensive income consists of the gain resulting from the merger mentionedin Note 2.c. In 2003, there were no other comprehensive income (loss) items.

 

**3.****                                     ****Summaryof significant accounting policies**

** **

The accounting policies followed by the Company are inconformity with Mexican GAAP, which require that management make certainestimates and use certain assumptions that affect the amounts reported in theconsolidated financial statements and the accompanying notes. Although theseestimates are based on management’s best knowledge of current events, actualresults may differ. The significant accounting policies of the Company are asfollows:

 

F-10

----

 

a.               ***Recognition of the effects of inflation***- The Companyrestates its consolidated financial statements to Mexican peso purchasing poweras of the most recent balance sheet date presented. Accordingly, theconsolidated financial statements of the prior years have been restated toMexican pesos of purchasing power of December 31, 2004 and, therefore, differfrom those originally reported in the prior year.

 

b.              ***Temporary investments*** - Temporaryinvestments representing cash equivalents are stated at the lower ofacquisition cost plus accrued yields, or estimated net realizable value. 

 

c.               ***Inventoriesand costs of sales*** - Finished construction, construction-in-process andland for development are recorded at acquisition cost and restated using theNational Consumer Price Index (NCPI). Cost of sales is also restated byapplying such index.

 

d.              ***Property and equipment*** - Property and equipmentare initially 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:

 
| ** **                     | ** ** | **Years** | ** ** |
|--------------------------------|------------|-----------|------------|
| Buildings                      |       | 20        |       |
| Machinery and equipment        |       | 4 to 10   |       |
| Transportation equipment       |       | 4         |       |
| Computers                      |       | 4         |       |
| Office furniture and equipment |       | 10        |       |
| Communication equipment        |       | 4         |       |
| Air transportation equipment   |       | 10        |       |

 

e.               ***Impairmentof long-lived assets in use*** - The Company reviews the carrying amounts of long-livedassets in use when an impairment indicator suggests that such amounts might notbe recoverable, considering the greater of the present value of future net cashflows using appropriate discount rate, or the net sales price upon disposal.Impairment is recorded when the carrying amounts exceed the greater of theamounts mentioned above. The impairment indicators considered for thesepurposes are, among others, the operating losses or negative cash flows in theperiod if they are combined with a history or projection of losses,depreciation and amortization charged to results, which in percentage terms inrelation to revenues are substantially higher than that of previous years,obsolescence, reduction in the demand for the products manufactured, competitionand other legal and economic factors. 

 

f.                 ***Employeeretirement obligations*** - Statutory seniority premiums are recognized ascosts over employee years of service and are calculated by independentactuaries using the projected unit credit method at net discount rates.Severance cost is charged to results when the liability is determined to bepayable. Due to the low level of seniority for the majority of the Company’semployees, the liability for employee retirement obligations is not significantat December 31, 2004 or 2003.

 

g.              ***Provisions*** - Provisions arerecognized for obligations that result from a past event, that are probable toresult in the use of economic resources and that can be reasonably estimated. 

 

h.              ***Warranties*** - The Companyprovides product warranties against manufacturing defects for periods rangingfrom two to four years. Provisions for estimated expenses related to suchproduct warranties are recorded at the time the product is sold, basedprimarily on the warranty costs incurred during the last three years. (Theamount is recorded at its present value when the effect of the discount issignificant).

 

i.                  ***Incometax, tax on assets and employee statutory profit sharing*** - Income tax (ISR)and employee statutory profit sharing (PTU) are recorded in results of the yearin which they are incurred.  Deferredincome tax assets and liabilities are recognized for temporary differencesresulting from comparing the book and tax values of assets and liabilities plusany future benefits from tax loss carryforwards. Deferred ISR assets arereduced by any benefits about which there is uncertainty as to theirrealizability. Deferred PTU is derived from temporary differences between theaccounting result and income for PTU purposes and is recognized only when itcan be reasonably assumed that they will generate a liability or benefit, andthere is no indication that circumstances will change in such a way that theliabilities will not be paid or benefits will not be realized. 

 

The tax on assets paid that is expected to berecoverable is recorded as an advance payment of ISR and is presented in thebalance sheet decreasing the deferred ISR liability.

 

F-11

----

 

j.                  ***Foreigncurrency balances and transactions*** - Foreign currency transactions are recordedat the applicable exchange rate in effect at the transaction date. Monetaryassets and liabilities denominated in foreign currency are translated intoMexican pesos at the applicable exchange rate in effect at the balance sheetdate. Exchange fluctuations are recorded as a component of net comprehensivefinancing cost (income) in the consolidated statements of income.

 

k.               ***Excessin restated stockholders’ equity*** - Excessin restated stockholders’ equity represents the accumulated monetary positionresult through the initial restatement of the consolidated financial statementsand the increase in the restated value of certain nonmonetary assets aboveinflation.

 

l.                  ***Revenueand cost recognition*** - Revenues from the Company’s activities as adeveloper are recorded pursuant to the percentage-of-completion method,measured by the percentage of actual costs incurred to total estimated costsfor each development and each project. Under this method, the estimated revenue for each development andproject is multiplied by such percentage to determine the amount of revenue tobe recognized. The Company begins applying the percentage-of-completion methodwhen the following conditions have been met:

 

•                  The Companyestablishes that the homebuyer will obtain the required financing from themortgage lender;

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

•                  The homebuyer has signed a purchase agreement; and

•                  The homebuyer has made a down payment, where downpayments are required.

 

m.            ***Monetary position loss*** - Monetary positionresult, which represents the erosion of purchasing power of monetary itemscaused by inflation, is calculated by applying NCPI factors to monthly net monetaryposition. Losses result from maintaining a net monetary asset position.

 

n.              ***Earnings per share*** - Earnings per shareis calculated by dividing net income of majorityinterest by the weighted average number of shares outstanding during theyear.  The Company does not have anydilutive securities; therefore, basic and diluted earningsper share is the same. 

 

**4.****                                    ****Cashand temporary investments**

** **

Cash and temporaryinvestments consist of the following at December 31:

** **
| ** **            | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                  |       | Ps.        | 289,516    |       | Ps.        | 2,259 |   |
| Temporary investments |       | 221,534    |       | 217,852    |       |
|                  |       |       |       |       |       |
|                  |       | Ps.        | 511,050    |       | Ps.        | 220,111 |   |

** **

**5.****                                    ****Tradeaccounts receivable - net**

** **

Trade accounts receivableconsist of the following at December 31:

** **
| ** **                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Due from customers                             |       | Ps.        | 608,921    |       | Ps.        | 486,792 |   |
| Unbilled revenues on  developments in progress |       | 2,450,820  |       | 1,240,604  |       |
| Services                                       |       | 27,569     |       | 17,721     |       |
|                                           |       | 3,087,310  |       | 1,745,117  |       |
| Allowance for doubtful  accounts               |       | (11,737    | )          | (6,419     | )          |
|                                           |       | 3,075,573  |       | 1,738,698  |       |
| Other debtors                                  |       | 32,708     |       | 49,983     |       |
| Recoverable value-added taxes                  |       | 81,224     |       | 55,896     |       |
|                                           |       | 3,189,505  |       | 1,844,577  |       |
| Trade accounts receivable long-term  (Note 9)  |       | (19,560    | )          | —     |       |
|                                           |       |       |       |       |       |
|                                           |       | Ps.        | 3,169,945  |       | Ps.        | 1,844,577 |   |

 

F-12

----

 

Unbilled revenues on developments in progress******represent revenuesrecognized on costs incurred, in accordance with the percentage-of-completionmethod, which have not yet been billed.

 

**6.****                                    ****Inventories**

** **

Inventories consist of thefollowing at December 31:

 
| ** **                                      | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                            |       |      |       |      |       |
| Land held for future  developments              |       | Ps.       | 1,636,004  |      | Ps.        | 894,756 |   |
| Construction-in-process                         |       | 650,582   |       | 254,692   |       |
| Finished construction                           |       | 3,158     |       | 2,166     |       |
| Construction materials                          |       | 60,432    |       | 31,912    |       |
| Merchandise-in-transit                          |       | 1,735     |       | 11,181    |       |
| Advances to suppliers                           |       | 236,913   |       | 59,667    |       |
|                                            |       | 2,588,824 |       | 1,254,374 |       |
| Land held for future  developments - noncurrent |       | (503,920  | )          | (239,885  | )          |
|                                            |       |      |       |      |       |
|                                            |       | Ps.       | 2,084,904  |      | Ps.        | 1,014,489 |   |

 

At December 31, 2004 and 2003, construction in processand land held for future development for Ps.173,334 and Ps.66,337,respectively, have been pledged as collateral for the Company’s notes payable(see Note 10).

 

The Company’s policy is to locate and acquire landeach year, classifying land currently being developed and land planned fordevelopment within one year as a part of current assets, and classifying allremaining land as noncurrent assets.

 

**7.****                                    ****Othercurrent assets**

** **

Other current assets consistof the following at December 31:

** **
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Sales commissions            |       | Ps.      | 60,382     |     | Ps.        | 14,060 |   |
| Prepaid expenses             |       | 18,172   |       | 13,026   |       |
| Insurance and bond contracts |       | 19,312   |       | 236      |       |
| Prepaid interest             |       | 4,146    |       | 2,789    |       |
| Other                        |       | 2,193    |       | —   |       |
|                         |       |     |       |     |       |
|                         |       | Ps.      | 104,205    |     | Ps.        | 30,111 |   |

** **

**8.****                                    ****Propertyand equipment - net**

** **

Property and equipment consistof the following at December 31:

** **
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Buildings                      |       | Ps.      | 15,628     |     | Ps.        | 10,190 |   |
| Machinery and equipment        |       | 149,001  |       | 32,036   |       |
| Transportation equipment       |       | 37,159   |       | 23,248   |       |
| Air transportation equipment   |       | 33,899   |       | —   |       |
| Office furniture and equipment |       | 14,953   |       | 6,341    |       |
| Computers                      |       | 23,516   |       | 15,176   |       |
| Communication equipment        |       | 6,957    |       | 2,030    |       |
| Construction-in-process        |       | 900      |       | —   |       |
|                           |       | 282,013  |       | 89,021   |       |
| Accumulated depreciation       |       | (57,949  | )          | (36,765  | )          |
|                           |       | 224,064  |       | 52,256   |       |
| Land                           |       | 27,327   |       | 4,996    |       |
|                           |       |     |       |     |       |
|                           |       | Ps.      | 251,391    |     | Ps.        | 57,252 |   |

 

F-13

----

 

**9.****                                    ****Otherassets**

** **

Other assets consist of thefollowing at December 31:

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Accounts receivable due from  Proyectos y     |       |     |       |     |       |
| Servicios Alce Blanco, S. A. de C. V.         |       | Ps.      | 46,476     |     | Ps.        | — |   |
| Long-term trade accounts  receivable (Note 5) |       | 19,560   |       | —   |       |
| Other accounts receivable                     |       | 18,580   |       | 9,959    |       |
|                                          |       |     |       |     |       |
|                                          |       | Ps.      | 84,616     |     | Ps.        | 9,959 |   |

 

**10.****                             ****Notespayable to financial institutions**

** **

Notes payable to financialinstitutions consist of the following at December 31:

** **
| ** **                                                                                                                                                                          | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Notes payable to related  party financial institutions are as follow:**                                                                                                           |       |       |       |       |       |
|                                                                                                                                                                                |       |       |       |       |       |
| **UDI Denominated Notes Payable**                                                                                                                                                   |       |       |       |       |       |
|                                                                                                                                                                                |       |       |       |       |       |
| **Hipotecaria Crédito y Casa, S.A. de C.V.**                                                                                                                                   |       |       |       |       |       |
| Note payable bearing interest  at 11.2%                                                                                                                                             |       | Ps.        | —     |       | Ps.        | 25,800 |   |
|                                                                                                                                                                                |       |       |       |       |       |
| **Mexican Peso Denominated Notes Payable**                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Hipotecaria Crédito y Casa, S.A. de C.V.**                                                                                                                                   |       |       |       |       |       |
| Notes payable bearing interest  ranging from the Mexican Government Treasury Securities Rate (Cetes) plus 6%  to the Mexican Interbank Rate (TIIE) plus 5.5%, prepaid in July 2004. |       | —     |       | 94,154     |       |
| ** **                                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Crédito Inmobiliario, S.A. de C.V.**                                                                                                                                         |       |       |       |       |       |
| Note payable bearing interest  at TIIE plus 5.7%, prepaid in July 2004.                                                                                                             |       | —     |       | 24,295     |       |
|                                                                                                                                                                                |       |       |       |       |       |
| Total                                                                                                                                                                               |       | Ps.        | —     |       | Ps.        | 144,249 |   |
|                                                                                                                                                                                |       |       |       |       |       |
| **Notes payable to other  financial institutions are as follows:**                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mexican Peso Denominated Notes Payable**                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **GMAC Hipotecaria, S.A. de C.V.**                                                                                                                                                  |       |       |       |       |       |
| Term loan secured by land for  development, payable on June 15, 2006, bearing interest at TIIE plus 2.5%.                                                                           |       | Ps.        | 40,417     |       | Ps.        | — |   |
|                                                                                                                                                                                |       |       |       |       |       |
| Term loan secured by land for  development, payable on April 15, 2006, bearing interest at TIIE plus 2.5%.                                                                          |       | 72,472     |       | —     |       |
|                                                                                                                                                                                |       |       |       |       |       |
| Term loan secured by land for  development, payable on June 25, 2006, bearing interest at TIIE plus 2.5%.                                                                           |       | 28,207     |       | —     |       |
|                                                                                                                                                                                |       |       |       |       |       |
| **BBVA Bancomer, S.A.**                                                                                                                                                             |       |       |       |       |       |
| Notes payable in 2004, bearing  interest at TIIE plus 3.0%.                                                                                                                         |       | —     |       | 25,967     |       |
|                                                                                                                                                                                |       |       |       |       |       |

 

F-14

----

 
| ** **                                                                                              | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                    |       |       |       |       |       |
| **HSBC México, S.A.**                                                                              |       |       |       |       |       |
| Notes payable in 2004, bearing  interest at TIIE plus 4.75%.                                            |       | —     |       | 13,680     |       |
|                                                                                                    |       |       |       |       |       |
| **IXE Banco, S.A.**                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Notes payable in 2004, bearing  interest at TIIE plus 3.5%.                                             |       | —     |       | 35,516     |       |
|                                                                                                    |       |       |       |       |       |
| **Commercial paper placed through:**                                                                    |       |       |       |       |       |
| **IXE Casa de Bolsa, S.A. de C.V.**                                                                     |       |       |       |       |       |
| One year note issued on May  28, 2003, bearing interest at TIIE plus 3.25%                              |       | —     |       | 126,279    |       |
|                                                                                                    |       |       |       |       |       |
| Note renewable annually issued  on November 14, 2004, bearing interest at TIIE plus 3.25%.              |       | 114,900    |       | 136,802    |       |
|                                                                                                    |       |       |       |       |       |
| **Multivalores Casa de Bolsa, S.A. de C.V.**                                                            |       |       |       |       |       |
| Note renewable annually issued  on December 19, 2004, bearing interest at TIIE plus 2.7%.               |       | 250,000    |       | 189,420    |       |
|                                                                                                    |       |       |       |       |       |
| **Capital lease obligations:**                                                                          |       |       |       |       |       |
| **Paccar Arrendadora Financiera, S.A. de C.V**                                                          |       |       |       |       |       |
| Capital lease obligations for  equipment with a net book value of Ps.11,591,  payable on July 1, 2006.  |       | 10,664     |       | —     |       |
|                                                                                                    |       |       |       |       |       |
| **Arrendadora Financiera Navistar, S.A. de  C.V.**                                                      |       |       |       |       |       |
| Capital lease obligations for  equipment with a net book value of Ps.23,603,  payable on July 10, 2006. |       | 24,447     |       | —     |       |
|                                                                                                    |       |       |       |       |       |
| Capital lease obligations for  equipment with a net book value of Ps.15,473,  payable on July 10, 2006. |       | 16,027     |       | —     |       |
|                                                                                                    |       | 557,134    |       | 527,664    |       |
| Less current portion                                                                                    |       | (397,042   | )          | (527,664   | )          |
|                                                                                                    |       | 160,092    |       |       |       |
| Land purchases - long term  (See Note 11)                                                               |       | 20,086     |       | —     |       |
|                                                                                                    |       |       |       |       |       |
|                                                                                                    |       | Ps.        | 180,178    |       | Ps.        | — |   |
|                                                                                                         |            |            |            |            |            |  |  |

** **

As of December 31, 2004 and 2003 the Cetes interestrate was 8.75% and 6.04%, respectively, and the TIIE interest rate was 8.95%,6.25%, respectively.

 

As of December 31, 2004, 2003 the UDI exchange valuewas Ps.3.534716 and Ps.3.352003, respectively.

 

**11.****                             ****Tradeaccounts payable**

** **

Trade accounts payableconsist of the following at December 31:

** **
| ** **                                | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
|                                      |       |       |       |       |       |
| Suppliers                                 |       | Ps.        | 920,114    |       | Ps.        | 443,025 |   |
| Land purchases                            |       | 750,505    |       | 541,082    |       |
| Other                                     |       | 8,108      |       | 20,003     |       |
|                                      |       | 1,678,727  |       | 1,004,110  |       |
| Less current portion                      |       | (1,658,641 | )          | (1,004,110 | )          |
|                                      |       |       |       |       |       |
| Land purchases - long term  (See Note 10) |       | Ps.        | 20,086     |       | Ps.        | — |   |

 

F-15

----

 

**12.****                             ****Stockholders’equity**

 
| ** **        | ** ** | **Number of shares** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------|------------|----------------------|------------|-------------|------------|------------|------------|
| ** **        | ** ** | **2004**             | ** ** | **2003**    | ** ** | **2004**   | ** ** | **2003** | ** ** |
| Fixed capital:    |       |                 |       |        |       |       |       |   |   |
| Series B          |       | —               |       | 100,000     |       | Ps.        | —     |   | Ps. | 50 |   |
| Single series     |       | 313,856,490          |       | —      |       | 166,636    |       | — |   |
|              |       |                 |       |        |       |       |       |   |   |
| Variable capital: |       |                 |       |        |       |       |       |   |   |
| Series B          |       | —               |       | 248,184,817 |       | —     |       | 124,092 |   |
|              |       |                 |       |        |       |       |       |   |   |
| Total             |       | 313,856,490          |       | 248,284,817 |       | Ps.        | 166,636    |   | Ps. | 124,142 |   |

 
| ** **                                          | ** ** | **Par**   | ** ** | **Restatement** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|-----------------|------------|------------|------------|
| ** **                                          | ** ** | **Value** | ** ** | **Effect**      | ** ** | **Total**  | ** ** |
|                                                |       |      |       |            |       |       |       |
| Common stock                                        |       | Ps.       | 166,636    |            | Ps.        | 50,447     |       | Ps. | 217,083 |   |
| Additional paid-in capital                          |       | 2,088,284 |       | 139,970         |       | 2,228,254  |       |
| Retained earnings                                   |       | 1,093,314 |       | 18,323          |       | 1,111,637  |       |
| Excess in restated  stockholders’ equity       |       | —    |       | 310,635         |       | 310,635    |       |
| Cumulative initial effect of  deferred income taxes |       | (116,956  | )          | (24,476         | )          | (141,432   | )          |
|                                                |       |      |       |            |       |       |       |
|                                                |       | Ps.       | 3,231,278  |            | Ps.        | 494,899    |       | Ps. | 3,726,177 |   |

 

a.               At a stockholders’ordinary general meeting held on June 1, 2004, among others, resolutions wereapproved to convert the 256,666,490 shares of series “B”, sub series B1, B2 andB3, representing the Company’s variable capital, currently outstanding, for thesame number of ordinary, nominative shares, at no par value, representing theCompany’s fixed capital without right of withdrawal, all of which belong to thesame series; increase fixed capital without right of withdrawal by issuing64,220,000 ordinary, nominative shares at no par value, which may be freelysubscribed, and will be made available in a placement through a primaryoffering of shares and ADR’S issued based on common stock shares;

 

At the same time, aresolution was approved whereby the Company’s Board of Directors will beempowered to determine the amount of the Company’s common stock as a result ofthe offering, and then make the respective amendments to the corporate bylawsand the resulting cancellation of any shares issued, which were not placedamong public investors.

 

b.              A meeting of theBoard of Directors of Desarrolladora Homex, S.A. de C. V. approved aresolution, among others, to increase common stock by Ps.39,466 (Ps.38,258historical pesos) to the amount of Ps.166,636, which is represented by313,856,490 shares.  Consequently, theboard approved the cancellation of 7,130,000 shares, which were issued by thestockholders’ ordinary and extraordinary meeting held on June 1, 2004, whichwere not available for subscription in the public offering.  Furthermore, it was agreed to modify thefirst paragraph of article six of the corporate bylaws to reflect thefollowing:

 

Article Six. Common stock is variable.  Fixed capital without right of withdrawal isPs.166,636 and will be represented by 313,856,490ordinary, nominative shares, at no par value, fully subscribed and paid in, ofa single series ( ̈single series ̈).  Thevariable portion of common stock is unlimited and will be represented byordinary, nominative shares at no par value, of the single series. Except forthe right of withdrawal to which the holders of shares representing thevariable part of common stock are entitled, all common stock shares confer thesame rights and obligations.

 

c.               At a meeting of theBoard of Directors held on July 22, 2004, it was agreed that the total numberof the Company’s outstanding common stock shares after the public offering is313,856,490 shares, and a resolution was approved to increase common stock bythe amount resulting from decreasing the total proceeds from the placement bythe expenses incurred in relation to the public offering, and the amountapplicable to additional paid in capital.

 

F-16

----

 

d.              Pursuant to a resolution of the generalordinary stockholders’ meeting on May 26, 2004, variable common stock wasincreased by 8,481,673 no-par value SeriesB, Sub Series B1 shares for Ps.4,369 (Ps. 4,236 historical pesos) through cashcontributions. Shares were paid at Ps. 0.49942646 each.

 

e.               Pursuant to a resolution of the generalordinary stockholders’ meeting on August 15, 2003, variable common stock wasincreased by 10,924,532 no-par value SeriesB, sub series B1 shares for Ps.5,883, (Ps. 5,462 historical pesos) through cashcontributions. Shares were paid at U.S.$ 0.503454each, of which Ps. 0.50 per share was applied to common stock and Ps.58,503(Ps.54,319 historical pesos) was applied to additional paid in capital.

 

f.                 Retained earnings includes the statutory legal reserve. The General CorporateLaw requires that at least 5% of net income of the year be transferred to thelegal reserve until the reserve equals 20% of capital stock at par value(historical pesos). The legal reserve may be capitalized but may not bedistributed unless the entity is dissolved. The legal reserve must bereplenished if it is reduced for any reason. At December 31, 2004 and 2003, thelegal reserve, in historical pesos, was Ps.19,719 andPs.3,603, respectively.

 

g.              Stockholders’ equity,except restated paid-in capital and tax retained earnings, will be subject toincome tax at the rate in effect when the dividend is distributed. In 2004, theISR rate was 33%; it will decrease to 30% in 2005, and subsequently onepercentage point each year, until reaching 28% in 2007. Any tax paid on suchdistribution, may be credited against the income tax payable of the year, inwhich the tax on the dividend is paid and the two fiscal years following suchpayment.

 

h.              The balances of thestockholders’ equity tax accounts as of December 31 are:

 
| ** **                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Contributed capital account |       | Ps.      | 2,518,635  |     | Ps.        | 775,758 |   |
|                             |            |          |            |          |            |  |  |

 

**13.****                             ****Foreign currency balances andtransactions**

 

a.               At December 31, the foreign currency monetary position is as follows:

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| **Thousands of U.S. dollars:**   |       |     |       |     |       |
| Monetary assets                  |       | $        | 1,458      |     | $          | 93 |   |
| Monetary liabilities             |       | (10,623  | )          | (6,810   | )          |
|                             |       |     |       |     |       |
| Monetary liability position, net |       | $        | (9,165     | )        | $          | (6,717 | ) |
|                             |       |     |       |     |       |
| Equivalent in Mexican pesos      |       | $        | (102,190   | )        | $          | (75,501 | ) |

 

b.              Nonmonetary assets of foreign origin atDecember 31, 2004 are as follows:

 
| ** **                   | ** ** | ** **   | ** ** | **Foreign**     | ** ** | **Mexican**    | ** ** |
|------------------------------|------------|--------------|------------|-----------------|------------|----------------|------------|
| ** **                   | ** ** | **Currency** | ** ** | **(Thousands)** | ** ** | **Equivalent** | ** ** |
|                         |       |         |       |            |       |           |       |
| Air transportation equipment |       | U.S. dollars |       | 3,040           |       | 33,899         |       |

 

c.               The exchange rate in effect at the dates of thebalance sheets and the issuance of these financial statements, were as follows:

 
| ** ** | ** ** | **December 31,** | ** ** | **April 6,** | ** ** |
|------------|------------|------------------|------------|--------------|------------|
| ** ** | ** ** | **2004**         | ** ** | **2003**     | ** ** | **2005** | ** ** |
|       |       |             |       |         |       |   |   |
| Dollar     |       | 11.15            |       | 11.24        |       | 11.25 |   |

 

F-17

----

 

**14.****                             ****Transactionswith related parties**

 

Transactions with related parties (as a result ofcommon shareholders), carried out in the ordinary course of business, were asfollows:

 
| ** **       | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense |       | Ps.        | 6,010      |       | Ps.        | 16,993     |       | Ps. | 15,861 |   |
| Services paid(1) |       | 47,049     |       | 50,618     |       | 31,686     |       |
|                  |            |            |            |            |            |            |            |  |  |  |

 

----

(1)          The Company is a party to an administrativeservice agreement with two entities whose principal owners are officers of theCompany. 

 

**15.****                             ****Sellingand administrative expenses**

 

Selling and administrativeexpenses are comprised of the following for the years ended December 31:

 
| ** **     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------|------------|------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling        |       | Ps.        | 233,580    |       | Ps.        | 180,367    |       | Ps. | 101,021 |   |
| Administrative |       | 199,760    |       | 86,315     |       | 66,522     |       |
|           |       |       |       |       |       |       |       |
|           |       | Ps.        | 433,340    |       | Ps.        | 266,682    |       | Ps. | 167,543 |   |

 

**16.****                             ****Otherincome (expense) - net**

 

Other income (expense) iscomprised of the following for the years ended December 31:

 
| ** **        | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Recovery of taxes |       | Ps.        | 34,611     |       | Ps.        | 73,286     |       | Ps. | 2,450 |   |
| Other income      |       | 8,416      |       | 4,552      |       | (4,216     | )          |
|              |       |       |       |       |       |       |       |
|              |       | Ps.        | 43,027     |       | Ps.        | 77,838     |       | Ps. | (1,766 | ) |

 

**17.****                             ****Interestexpense**

 

Interest expense iscomprised of the following for the years ended December 31:

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |     |       |
| Interest expense                 |       | Ps.      | 101,184    |     | Ps.        | 70,711   |       | Ps. | 81,674 |   |
| Commissions and financing  costs |       | 31,007   |       | 47,011   |       | 50,163   |       |
|                             |       |     |       |     |       |     |       |
|                             |       | Ps.      | 132,191    |     | Ps.        | 117,722  |       | Ps. | 131,837 |   |

 

**18.****                             ****Incometaxes, tax on assets and employee statutory profit sharing**

 

In accordance with Mexican tax law, the Company issubject to income tax (ISR) and tax on assets (IMPAC), which take intoconsideration the taxable and deductible effects of inflation. The ISR rate was33% in 2004 and 34% in 2003. IMPAC is calculated by applying 1.8% on the netaverage of the majority of restated assets less certain liabilities and ispayable only to the extent that it exceeds ISR payable for the same period; anyrequired payment of IMPAC is creditable against the excess of ISR over IMPAC ofthe following ten years.

 

On December 1, 2004, certain amendments to the ISR andIMPAC Laws were enacted and are effective as of 2005.  The most significant amendments were asfollows: a) the ISR rate was reduced to 30% in 2005, 29% in 2006, and 28% as of2007 and thereafter; (b) for ISR purposes, cost of sales will be deductedinstead of inventory purchases in the period; c) companies may elect in 2005 toratably increase taxable income over a period from four to 12 years by the taxvalue of inventories on hand as of December 31, 2004 determined in conformitywith the respective tax rules, which include deducting any previous tax basis of inventories and any unamortized taxloss carryforwards, and the tax basis of such inventories may be deducted assold; d) as of 2006, paid employee statutory profit sharing will be fully deductiblefor ISR purposes; e) bank liabilities and liabilities with foreign entities arenow included in the determination of the IMPAC taxable base.

 

F-18

----

 

a.               ISR and PTU consist of the following for the years ended December31:

 
| ** **                                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ISR:                                                              |       |     |       |     |       |     |       |
| Current                                                           |       | Ps.      | 2,333      |     | Ps.        | 224      |       | Ps. | 3,335 |   |
| Deferred                                                          |       | 393,272  |       | 182,552  |       | 50,043   |       |
| Effect of change in statutory  rate on deferred ISR               |       | (56,069  | )          | —   |       | —   |       |
| Change in valuation allowance  for recoverable tax on assets paid |       | —   |       | 538      |       | 235      |       |
|                                                              |       |     |       |     |       |     |       |
|                                                              |       | Ps.      | 339,536    |     | Ps.        | 183,314  |       | Ps. | 53,613 |   |
|                                                              |       |     |       |     |       |     |       |
| PTU:                                                              |       |     |       |     |       |     |       |
| Current                                                           |       | Ps.      | 1,551      |     | Ps.        | 276      |       | 1,424 |   |
| Deferred                                                          |       | 6,969    |       | —   |       | 139      |       |
|                                                              |       |     |       |     |       |     |       |
|                                                              |       | Ps.      | 8,520      |     | Ps.        | 276      |       | Ps. | 1,563 |   |

 

To determine deferred ISR at December 31, 2004, theCompany applied the different tax rates that will be in effect beginning in2005 to temporary differences according to their estimated dates of reversal.The result derived from applying the different tax rates is shown in the tablebelow under the effect of change in statutory rate on deferred ISR.

 

b.              The reconciliation of the statutory and effective ISR ratesexpressed as a percentage of income before ISR and PTU for the years endedDecember 31, 2004, 2003 and 2002 is:

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
|                                                |       |     |       |     |       |     |       |
| Statutory rate                                      |       | 33       |       | 34       |       | 35       |       |
| Add (less) effect of permanent  differences mainly: |       |     |       |     |       |     |       |
| Nondeductible expenses                              |       | 1        |       | 1        |       | 3        |       |
| Difference between book and  tax inflation effects  |       | 4        |       | 1        |       | 25       |       |
| Effect of change in statutory  rate on deferred ISR |       | (6       | )          | —   |       | —   |       |
|                                                |       |     |       |     |       |     |       |
| Effective rate                                      |       | 32       |       | 36       |       | 63       |       |

 

c.               At December 31, the main items comprising the asset(liability) balance of deferred ISR and PTU are:

 
| ** **                            | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
|                                  |       |       |       |     |       |
| Deferred ISR asset:                   |       |       |       |     |       |
| Effect of tax loss  carryforwards     |       | Ps.        | 582,065    |     | Ps.        | 185,510 |   |
| Deferred PTU liability                |       | 2,169      |       | —   |       |
| Accrued liabilities                   |       | 31,651     |       | 37,085   |       |
| Other, net                            |       | 4,265      |       | 2,011    |       |
| Deferred ISR asset                    |       | 620,150    |       | 224,606  |       |
|                                  |       |       |       |     |       |
| Deferred ISR liability:               |       |       |       |     |       |
| Trade accounts receivable             |       | (735,246   | )          | (409,399 | )          |
| Inventories                           |       | (504,850   | )          | (170,497 | )          |
| Prepaid expenses                      |       | (25,346    | )          | (10,286  | )          |
| Deferred ISR liability                |       | (1,265,442 | )          | (590,182 | )          |
|                                  |       |       |       |     |       |
| Recoverable tax on assets paid        |       | 19,380     |       | 10,466   |       |
|                                  |       |       |       |     |       |
| Net long-term deferred ISR  liability |       | (625,912   | )          | (355,110 | )          |
|                                  |       |       |       |     |       |
| Deferred PTU asset (liability)        |       |       |       |     |       |
| Inventory purchases                   |       | (7,232     | )          | 2,116    |       |
| Other, net                            |       | —     |       | (2,392   | )          |
| Net long-term deferred ISR  liability |       | (7,232     | )          | (276     | )          |
|                                  |       |       |       |     |       |
| Total liability                       |       | Ps.        | (633,144   | )        | Ps.        | (355,386 | ) |

 

F-19

----

 

d.                            Tax losscarryforwards and recoverable IMPAC for which the deferred ISR asset andprepaid ISR, respectively, have been recognized can be recovered subject tocertain conditions. Restated amounts as of December 31, 2004 and expirationdates are:

 
| **Year of**    | ** ** | **Tax Loss**       | ** ** | **Recoverable** | ** ** |
|----------------|------------|--------------------|------------|-----------------|------------|
| **Expiration** | ** ** | **Carry forwards** | ** ** | **IMPAC**       | ** ** |
|           |       |               |       |            |       |
| 2005           |       |               |       | Ps.             | 507        |   |
| 2007           |       |               |       | 224             |       |
| 2008           |       |               |       | 512             |       |
| 2009           |       | Ps.                | 226,459    |            | 337        |   |
| 2010           |       | 101,006            |       | 115             |       |
| 2011           |       | 36,049             |       | —          |       |
| 2012           |       | 1,761              |       | 3,220           |       |
| 2013           |       | 115,774            |       | 3,943           |       |
| 2014           |       | 1,461,625          |       | 10,522          |       |
|           |       |               |       |            |       |
|           |       | Ps.                | 1,942,674  |            | Ps.        | 19,380 |   |

 

**19.****                             ****Commitments**

 

a.               The Company hasassisted in obtaining financing from various financial institutions, mainlythrough a factoring arrangement sponsored by Nacional Financiera, S.N.C. (“Nafinsa”).In connection with this arrangement, the Company established AAA-Homex Trust, anon-bank financial intermediary, pursuant to which Nafinsa has granted a lineof credit of Ps.260,000 to the AAA-Homex Trust.  Pursuant to this agreement the AAA-HomexTrust, through the use of the line of credit granted by Nafinsa, financesaccounts payable of the Company (accounts receivable of the Company’s suppliersand distributors).  In accordance withthe agreement the Company is required to deposit in a trust guaranty fund anamount equal to 20% of the total amount of receivables to be financed byNafinsa.  The amount deposited in thetrust guaranty fund as of December 31, 2004 and 2003 was Ps.34,824 and Ps.27,481, respectively.  The Company is also committed to makecontributions to the trust fund for an amount equal to the amounts drawn fromthe lines of credit by the trust.  Suchcontributions would be used to pay Nafinsa in the event that the amounts dueand payable by the trust under the line of credit are not covered by the trust’sassets. The AAA-Homex Trust is a consolidated subsidiary of the Company.

 

In addition to the AAA-Homex Trust,the Company established a supplier factoring agreement with IXE Banco. S.A.,pursuant to which the Company was committed to make contributions to adepository fund to guarantee the fulfillment of the obligations of paymentderived from the supplier factoring agreement. The amount deposited in thedepository fund as of December 31, 2004 and 2003 was Ps.42,931and Ps.35,136, respectively

 

b.              The company leasesoffice space under one year cancelable operating leases, which are renewed onan annual basis. Rent expense was Ps.7,885, Ps.4,962and Ps.10,940 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

**20.****                             ****Contingencies**

 

a.               The Mexican Social Security Institute, in official letter 572/2004addressed to National Banking and Securities Commission, ordered theidentification and total seizure of all the bank accounts of Desarrolladora deCasas del Noroeste, S.A. de C.V. (subsidiary company), which only affects theCompany’s bank account with IXE Bank, which contains a balance of Ps.20,474. Such action was taken to guarantee the liabilitiesassessed during their review, which includes the years 1997 to 2000. TheCompany believes that it has meritorious defenses to the assertion of theclaim. On April 5, 2005 the Company obtained an order to release its bankaccounts.

 

b.              Two subsidiaries ofthe Company have filed for a ruling with the Mexican tax authorities to confirmthat they are exempt from value-added taxes payable in connection with workprovided in order to construct infrastructure projects (such as roads andutility services) for various of the Company’s housing projects, as well asvalue-added taxes derived from the acquisition of developed land.  In addition, the Company applied for a refundin respect of such value-added taxes paid for years 1997 through 2003.  As of the date of the financial statements,the Company has obtained a refund in respect of such taxes paid for the years1997 through 2003 in the amount of approximately Ps.100,000and is currently in the process of obtaining the ruling mentioned in thisparagraph.

 

F-20

----

 

**21.****                             ****Newaccounting principles**

 

In May 2004, the IMCP issued Bulletin B-7, “BusinessAcquisitions” (“B-7”), whose application is mandatory for financial statementsof periods beginning on January 1, 2005, although early adoption isencouraged.  B-7 provides updated rulesfor the accounting treatment of business acquisitions and investments inassociated entities. It establishes, among others; the adoption of the purchasemethod as the only accounting method for business combinations; it eliminatesthe amortization of goodwill, which is now subject to the impairment rules; itestablishes rules for the accounting treatment of asset transfers or shareexchange among entities under common control as well as for the acquisition ofminority interest based on the provisions of Bulletin B-8, “Consolidated andcombined financial statements and valuation of permanent investments in shares”.  Management believes that the adoption of thisnew Bulletin as of January 1, 2005, will not have significant effects on theCompany’s financial position or results of operations.  

 

In April 2004, the IMCP issued Bulletin C-10, “Derivativeinstruments and hedging activities” (“C-10 “), whose application is mandatoryfor financial statements of periods beginning on January 1, 2005, althoughearly adoption is encouraged.  Ingeneral, C-10 establishes that for fair value hedges, any variances in the fairvalue, both of the derivative and the underlying, must be reflected in currentearnings when such variances occur; for cash flow hedges, the effective portionof fair value variances must be recognized in other comprehensive income instockholders’ equity, while the ineffective portion must affect currentearnings. 

 

With respect to derivative financialinstruments, C-10 establishes the conditions that must be met for an instrumentto be considered as such, and revises and adds definitions.  It also includes rules regarding the elementsinvolved in hedging activities, including the formal documentation at the inceptionof each hedge and measurement of its effectiveness during its term, amongothers; C-10 classifies hedges into three categories: a) fair value hedges, b)cash flow hedges and c) foreign currency hedges, and provides specific rules by type ofhedge, for their valuation, recognition, presentation and disclosure. Management believesthat the adoption of this new Bulletin as of January 1, 2005, will not havesignificant effects on the Company’s financial position or results ofoperations.

 

In April 2004, the IMCP issued Amendments toBulletin C-2, “Financial instruments” (“C-2”), whose application is mandatory for financial statements of periods beginning onJanuary 1, 2005, although early adoption is encouraged.  Revised C-2 basically establishes that any variancesin the fair value of financial instruments classified as available for salemust be recognized in other comprehensive income and reclassified to currentearnings upon sale of such instruments; revised C-2 includes the possibility ofmaking transfers among some of the categories under which financial instrumentsare classified, provided that conditions and rules for their accountingrecognition are met.  It also extends theapplicability of impairment rules to financial instruments available for saleand provides more precise rules for their recognition. Management believesthat the adoption of this new Bulletin as of January 1, 2005, will not havesignificant effects on the Company’s financial position or results ofoperations.

 

In January 2004, the IMCP issued revisedBulletin D-3, “Labor obligations” (“D-3”), which replaces the concept ofunforeseen severancepayments that are recognized in earnings of the period in which the paymentdecision is made, with that of “Severance payments at the end of the workrelationship”, defined as payments granted to employees when they concludetheir labor relationship before reaching retirement age, for which thevaluation and disclosure rules applicable to pension and seniority premiumpayments must be followed.

 

Revised D-3 is mandatory as of January 1,2005, but grants the option to immediately recognize in earnings the resultingtransition asset or liability, or to amortize it over the average remaininglabor life of employees. Management believes that the adoption of thisnew Bulletin as of January 1, 2005, will not have significant effects on theCompany’s financial position or results of operations.

 

F-21

----

 

**22.****                              Summary of differences between Mexican GAAP and U.S. GAAP**

 

**The consolidatedfinancial statements of the Company are prepared in accordance with MexicanGAAP, which vary in certain significant respects 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 23.  It shouldbe noted that this reconciliation to U.S. GAAP does not include the reversal ofthe restatement of the financial statements for the effects of inflation asrequired by Bulletin B-10, “Recognition of the Effects of Inflation inFinancial Information”, of Mexican GAAP. The application of this Bulletin represents a comprehensive measure ofthe 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 Mexican and U.S. GAAP.**

 

**The differencesbetween Mexican GAAP and U.S. GAAP included in the reconciliation that affectthe consolidated financial statements of the Company are described as follows:**

 

**a.**                                       Revenue and CostRecognition

 

UnderMexican GAAP, the Company uses the percentage-of-completion method ofaccounting to account for housing project revenues and costs related to housingconstruction, progress towards completion is measured in terms of comparing theactual costs incurred to the estimated total cost of a project.

 

In accordance withU.S.GAAP sales arerecognized when all of the following conditions are met: a sale is consummated,a significant down payment is received, the earnings process is complete andthe collection of any remaining receivables is reasonably assured. All suchconditions are met at the time title passes to the buyer. 

 

Accordingly, areconciling item for the additional revenues and additional costs recognizedunder the percentage-of-completion of accounting under Mexican GAAP is includedin the U.S. GAAP reconciliation of net income and stockholders’ equity.

 

**b.**                                      Recovery ofValue-Added Taxes Paid

** **

Under Mexican GAAPthe Company recognized other income in 2003 for the recovery of value-added taxes paid and expensed by the Company in 2002 in theamount of Ps.18.9 million, since in the opinion of management and its taxadvisors, the future recovery of these amounts was probable.

 

Inaccordance with U.S. GAAP the recovery of such taxes was considered acontingent gain due to the prolonged challenge faced by the Company in settlingthe related tax dispute and was not recorded as income until the cash wasreceived, which occurred during the first quarter of 2004.

 

**c**.                                       Capitalizationof Net Comprehensive Financing Cost

 

UnderMexican GAAP, the capitalization of net comprehensive financing costs(interest, foreign exchange gains and losses and monetary position gains andlosses) incurred to finance investment projects is optional. The Company doesnot capitalize the integral cost of financing for Mexican GAAP reporting.

 

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 theweighted-average interest rate on all outstanding debt to the balance ofconstruction-in-progress and such amount is reduced by the gain on monetaryposition associated with the debt to determine the amount of interest to becapitalized in accordance with U.S. GAAP. 

 

Accordingly,a reconciling item for the capitalization of interest is included in the U.S.GAAP reconciliation of net income and stockholders’ equity, and the effect of interestcapitalized to the cost of inventories is included within operating income forU.S. GAAP purposes. 

 

**d.**                                      Deferred IncomeTaxes and Employee Statutory Profit Sharing

 

F-22

----

 

TheCompany follows SFAS No. 109, “Accounting for Income Taxes”, for U.S. GAAPpurposes, which differs from Mexican GAAP as follows:

 

•                               Under Mexican GAAP theeffects of inflation on the deferred tax balance generated by monetary itemsare recognized in the result on monetary position. Under U.S. GAAP the deferredtax balance is classified as a nonmonetary item. As a result, the consolidatedstatement of operations differs with respect to the presentation of the gain(loss) on monetary position and deferred income tax provision.

 

•                               Under Mexican GAAPdeferred employee statutory profit sharing is calculated considering only thosetemporary differences that arise during the year and which are expected toreverse within a defined period and the effect is recorded as a component ofincome tax expense. For purposes of applying U.S. GAAP the liability isdetermined using a methodology similar to the liability method used in thecalculation of deferred income taxes. Also, for U.S. GAAP purposes, employee statutory profit sharing isclassified as an operating expense.

 

As aresult of the differences related to the recognition of revenue, costs andinterest capitalization as described above, the related deferred income taxpresented under Mexican GAAP is different from the effect calculated in accordancewith U.S. GAAP.

 

Reconciliationof Deferred Income Taxes

 
| ** **                                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred income tax liability  according to Mexican GAAP, net |       | Ps.        | 625,912    |       | Ps.        | 355,110 |   |
| Effect of U.S. GAAP  adjustments:                             |       |       |       |       |       |
| Accounts receivable                                           |       | (735,246   | )          | (409,347   | )          |
| Inventories                                                   |       | 530,158    |       | 320,983    |       |
| Employee profit sharing                                       |       | (2,871     | )          | —     |       |
|                                                          |       |       |       |       |       |
| Deferred income tax liability  according to U.S. GAAP, net    |       | Ps.        | 417,953    |       | Ps.        | 266,746 |   |

 

Deferredincome tax balance sheet classification:

 
| ** **                          | ** ** | **2004**    | ** ** | **2003**       | ** ** |
|-------------------------------------|------------|-------------|------------|----------------|------------|
| ** **                          | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **Current** | ** ** | **Noncurrent** | ** ** |
| ** **                          | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred tax assets                 |       | Ps.         | —     |           | Ps.        | 338,563 |   | Ps. | — |   | Ps. | — |   |
| Deferred tax liability              |       | (756,516    | )          | —         |       | (266,746 | ) | — |   |
| Net deferred tax (liability)  asset |       | Ps.         | (756,516   | )              | Ps.        | 338,563 |   | Ps. | (266,746 | ) | Ps. | — |   |

 

Thechanges in the balance of the deferred income tax liability for the year are asfollows:

 
| ** **                            | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at the beginning of  the year |       | Ps.        | 266,746    |       | Ps.        | 139,756    |       | Ps. | 103,369 |   |
| Provision for the year                |       | 151,207    |       | 126,990    |       | 36,387     |       |
|                                  |       |       |       |       |       |       |       |
| Balance at the end of the year        |       | Ps.        | 417,953    |       | Ps.        | 266,746    |       | Ps. | 139,756 |   |

 

F-23

----

 

Reconciliationof Deferred Employee Profit Sharing

 
| ** **                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred employee profit  sharing liability according to Mexican GAAP |       | Ps.      | 7,232      |     | Ps.        | 276 |   |
| Effect of U.S. GAAP  adjustments:                                     |       |     |       |     |       |
| Accounts receivable                                                   |       | 14,099   |       | 7,892    |       |
| Inventories                                                           |       | —   |       | 4,155    |       |
| Property and equipment                                                |       | —   |       | 32       |       |
| Prepaid expenses                                                      |       | 4,066    |       | 1,292    |       |
| Accounts payable                                                      |       | (8,596   | )          | (10,946  | )          |
| Other                                                                 |       | —   |       | (276     | )          |
| Deferred employee profit  sharing liability according to U.S. GAAP    |       | Ps.      | 16,801     |     | Ps.        | 2,425 |   |

 

Thechanges in the balance of the deferred employee profit sharing liability forthe year are as follows:

 
| ** **                            | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at the beginning of  the year |       | Ps.        | 2,425      |       | Ps.        | 2,246      |       | Ps. | 2,827 |   |
| Provision (benefit) for the  year     |       | 14,376     |       | 179        |       | (581       | )          |
|                                  |       |       |       |       |       |       |       |
| Balance at the end of the year        |       | Ps.        | 16,801     |       | Ps.        | 2,425      |       | Ps. | 2,246 |   |

 

e.               Statementof Cash Flows

 

UnderMexican GAAP, the Company presents a consolidated statement of changes infinancial position in accordance with Bulletin B-12, “Statement of Changes inFinancial Position” (B-12), which identifies the generation and application ofresources by the differences between beginning andending financial statement balances in constant Mexican pesos. B-12 alsorequires that monetary and foreign exchange gains and losses be treated as cashitems for the determination of resources generated by operations.

 

Inaccordance with U.S. GAAP the Company follows the requirements of SFAS No. 95, “Statementof Cash Flows”, excluding the effects of inflation (see Note 23.g.).

 

f.                 ClassificationDifferences

 

UnderMexican GAAP advances for the purchase of land and construction materials arerecorded as part of the cost of real estate inventories.  Under U.S. GAAP such advances are classifiedas prepaid expenses.

 

UnderMexican GAAP, deferred taxes are classified as non-current; U.S. GAAP requiresa current, non-current classification based on the classification of therelated asset or liability.

 

UnderMexican GAAP, amounts due under the Company’s factoring agreements are includedin trade accounts payable; U.S. GAAP requires that such amounts be recorded asa borrowing from the financial intermediary.

 

g.              Merger of entitiesunder common control

 

As described in Note 2, on May 16, 2004, Econoblock, S.A. deC.V. (affiliated company)merged with Desarrolladora de Casas del Noroeste, S.A. de C.V. (subsidiary company) with the latter assuming all the rights andobligations of the merged company.

 

F-24

----

 

As the companies were under common control, the merger was recorded ina manner similar to a pooling-of-interest. As a consequence of the merger, theCompany is required to restate its reconciliation of Mexican GAAP net incomeand equity to U.S. GAAP net income and equity and the presentation of condensedfinancial statements in accordance with U.S. GAAP, as if the merger had takenplace as of the beginning of the earliest period presented.

 

**23.**                     Reconciliation of MexicanGAAP 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

 
| ** **                                                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Majority net income according  to Mexican GAAP                                                 |       | Ps.        | 706,487    |       | Ps.        | 323,537    |       | Ps. | 31,059 |   |
|                                                                                           |       |       |       |       |       |       |       |
| U.S. GAAP adjustments:                                                                         |       |       |       |       |       |       |       |
| Reversal of revenue recognized  under percentage-of-completion method of accounting (Note 22a) |       | (1,367,696 | )          | (187,244   | )          | (139,980   | )          |
| Reversal of cost recognized  under percentage-of-completion method of accounting (Note 22a)    |       | 795,582    |       | 96,239     |       | 97,339     |       |
| Value-added tax recovery (Note  22b)                                                           |       | 18,942     |       | (18,942    | )          | —     |       |
| Capitalization of interest  (Note 22c)                                                         |       | 32,343     |       | (36,753    | )          | (6,389     | )          |
| Deferred employee statutory profit sharing (Note 22d)                                          |       | (7,263     | )          | (180       | )          | 581        |       |
| Effects of inflation on U.S.  GAAP adjustments                                                 |       | 109,601    |       | 43,763     |       | 65,035     |       |
| Total U.S. GAAP adjustments  before tax effects                                                |       | (418,491   | )          | (103,117   | )          | 16,586     |       |
| Tax effects on U.S. GAAP  adjustments                                                          |       | 134,130    |       | 25,871     |       | 16,669     |       |
| Total U.S. GAAP adjustments                                                                    |       | (284,361   | )          | (77,246    | )          | 33,255     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net income according to U.S.  GAAP                                                             |       | Ps.        | 422,126    |       | Ps.        | 246,291    |       | Ps. | 64,314 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Weighted average shares  outstanding (in thousands)                                            |       | 281,997    |       | 241,521    |       | 191,896    |       |
|                                                                                           |       |       |       |       |       |       |       |
| Earnings per share according to U.S. GAAP                                                      |       | Ps.        | 1.50       |       | Ps.        | 1.02       |       | Ps. | 0.34 |   |

 

b.                            Reconciliation ofMajority Stockholders’ Equity

 
| ** **                                                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Majority stockholders’ equity  according to Mexican GAAP                                  |       | Ps.        | 3,726,177  |       | Ps.        | 1,319,206  |       | Ps. | 931,283 |   |
| U.S. GAAP adjustments:                                                                         |       |       |       |       |       |       |       |
| Dilution effect of merger  (Note 22g)                                                          |       | —     |       | —     |       | —     |       |
| Reversal of revenue recognized  under percentage-of-completion method of accounting (Note 22a) |       | (2,450,820 | )          | (1,240,604 | )          | (1,108,558 | )          |
| Reversal of cost recognized  under percentage-of-completion method of accounting (Note 22a)    |       | 1,671,835  |       | 906,421    |       | 766,128    |       |
| Reversal of value-added tax  recovery (Note 22b)                                               |       |       |       | (18,942    | )          |       |       |
| Capitalization of interest  (Note 22c)                                                         |       | 95,357     |       | 66,310     |       | 103,063    |       |
| Deferred employee statutory profit sharing (Note 22d)                                          |       | (9,569     | )          | (2,425     | )          | (2,246     | )          |
| Other                                                                                          |       | (10,593    | )          | —     |       | 31,870     |       |
| Total U.S. GAAP adjustments  before tax effects                                                |       | (703,790   | )          | (289,240   | )          | (209,743   | )          |
| Tax effects on U.S. GAAP  adjustments                                                          |       | 207,960    |       | 88,364     |       | 86,113     |       |
| Total U.S. GAAP adjustments                                                                    |       | (495,830   | )          | (200,876   | )          | (123,630   | )          |
|                                                                                           |       |       |       |       |       |       |       |
| Stockholders’ equity according  to U.S. GAAP                                              |       | Ps.        | 3,230,347  |       | Ps.        | 1,118,330  |       | Ps. | 807,653 |   |

 

F-25

----

 

c.               Reconciliation of Majority ComprehensiveIncome

** **
| ** **                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Majority comprehensive income  according to Mexican GAAP |       | Ps.      | 706,487    |     | Ps.        | 323,537  |       | Ps. | 31,059 |   |
|                                                     |       |     |       |     |       |     |       |
| Net U.S. GAAP adjustments:                               |       |     |       |     |       |     |       |
| Net income                                               |       | (284,361 | )          | (77,246  | )          | 33,255   |       |
|                                                     |       |     |       |     |       |     |       |
| Comprehensive income according  to U.S. GAAP             |       | Ps.      | 422,126    |     | Ps.        | 246,291  |       | Ps. | 64,314 |   |

** **

d.              Condensed balance sheets according to U.S.GAAP

 
| ** **                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                                       |       |       |       |       |       |
| Current assets                                   |       | Ps.        | 5,545,512  |       | Ps.        | 2,845,351 |   |
| Land for development                             |       | 503,920    |       | 236,164    |       |
| Property and equipment                           |       | 251,391    |       | 57,299     |       |
| Other assets                                     |       | 127,547    |       | 37,451     |       |
|                                             |       |       |       |       |       |
| Total assets                                     |       | Ps.        | 6,428,370  |       | Ps.        | 3,176,265 |   |
|                                             |       |       |       |       |       |
| **Liabilities and stockholders’  equity**   |       |       |       |       |       |
| Current liabilities                              |       | 2,957,424  |       | 2,011,919  |       |
| Long term debt                                   |       | 180,178    |       |       |       |
| Minority interest                                |       | 60,421     |       | 46,016     |       |
| Majority stockholders’ equity               |       | 3,230,347  |       | 1,118,330  |       |
|                                             |       |       |       |       |       |
| Total liabilities and  stockholders’ equity |       | Ps.        | 6,428,370  |       | Ps.        | 3,176,265 |   |

** **

e.               Condensed statements of operationsaccording to U.S. GAAP

 
| ** **                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                       |       | Ps.        | 3,945,073  |       | Ps.        | 2,723,777  |       | Ps. | 1,217,654 |   |
| Costs                                                          |       | 2,973,858  |       | 2,089,026  |       | 963,550    |       |
| Gross profit                                                   |       | 971,215    |       | 634,751    |       | 254,104    |       |
| Operating income                                               |       | 522,092    |       | 367,748    |       | 86,188     |       |
| Income before income taxes                                     |       | 636,593    |       | 409,170    |       | 103,232    |       |
| Income taxes                                                   |       | 205,404    |       | 157,577    |       | 37,553     |       |
| Minority interest                                              |       | 9,063      |       | 5,302      |       | 1,365      |       |
| Net income according to U.S.  GAAP                             |       | Ps.        | 422,126    |       | Ps.        | 246,291    |       | Ps. | 64,314 |   |
|                                                           |       |       |       |       |       |       |       |
| Weighted average shares  outstanding (in thousands)            |       | 281,997    |       | 241,521    |       | 191,896    |       |
|                                                           |       |       |       |       |       |       |       |
| Earnings per share according  to U.S. GAAP (basic and diluted) |       | Ps.        | 1.50       |       | Ps.        | 1.02       |       | Ps. | 0.34 |   |

 

F-26

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f.                 Reconciliation ofchanges in stockholders’ equity according to U.S. GAAP

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stockholders’ equity at  beginning of year |       | Ps.        | 1,118,330  |       | Ps.        | 807,653    |       | Ps. | 424,536 |   |
| Net income according to U.S.  GAAP              |       | 422,126    |       | 246,291    |       | 64,314     |       |
| Issuance of common stock                        |       | 1,689,891  |       | 64,386     |       | 318,803    |       |
|                                            |       |       |       |       |       |       |       |
| Stockholders’ equity at end of  year       |       | Ps.        | 3,230,347  |       | Ps.        | 1,118,330  |       | Ps. | 807,653 |   |

** **

g.              Condensed statements of cash flowsaccording to U.S. GAAP

 
| ** **                                           | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                 |       |       |       |     |       |     |       |
| Operating activities:                                |       |       |       |     |       |     |       |
| Consolidated net income                              |       | Ps.        | 446,443    |     | Ps.        | 274,421  |       | Ps. | 38,041 |   |
| Non-cash items:                                      |       |       |       |     |       |     |       |
| Depreciation                                         |       | 22,141     |       | 8,228    |       | 6,286    |       |
| Allowance for doubtful  accounts                     |       | 5,244      |       | 1,439    |       | 1,669    |       |
| Deferred income tax and  statutory profit sharing    |       | 153,384    |       | 127,171  |       | 22,785   |       |
| Working capital investment                           |       | (2,137,670 | )          | (830,949 | )          | (350,955 | )          |
| Recoverable taxes, net                               |       | 28,306     |       | 36,780   |       | 12,559   |       |
| Interest payable                                     |       | 1,244      |       | (799     | )          | 391      |       |
| Net cash flows used in  operating activities         |       | (1,480,908 | )          | (383,709 | )          | (269,224 | )          |
|                                                 |       |       |       |     |       |     |       |
| Investing activities:                                |       |       |       |     |       |     |       |
| Investments in:                                      |       |       |       |     |       |     |       |
| Property and equipment                               |       | (211,125   | )          | (33,477  | )          | (11,086  | )          |
| Other assets                                         |       | (16,807    | )          | (26,124  | )          | —   |       |
| Net cash flows used in  investing activities         |       | (277,932   | )          | (59,601  | )          | (11,086  | )          |
|                                                 |       |       |       |     |       |     |       |
| Financing activities:                                |       |       |       |     |       |     |       |
| Supplier factoring agreement                         |       | 461,842    |       | 251,688  |       | 51,013   |       |
| Notes payable to financial  institutions             |       |       |       |     |       |     |       |
| Proceeds from new borrowings                         |       | 404,416    |       | 460,278  |       | 394,795  |       |
| Payments of notes payable to  financial institutions |       | (348,708   | )          | (182,990 | )          | (502,975 | )          |
| Related parties:                                     |       |       |       |     |       |     |       |
| Loans from related parties                           |       | 30,000     |       | 387,939  |       | 371,212  |       |
| Payments of related party  loans                     |       | (167,076   | )          | (415,292 | )          | (294,911 | )          |
| Proceeds from issuance of  common stock              |       | 1,643,469  |       | 95,109   |       | 283,141  |       |
| Net cash flows from financing  activities            |       | 2,023,943  |       | 596,732  |       | 302,275  |       |
|                                                      |            |            |            |          |            |          |            |  |  |  |

 

F-27

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| ** **                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |     |       |
| Net increase in cash and cash  equivalents              |       | 315,103  |       | 153,422  |       | 21,965   |       |
| Cash and cash equivalents at  the beginning of the year |       | 216,421  |       | 62,999   |       | 41,034   |       |
| Cash and cash equivalents at  the end of the year       |       | Ps.      | 531,524    |     | Ps.        | 216,421  |       | Ps. | 62,999 |   |
|                                                    |       |     |       |     |       |     |       |
| Supplemental cash flow  information:                    |       |     |       |     |       |     |       |
| Interest paid                                           |       | Ps.      | 59,535     |     | Ps.        | 53,181   |       | Ps. | 68,407 |   |
|                                                    |       |     |       |     |       |     |       |
| Income tax and tax on assets  paid                      |       | Ps.      | 3,268      |     | Ps.        | 4,155    |       | Ps. | 4,342 |   |

 

**24.****                    ****Additional U.S. GAAP disclosure information**

** **

**Recently Issued Accounting Standards.**

 

**U.S.GAAP**

** **

InDecember 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.123 (revised 2004), Share-Based Payments or SFAS No. 123R.  This statement eliminates the option to applythe intrinsic value measurement provisions of Accounting Principles Board (APB)Opinion No. 25, Accounting for Stock Issued to Employees to stock compensationawards issued to employees.  Rather, SFASNo. 123R requires companies to measure the cost of employee services receivedin exchange for an award of equity instruments based on the grant-date fairvalue of the award.  That cost will berecognized over the period during which an employee is required to provideservices in exchange for the award—the requisite service period (usually thevesting period).  SFAS No. 123R appliesto all awards granted after the required effective date and to awards modified,repurchased, or cancelled after that date. SFAS No. 123R will be effective for our fiscal year ending December 31,2006.  The Company does not believe theeffect of the future adoption of SFAS No. 123R will have a material impact onits financial position, results of operations or cash flows. 

 

InDecember 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets –an amendment of APB Opinion No. 29 or SFAS No. 153, which amends APB OpinionNo. 29, Accounting for Nonmonetary Transactions to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not have commercialsubstance.  SFAS No. 153 is effective fornonmonetary asset exchanges occurring after January 1, 2006.  The Company does not anticipate that theadoption of this statement will have a material effect on its financialposition, results of operations or cash flows. 

 

In January 2003, the FASB issuedInterpretation No. 46, Consolidation of Variable Interest Entities (FIN46).  In December 2003, FIN 46 wasreplaced by FASB Interpretation No. 46 (revised December 2003), Consolidationof Variable Interest Entities (FIN 46(R)). FIN 46R clarifies the application of Accounting Research Bulletin No.51, Consolidated Financial Statements, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  FIN 46(R) requires anenterprise to consolidate a variable interest entity if that enterprise willabsorb a majority of the entity’s expected losses, is entitled to receive amajority of the entity’s expected residual returns, or both.  For the purpose of analyzing investments inpotential variable interest entities formed after January 31, 2003, the Companyhas applied the provision of FIN 46 and FIN 46(R) as of January 1, 2004.  For the purpose of analyzing potentialvariable interests in variable interest entities previously defined as SpecialPurpose Entities (SPE’s) created before February 1, 2003, the Company hasapplied the provision of FIN 46 and FIN 46(R) for the period beginning January1, 2004.  The Company has also appliedthe provisions of FIN 46 and FIN 46(R) in determining whether the Company holdspotential interests in variable interest entities not previously defined as SPE’sfor the period ending December 31, 2004. The adoption of FIN 46(R) did not have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

F-28

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On January 1, 2004, the Companyadopted SFAS No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity and requires that certain financial instruments be classified asliabilities that were previously considered equity.  The provisions of SFAS No. 150 were effectivefor financial instruments entered into or modified after May 31, 2003.  For pre-existing instruments, the Companyadopted SFAS No. 150 on January 1, 2004. The adoption of SFAS No. 150 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**25.****                    ****Subsequent event**

** **

OnJune 14, 2005, the Company executed the amendment agreement to the sharepurchase agreement dated April 21, 2005, to establish the following clauses:the Company will acquire 184,175 nominative, ordinary shares at no par value,fully subscribed and paid in, representing 53% of the common stock ofControladora Casas Beta, S.A. de C.V. (“Beta”), at an acquisition cost of U.S.$98,428,571. Such acquisition will be followed by a mergerbetween Beta and the Company, with the latter assuming all of the rights andobligations of the merged company. As a result of the merger, the Company willincrease fixed capital through the issuance of 22,013,060 new shares, whichwill be issued to the shareholders of Beta at a ratio of 134.780714 new sharesfor each Beta share. It was also established that the aforementionedtransactions will go into effect once the conditions for the closing arefulfilled.

 

F-29

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**SCHEDULE II VALUATION ANDQUALIFYING ACCOUNTS**

** **

**FOR THE YEARS ENDED DECEMBER31, 2004, 2003 AND 2002**

 
| ** **                       | ** ** | **Beginning** | ** ** | **Additions**  | ** ** | ** **     | ** ** | **Non-cash**    | ** ** | ** **   | ** ** | **Ending**  | ** ** |
|----------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|------------|--------------|------------|-------------|------------|
| ** **                       | ** ** | **Balance**   | ** ** | **Charged to** | ** ** | **Cash**       | ** ** | **Reductions**  | ** ** | ** **   | ** ** | **Balance** | ** ** |
| **Description**                  | ** ** | **Accrual**   | ** ** | **Income**     | ** ** | **Reductions** | ** ** | **(Additions)** | ** ** | **Reversal** | ** ** | **Accrual** | ** ** |
|                             |       |          |       |           |       |           |       |            |       |         |       |        |       |
| Allowance for doubtful  accounts |       |          |       |           |       |           |       |            |       |         |       |        |       |
| 2004                             |       | Ps.           | 6,419      |           | Ps.        | 5,318          |       | Ps.             |       |         | Ps.        |        |       | Ps. |   |   | Ps. | 11,737 |   |
| 2003                             |       | 5,088         |       | 1,331          |       |           |       |            |       |         |       | 6,419       |       |
| 2002                             |       | 3,263         |       | 2,395          |       |           |       | 570             |       |         |       | 5,088       |       |
|                                  |            |               |            |                |            |                |            |                 |            |              |            |             |            |  |  |  |  |  |  |

 

* * * * * *

 

F-30

----