**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
  **Washington,
        DC 20549**
  **FORM
        20-F**
 
 **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 **for
        the year ended December 31, 2005**
  **Commission
        file number 1-12632**
  **Grupo
        Casa Saba, S.A. de C.V.**
 **(Exact
        name of Registrant as specified in its charter)**
  **N/A**
 **(Translation
        of Registrant’s name into English)**
  **Mexico**
 **(Jurisdiction
        of Incorporation or Organization)**
  **Paseo
        de la Reforma, No. 215**
 **Colonia
        Lomas de Chapultepec México, D.F. 11000**
  **México**
 **(Address
        of Principal Executive Offices)**
  **SECURITIES
        REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE
        ACT:**
  **Title
                  of Each Class**
              **Name
                  of Each Exchange**
                **on
                  Which Registered****American
                  Depositary Shares, each representing ten Ordinary Shares, without
                  par
                  value**
              **New
                  York Stock Exchange**
 
 **Ordinary
                  Shares, without par value**
              **New
                  York Stock Exchange**
                **(for
                  listing purposes only)**
 
 **Securities
        registered or to be registered pursuant to Section 12(g) of the Act:
        None**
  **Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act:
        None**
  **The
        number of outstanding shares of each class of capital or common stock as
        of
        December 31,****2005********was:**
 **265,419,360
        Ordinary Shares, without par value.  Indicate by check mark if the
        registrant is a well-known seasoned issuer, as defined in Rule 405 of the
        Securities Act.**
  **Yes
                  __**
              
              **No****X**
 **If
        this report is an annual or transition report, indicate by check mark if
        the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of the Securities Exchange Act of 1934.**
  **Yes
                  __**
              
              **No****X**
 **Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the registrant
        was required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days.**
  **Yes
                  X**
              
              **No
                  __**
 **Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
        (Check one):**
  **Large
                  accelerated filer __**
              
              **Accelerated
                  Filer __**
              
              **Non-accelerated
                  filer****X**
 **Indicate
        by check mark which financial statement item the registrant has elected to
        follow.**
  **Item
                  17 __**
              
              **Item
                  18 X**
 **If
        this is an annual report, indicate by check mark whether the registrant is
        a
        shell company (as defined in Rule 12b-2 of the Exchange
        Act).**
  **Yes
                  __**
              
              **No****X**
 
 
  **TABLE
        OF CONTENTS**
  **PART
                  I**Item
                  1.
              Identity
                  of Directors, Senior Management and Advisers
              1Item
                  2.
              Offer
                  Statistics and Expected Timetable
              1Item
                  3.
              Key
                  Information
              1Item
                  4.
              Information
                  on the Company
              9Item
                  5.
              Operating
                  and Financial Review and Prospects
              25Item
                  6.
              Directors,
                  Senior Management and Employees
              42Item
                  7.
              Major
                  Shareholders and Related Party Transactions
              46Item
                  8.
              Financial
                  Information
              48Item
                  9.
              Offer
                  and Listing Details
              49Item
                  10.
              Additional
                  Information
              52Item
                  11.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              65Item
                  12.
              Description
                  of Securities Other than Equity Securities
              65**PART
                  II**Item
                  13.
              Defaults,
                  Dividend Arrearages and Delinquencies
              65Item
                  14.
              Material
                  Modifications to the Rights of Security Holders and Use of
                  Proceeds
              65Item
                  15.
              Controls
                  and Procedures
              65Item
                  16.
              Reserved
              66**PART
                  III**Item
                  17.
              Financial
                  Statements
              67Item
                  18.
              Financial
                  Statements
              67Item
                  19.
              Exhibits
              67INDEX
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
              F-1
 
  i
  **INTRODUCTION**
  Grupo
          Casa Saba, S.A. de C.V. is a limited liability stock corporation with variable
          capital, or *sociedad
          anónima de capital variable* ,
          organized under the laws of the United Mexican States, or “Mexico”, and is a
          holding company that conducts substantially all of its operations through
          subsidiaries. In this annual report, except when indicated or the context
          otherwise requires, the words “Grupo Casa Saba,” “the company,” “we,” “us,”
“our,” and “ours” refer to Grupo Casa Saba, S.A. de C.V. and its consolidated
          subsidiaries. Each subsidiary of Grupo Casa Saba is an independent legal
          entity
          with its own accounting, corporate structure and records, executives and
          employees. References in this annual report to divisions are to combinations
          of
          various subsidiaries that have been grouped together for management and
          presentation purposes.
  This
          annual report contains translations of certain constant Mexican Peso amounts
          into U.S. Dollars at specified rates solely for the convenience of the
          reader.
          These convenience translations should not be construed as representations
          that
          the constant Peso amounts actually represent such U.S. Dollar amounts or
          could
          be converted into U.S. Dollars at the rate indicated or at all. The exchange
          rates used in preparing our consolidated financial statements and in preparing
          convenience translations of such information into U.S. Dollars are determined
          by
          reference as of the specified date to the rate of Mexican Pesos per U.S.
          Dollar
          reported by the *Banco
          de México* ,
          or the
          Mexican Central Bank, in the *Diario
          Oficial de la Federación* ,
          or the
          Official Gazette of the Federation. As of December 31, 2005, the rate of
          Mexican Pesos per U.S. Dollar, as reported by the Mexican Central Bank
          in the
          Official Gazette of the Federation, was Ps. 10.7109 to one U.S. dollar.
          See
“Item 3 Key Information — Exchange
          Rate Information.”
  Unless
          otherwise specified, information included in this annual report is as of
          December 31, 2005. References to “Ps.” or “Pesos” in this annual report are
          to Mexican Pesos and references to “Dollars,” “U.S. Dollars,” “$” or “U.S.$” are
          to United States Dollars. Certain amounts included in this annual report
          may not
          sum due to rounding.
  **MARKET
          SHARE AND OTHER INFORMATION**
  Market
          share information for our private sector pharmaceutical sales is based
          on
          statistics provided exclusively to us by IMS A.G., known internationally
          as IMS
          Health, and our estimates.
  ii
   **FORWARD-LOOKING
          STATEMENTS**
  Some
          written information and oral statements made or incorporated by reference
          from
          time to time by us or our representatives in this annual report, other
          reports,
          filings with the Securities and Exchange Commission, or the SEC, press
          releases,
          conferences, or otherwise, are “forward-looking statements” within the meaning
          of the Private Securities Litigation Reform Act of 1995. Forward-looking
          statements, which are subject to various risks and uncertainties, include,
          without limitation, any statement that may predict, forecast, indicate,
          or imply
          future results, performance, or achievement, and may contain forward-looking
          terminology such as “anticipate,” “believe,” “continue,” “expect,” “estimate,”
“project,” “will,” “will be,” “will continue,” “will likely result,” “may,”
“plan,” or words or phrases of similar meaning. These statements are contained
          in the sections entitled “Risk Factors,” “Operating Financial Review and
          Prospects,” “Information on the Company” and other sections of this annual
          report.
  Forward-looking
          statements reflect our best assessment at the time and thus involve risks
          and
          uncertainties that may cause actual results to differ materially from the
          forward-looking statements. Therefore, these forward-looking statements
          are
          qualified by reference to the cautionary statements set forth in this annual
          report. The risks and uncertainties involved in the forward-looking statements
          are detailed from time to time in reports we file with the SEC and include,
          among others, the following:
  ·
                International,
                    national and local general economic and market conditions;·
                The
                    overall size and growth of the Mexican pharmaceutical market;·
                The
                    level of competition among distributors, suppliers and sellers
                    of
                    pharmaceuticals;·
                Fluctuations
                    and difficulty in forecasting operating results;·
                Dependence
                    on suppliers and clients;·
                General
                    risks associated with doing business in Mexico, including political
                    and
                    economic instability and changes in government regulations;
                    and·
                Other
                    factors referenced in this annual report.
 
 The
          risks
          summarized above are not exhaustive. Other sections of this annual report
          may
          include additional factors that could adversely impact our business and
          financial performance. Moreover, we operate in a very competitive and rapidly
          changing environment. New risk factors emerge from time to time and it
          is not
          possible for our management to predict all of these risk factors, nor can
          it
          assess the impact of all of these risk factors on our business or the extent
          to
          which any factor, or combination of factors, may cause actual results to
          differ
          materially from those contained in any forward-looking statements. Given
          these
          risks and uncertainties, investors and analysts should not place undue
          reliance
          on forward-looking statements as a prediction of actual results. Accordingly,
          when considering forward-looking statements, investors and analysts should
          bear
          in mind the factors described in “Item 3. Key Information—Risk Factors” and
          other cautionary statements appearing in “Item 5. Operating and Financial Review
          and Prospects” and elsewhere in this annual report.
  The
          predictive and forward-looking statements in this annual report may never
          materialize and are made under the SEC’s disclosure safe harbor. Forward-looking
          statements speak only as of the date they are made, and we do not undertake
          any
          obligation to update them in light of new information or future
          developments.
  iii
 Table
              of Contents
 **PART
          I**
  **Item
          1.****Identity
          of Directors, Senior Management and Advisers**
  Not
          applicable.
  **Item
          2.** **Offer
          Statistics and Expected Timetable**
  Not
          applicable.
  **Item
          3.** **Key
          Information**
  ***(a)*** ***Selected
          Financial Data***
  We
          prepare our audited consolidated financial statements in accordance with
          Mexican
          GAAP, which differs in some significant respects from U.S. GAAP. Note 16
          to our
          audited consolidated financial statements provides a description of the
          principal differences between Mexican GAAP and U.S. GAAP as they relate
          to us,
          and describes differences in presentation between the statement of changes
          in
          financial position under Mexican GAAP and the requirements under U.S. GAAP
          for a
          statement of cash flows. Note 17 to our audited consolidated financial
          statements provides a partial reconciliation to U.S. GAAP of net income
          and
          stockholders’ equity.
  Pursuant
          to Mexican GAAP, our audited consolidated financial statements and the
          selected
          financial information set forth in the following table reflect inventories
          at
          current replacement cost. All other non-monetary assets are restated by
          using
          the Mexican National Consumer Price Index, or the NCPI. Components of
          stockholders’ equity are also restated using the NCPI. In addition, the
          statement of income recognizes the effect of gain or loss on the purchasing
          power from holding monetary assets and monetary liabilities. Mexican GAAP
          also
          requires the restatement of all financial statements in constant Pesos
          as of the
          date of the last day of the period reported and, accordingly, all information
          in
          our audited consolidated financial statements and in the selected financial
          information set forth in the following table has been restated in constant
          Pesos
          as of December 31, 2005. See Note 3 to our audited consolidated financial
          statements for significant accounting policies. The impact of inflation
          accounting under Mexican GAAP has not been reversed in our reconciliation
          to
          U.S. GAAP. See Notes 16 and 17 to our audited consolidated financial
          statements.
  The
          information set forth in the following table has been selected from our
          audited
          consolidated financial statements for the periods indicated. This information
          should be read together with, and it is qualified in its entirety by reference
          to, our audited consolidated financial statements, the notes to such financial
          statements and the information under the section entitled “Item 5.
          Operating and Financial Review and Prospects.”
 **Year
                        ended December 31,**
                    
                    2001
                    
                    2002
                    
                    2003
                    
                    2004
                    
                    2005
                    
                    2005
                        (1)(in
                        thousands of constant Pesos as of December 31, 2005 and U.S.
                        Dollars,
                        except share and per share data)**Income
                        Statement****Mexican
                        GAAP:**Net
                        sales
                    
                    Ps.
                    19,396,589
                    
                    Ps.
                    20,577,834
                    
                    Ps.
                    21,229,791
                    
                    Ps.
                    21,255,521
                    
                    Ps.
                    21,873,753
                    
                    
                    U.S.$ 
                        2,042,196Gross
                        profit
                    
                    
                    2,077,011
                    
                    
                    2,170,959
                    
                    
                    2,110,545
                    
                    
                    2,188,164
                    
                    
                    2,257,161
                    
                    
                    210,735Operating
                        expenses
                    
                    
                    1,318,813
                    
                    
                    1,377,536
                    
                    
                    1,308,435
                    
                    
                    1,363,782
                    
                    
                    1,361,922
                    
                    
                    127,153Operating
                        income, net
                    
                    
                    758,198
                    
                    
                    793,423
                    
                    
                    802,110
                    
                    
                    824,382
                    
                    
                    895,239
                    
                    
                    83,582Comprehensive
                        cost of financing, net
                    
                    
                    169,304
                    
                    
                    17,547
                    
                    
                    50,322
                    
                    
                    16,321
                    
                    
                    -1,568
                    
                    
                    -147Other
                        income (2)
                    
                    
                    -36,141
                    
                    
                    -6,700
                    
                    
                    -37,298
                    
                    
                    -51,562
                    
                    
                    -38,413
                    
                    
                    -3,586Income before
                        taxes and employee profit sharing
                    
                    
                    625,035
                    
                    
                    782,576
                    
                    
                    789,086
                    
                    
                    859,624
                    
                    
                    935,220
                    
                    
                    87,315Net
                        income
                    
                    
                    484,471
                    
                    
                    614,743
                    
                    
                    626,035
                    
                    
                    670,427
                    
                    
                    728,225
                    
                    
                    67,989Net
                        income per Ordinary Share (3)
                    
                    
                    1.825
                    
                    
                    2.316
                    
                    
                    2.359
                    
                    
                    2.526
                    
                    
                    2.744
                    
                    
                    0.256Weighted
                        average Ordinary Shares outstanding (in thousands) (3)
                    
                    
                    265,419
                    
                    
                    265,419
                    
                    
                    265,419
                    
                    
                    265,419
                    
                    
                    265,419**U.S.
                        GAAP (4):**Net
                        sales
                    
                    Ps.
                    19,396,589
                    
                    Ps.
                    20,577,834
                    
                    Ps.
                    21,229,791
                    
                    Ps.
                    21,255,521
                    
                    Ps.
                    21,873,753
                    
                    
                    U.S.$ 
                        2,042,196Gross
                        profit
                    
                    
                    2,077,011
                    
                    
                    2,170,959
                    
                    
                    2,110,545
                    
                    
                    2,188,164
                    
                    
                    2,257,161
                    
                    
                    210,735Operating
                        income
                    
                    
                    787,752
                    
                    
                    763,650
                    
                    
                    865,824
                    
                    
                    824,382
                    
                    
                    895,239
                    
                    
                    83,582Income before
                        taxes and employee profit sharing
                    
                    
                    654,588
                    
                    
                    752,801
                    
                    
                    852,800
                    
                    
                    859,624
                    
                    
                    933,652
                    
                    
                    87,168
   1
 Table
                  of Contents
  Net
                        income (4)
                    
                    
                    514,027
                    
                    
                    584,971
                    
                    
                    689,749
                    
                    
                    670,427
                    
                    
                    695,814
                    
                    
                    64,963Net
                        income per Ordinary share (3)
                    
                    
                    1.9367
                    
                    
                    2.2039
                    
                    
                    2.5987
                    
                    
                    2.5259
                    
                    
                    2.6216Weighted
                        average Ordinary Shares outstanding (in thousands) (3)
                    
                    
                    265,419
                    
                    
                    265,419
                    
                    
                    265,419
                    
                    
                    265,419
                    
                    
                    265,419**Balance
                        Sheet Data****Mexican
                        GAAP:**Property
                        and equipment, net
                    
                    Ps.
                    1,135,158
                    
                    Ps.
                    1,101,460
                    
                    Ps.
                    1,069,452
                    
                    Ps.
                    1,105,536
                    
                    Ps.
                    1,065,255
                    
                    
                    U.S.$   
                        99,455Total
                        assets
                    
                    
                    8,018,684
                    
                    
                    8,482,119
                    
                    
                    8,990,122
                    
                    
                    9,431,006
                    
                    
                    9,832,979
                    
                    
                    918,034Short-term
                        debt
                    
                    
                    363,164
                    
                    
                    401,222
                    
                    
                    423,916
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Long-term
                        debt
                    
                    
                    452,760
                    
                    
                    48,594
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Capital
                        stock
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    97,178Total
                        stockholders’ equity (4)
                    
                    
                    3,134,571
                    
                    
                    3,369,064
                    
                    
                    3,631,498
                    
                    
                    4,167,477
                    
                    
                    4,614,282
                    
                    
                    430,803**U.S.
                        GAAP (4):**Property
                        and equipment, net
                    
                    Ps.
                    1,135,158
                    
                    Ps.
                    1,101,460
                    
                    Ps.
                    1,069,452
                    
                    Ps.
                    1,105,536
                    
                    Ps.
                    1,065,255
                    
                    
                    U.S.$   
                        99,455Total
                        assets
                    
                    
                    8,018,684
                    
                    
                    8,482,119
                    
                    
                    8,990,122
                    
                    
                    9,431,006
                    
                    
                    9,832,979
                    
                    
                    918,034Short-term
                        debt
                    
                    
                    363,164
                    
                    
                    401,222
                    
                    
                    423,916
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Long-term
                        debt
                    
                    
                    452,760
                    
                    
                    48,594
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Capital
                        stock
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    1,040,863
                    
                    
                    97,178Total
                        stockholders’ equity (4)
                    
                    
                    3,163,265
                    
                    
                    3,330,291
                    
                    
                    3,656,439
                    
                    
                    4,192,418
                    
                    
                    4,635,121
                    
                    
                    432,749
 (1)
          Peso
          amounts have been translated into U.S. Dollars, solely for the convenience
          of
          the reader, at the rate of Ps. 10.7109 per U.S. $1.00, which was the Peso
          /U.S.
          Dollar exchange rate as of December 31, 2005, as reported by the Mexican
          Central
          Bank in the Official Gazette of the Federation.
  (2)
        Other
        income consists of fees on returned checks, miscellaneous articles and
        non-taxable items, adjustments and services.
  (3)
        Based
        on the weighted average number of Ordinary Shares outstanding during each
        year.
  (4)
        For a
        discussion of the principal differences between U.S. GAAP and Mexican GAAP
        concerning net income and total stockholders’ equity, as well as a partial
        reconciliation to U.S. GAAP of net income and total stockholders’ equity, see
        Notes 16 and 17 to our audited consolidated financial statements.
  
 ***(b)*** ***Dividends***
  Under
        Mexico’s *Ley
        General de Sociedades Mercantiles* ,
        or
        General Corporations Law, 5% of our net income in a given year must be
        allocated annually to a legal reserve. This legal reserve shall be increased
        annually until it reaches 20% of our capital stock. After this allocation
        is
        made, it is possible to make additional allocations, such as a contribution
        of
        funds for the payment of dividends or the creation of special reserves,
        generally, but not necessarily, upon the recommendation of our Board of
        Directors. We cannot pay dividends on our shares of capital stock, which
        we
        refer to as Ordinary Shares, unless these allocations are previously made.
        As of
        December 31, 2005, we had a legal reserve of approximately Ps. 59.59 million,
        which represented approximately 5.72% of our capital stock as of that date.
        See
        Note 11 to our audited consolidated financial statements. Five percent of
        our
        net income for the year ended December 31, 2002 was applied to the legal
        reserve, and thus our annual shareholders’ meeting, held on April 22, 2003,
        approved the payment of a dividend in the amount of Ps. 100.0 million (Ps.
        111.1
        million at fiscal year end constant Pesos), equivalent to Ps. 0.38 per Ordinary
        Share. Five percent of our net income for the year ended December 31, 2003
        was applied to the legal reserve, and thus our annual shareholders’ meeting,
        held on April 27, 2004, approved the payment of a dividend in the amount of
        Ps. 110.0 million (Ps. 117.5 million at fiscal year end constant Pesos),
        equivalent to Ps. 0.41 per Ordinary Share. Our annual shareholders’ meeting held
        on April 29, 2005, approved the payment of a dividend in the amount of Ps.
        120.0
        million (Ps. 122.6 million at fiscal year end constant Pesos), equivalent
        to Ps.
        0.4521 per Ordinary Share. On April 27, 2006, our annual shareholders’ meeting
        approved the payment of a dividend in the amount of Ps. 150.0 million on
        June
        21, 2006.
  Our
        controlling shareholder has the ability to determine, by means of a shareholder
        vote, whether we will declare and pay dividends, in cash or otherwise. See
“Item
        3. Key Information—Risk Factors—Risk Factors Relating to Our Securities—Our
        Controlling Shareholder Has the Ability to Restrict the Payment and Amount
        of
        Dividends.” A determination to declare and pay dividends may depend on the
        following factors, among others:
  ·
              the
                  resolution by our shareholders in light of our results, financial
                  condition, cash requirements, future prospects and other factors
                  deemed
                  relevant by our shareholders for this purpose;·
              the
                  extent to which we receive cash dividends, advances and other payments
                  from our subsidiaries. We are a holding company with no significant
                  operating assets other than the ones we own through our subsidiaries.
                  Given the fact that we receive substantially all of our operating
                  income
                  from our subsidiaries, our ability to meet our financial obligations,
                  including the payment of dividends, depends significantly on the
                  dividend
                  payments we receive from our subsidiaries; and·
              the
                  extent to which we have cash available for distribution after funding
                  our
                  working capital needs, capital expenditures and investments.
  2
 Table
            of Contents
 
 To
        the
        extent that we declare and pay dividends on our Ordinary Shares, these dividends
        are payable to the holders of our American Depositary Shares, or ADSs. Owners
        of
        our ADSs are entitled to receive any dividends payable on the Ordinary Shares
        underlying their ADSs. We pay all cash dividends in Pesos, to the depositary
        of
        our ADSs, The Bank of New York. Except as otherwise provided in the Amended
        and
        Restated Deposit Agreement pursuant to which our ADSs are issued, cash dividends
        received by the depositary are converted by the depositary from Pesos into
        U.S.
        Dollars and, after the deduction or upon payment of the depositary’s expenses,
        are paid to the holders of ADSs in U.S. Dollars. No withholding tax applies
        to
        dividends on our ADSs paid to individuals and non-residents of Mexico. See
“Item
        10. Additional Information—Taxation—Mexican Taxes—Dividends.”
  **Exchange
        Rate Information**
  The
        following table sets forth, for the periods indicated, the high, low, average
        and period-end free market exchange rates, as reported by the Board of Governors
        of the U.S. Federal Reserve Bank of New York for the purchase of U.S. Dollars,
        expressed in nominal Pesos per $1.00 U.S. Dollar. The noon buying rate for
        Pesos
        on June 15, 2006, was Ps. 11.42 per U.S. Dollar.
  **Exchange
                  Rate****(1)****Year
                  ended December 31,**
              **High**
              **Low**
              **Average****(2)**
              **Period
                  End**2001
              9.97
              8.95
              9.34
              9.172002
              10.43
              9.00
              9.66
              10.432003
              11.41
              10.11
              10.79
              11.242004
              11.64
              10.81
              11.30
              11.152005
              11.41
              10.41
              10.89
              10.63**Month
                  ended**December
                  31, 2005
              10.77
              10.41
              10.63
              10.63January
                  30, 2006
              10.64
              10.44
              10.44
              10.44February
                  28, 2006
              10.53
              10.43
              10.48
              10.45March
                  31, 2006
              10.95
              10.46
              10.75
              10.90April
                  30, 2006
              11.16
              10.86
              11.05
              11.09May
                  31, 2006
              11.31
              10.84
              11.09
              11.29June
                  15, 2006
              11.46
              11.28
              11.37
              11.42
 (1)
        The
        free market exchange rate is the Noon Buying Rate for Mexican Pesos, as reported
        by the Board of Governors of the U.S. Federal Reserve Bank of New
        York.
  (2)
        Annual average rates reflect the average of monthly rates. Monthly average
        rates
        reflect the average of daily rates.
   3
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  ***(c)*** ***Risk
        Factors***
  *For
        purposes of this section, when we state that a risk, uncertainty or problem
        may,
        could or would have an “adverse effect” on us, we mean that the risk,
        uncertainty or problem may, could or would have an adverse effect on our
        business, financial condition, liquidity, results of operations or prospects,
        except as otherwise indicated or as the context may otherwise
        require.*
  *The
        risks described below are intended to highlight risks that are specific to
        us,
        but are not the only risks that we face. Additional risks and uncertainties,
        including those generally affecting the industries in which we operate and
        the
        countries where we have a presence, risks that we currently deem immaterial
        or
        other unforeseeable risks, may also impair our business.*
  *The
        information in this annual report includes forward-looking statements that
        involve risks and uncertainties. Our actual results could differ materially
        from
        those anticipated in these forward-looking statements as a result of numerous
        factors, including, without limitation, those described in this section and
        under the sections entitled “Item 4. Information on the Company” and “Item
        5. Operating and Financial Review and Prospects” and elsewhere in this annual
        report. Please see “Forward-Looking Statements.”*
  **Risk
        Factors Relating to the Company**
  ***We
        Participate in a Competitive Market and Increased Competition May Adversely
        Affect Our Business.*** ** We face
        competition in the distribution of pharmaceuticals, health, beauty aids and
        consumer goods, publications, general merchandise, office and other products.
        In
        our Pharmaceutical Products business division, we face competition primarily
        from Mexico’s only other national distributor, Nacional de Drogas, S.A. de C.V.,
        or Nadro, and several regional distributors. In our Health, Beauty Aids and
        Consumer Goods, Publications and General Merchandise and Other Products and
        Office Products business divisions, we compete with many manufacturers,
        wholesalers and distributors that target the same markets that we do. Loss
        of
        existing or future market share to competitors may adversely affect our
        performance and, to the extent that one or more of our competitors becomes
        more
        successful with respect to any key competitive factor, our operating
        margins and profitability could be adversely affected.
  ***There
        Are Differences in Corporate Disclosure and Accounting Standards for Mexican
        Companies and this May Cause Our Financial Statements to Differ in Certain
        Respects from U.S. Issuers*** **.**  A
        principal objective of the securities laws of the United States, Mexico and
        other countries is to promote full and fair disclosure of all material corporate
        information. However, there may be less publicly available information about
        foreign issuers of securities listed in the United States than is regularly
        published by or about domestic issuers of listed securities. In addition,
        we
        prepare our financial statements in accordance with Mexican GAAP, which differs
        from U.S. GAAP and accounting procedures in certain significant respects.
        For
        example, most Mexican companies, including us, have incorporated the impact
        of
        inflation directly in accounting records and in their published financial
        statements. Thus, Mexican financial statements and reported earnings may
        differ
        from those of companies in other countries in this and other respects. Notes 16 and 17 to our
        audited annual financial statements describe the principal differences between
        Mexican GAAP and U.S. GAAP as they relate to us and provide reconciliation
        to
        U.S. GAAP of net income and total stockholders’ equity.
  ***We
        Are Controlled by One Controlling Shareholder.*** Eighty-five percent of our outstanding Ordinary Shares are directly owned
        by one
        shareholder, our controlling shareholder. See “Item 7. Major Shareholders and
        Related Party Transactions—Principal Shareholders.” Our controlling shareholder
        controls our business and has the power to elect the majority of our Board
        of
        Directors, as well as to determine the outcome of all actions that require
        shareholder approval, including the determination to declare and pay dividends,
        in cash or otherwise.
  **Risk
        Factors Related to our Securities**
  ***Our
        Controlling Shareholder Has the Ability to Restrict the Payment and Amount
        of
        Dividends.*** By law,
        decisions regarding the payment and amount of dividends are subject to approval
        of our shareholders, generally, but not necessarily, on the recommendation
        of
        the Board of Directors. Our controlling shareholder owns 85% of our outstanding
        Ordinary Shares and, so long as he continues to own a majority of our
        outstanding shares, he will have the ability to determine whether we will
        declare and pay dividends, in cash or otherwise. See “Item 3. Key
        Information—Dividends.”
   4
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 ***Preemptive
        Rights May Be Unavailable to Holders of Our ADSs. Under Mexican Law, Our
        Shareholders Have Preemptive Rights.*** This
        means that, in the event that we issue new Ordinary Shares for cash, our
        shareholders will have the right to purchase the number of Ordinary Shares
        necessary to maintain their existing share participation. U.S. holders of
        our
        ADSs cannot exercise their preemptive rights unless we register any newly
        issued
        Ordinary Shares under the Securities Act of 1933 or qualify for an exemption
        from registration. If U.S. holders of our ADSs cannot exercise their preemptive
        rights, the interests of these holders would be diluted in the event that
        we
        issue new Ordinary Shares for cash. We intend to evaluate at the time of
        any
        offering of preemptive rights the costs and potential liabilities associated
        with registering any additional Ordinary Shares under the Securities Act
        of
        1933. We cannot assure you that we will register any new Ordinary Shares
        that we
        issue for cash. In addition, although the deposit agreement provides that
        the
        Depositary may, after consulting with us, sell preemptive rights in Mexico
        or
        elsewhere outside the United States and distribute the proceeds to holders
        of
        ADSs, under current Mexican law, these sales are not possible.
  ***The
        Protections Afforded to Minority Shareholders in Mexico Are Different from
        Those
        in the United States.*** Under
        Mexican law, the protections afforded to minority shareholders are different
        from those in the United States. In particular, the law concerning fiduciary
        duties of directors is not appropriately developed, there is no procedure
        for
        class actions or shareholder derivative action, and there are different
        procedural requirements for bringing shareholder lawsuits. As a result, in
        practice, it may be more difficult for our minority shareholders to enforce
        their rights against us or our directors or controlling shareholder than
        it
        would be for shareholders of a U.S. company. On
        December 30, 2005, Mexico’s Federal
        Congress
        enacted a new federal statute that, upon its effectiveness 180 days from
        its
        enactment, will amend and restate the existing Mexican Securities Market
        Law in
        its entirety. The new Mexican Securities Market Law enhances disclosure
        requirements and corporate governance standards for Mexican listed companies
        through the refinement of existing concepts (such as the functions, duties
        and
        liabilities of management, directors and audit committees) and the introduction
        of new concepts, such as corporate practices committees (comprised, the case
        of
        companies such as us, of independent directors), institutional investors
        and
        safe harbors from public offering requirements. The new law also provides
        minority shareholders of Mexican listed companies with improved information
        rights and legal remedies. In order to comply with the new legal regime
        applicable to and governing public issuers in Mexico upon the effectiveness
        of
        the new Mexican Securities Market Law, we will be required to amend our bylaws.
        We cannot predict what impact this will have upon our business at this time.
        See
“Item 10. Additional Information—Amendments to the Mexican Securities Market
        Law.”
  ***You
        May Be Unable to Enforce Judgments Against Us.*** We
        are a
        corporation with variable capital ( *sociedad
        anónima de capital variable* )
        organized under the laws of Mexico. A majority of our assets and operations
        are
        located, and a majority of our revenues are derived from sources, outside
        the
        United States. All of our directors and officers reside outside of the United
        States and all or a significant portion of the assets of these persons and
        of
        our assets are located outside of the United States. As a result, it may
        not be
        possible for shareholders to effect service of process within the United
        States
        upon such persons or upon us, or to enforce against them or against us judgments
        by U.S. courts predicated upon the civil liability provisions of the U.S.
        federal securities laws or otherwise. As of this date, there is no effective
        treaty between the United States and Mexico for the reciprocal enforcement
        of
        judgments issued in the other country. Generally, Mexican courts would enforce
        final judgments rendered in the United States if certain requirements are
        met,
        including the review in Mexico of the U.S. judgment to ascertain compliance
        with
        certain basic principles of due process and the non-violation of Mexican
        law or
        public policy, provided that U.S. courts would grant reciprocal treatment
        to
        Mexican judgments. Additionally, we have been advised by our Mexican counsel
        that there is doubt as to the enforceability, in original actions in Mexican
        courts, of liabilities predicated in whole or in part on U.S. federal securities
        laws and as to the enforceability in Mexican courts of judgments of U.S.
        courts
        obtained in actions predicated upon the civil liability provisions of U.S.
        federal securities laws.
   5
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 **Risk
        Factors Relating to Economic and Political Developments in
        Mexico**
  ***Economic
        and Political Developments in Mexico May Adversely Affect Our
        Business.***
  In
        December 1994 and continuing through 1995, Mexico experienced an economic
        crisis
        characterized by a sharp devaluation of the Peso, high inflation, foreign
        currency exchange rate instability, high domestic interest rates, a strong
        contraction in consumer demand for many products and services, reduced
        availability of credit, high unemployment and diminished international investor
        confidence in Mexico. Mexico’s GDP, which grew at a real annual rate of 4.4%
        during 1994, declined by 6.2% in real terms during 1995.
  In
        response to these developments, beginning in February 1995, the Mexican
        government implemented a variety of economic programs designed to promote
        economic recovery, stabilize foreign currency exchange rates and reduce
        inflation. Economic conditions in Mexico improved moderately in 1996 and
        1997.
        However, a combination of factors led to a slowdown in Mexico’s economic growth
        in 1998. Notably, the decline in the international price of oil resulted
        in a
        reduction of federal revenues, approximately one-third of which are derived
        from
        petroleum taxes and duties. In addition, the economic crises in Asia and
        Russia,
        as well as the financial turmoil in Brazil, Venezuela and elsewhere, produced
        greater volatility in the international financial markets, which further
        slowed
        Mexico’s economic growth. In 1998, the inflation rate in Mexico was 18.6%,
        interest rates on 28-day Mexican government treasury securities, which we
        refer
        to as “CETES,” averaged 24.7% and the Peso lost approximately 22.7% of its value
        relative to the U.S. Dollar.
  During
        1999 conditions improved with inflation in Mexico at 12.3%, interest rates
        on
        28-day CETES averaging 21.4% and the Peso appreciating approximately 4.2%
        in
        value relative to the U.S. Dollar. Throughout 2000, the improvement shown
        in
        1999 continued. In 2000 the inflation rate was 9.0%, interest rates on 28-day
        CETES averaged 15.3% and the Peso lost approximately 1.5% of its value relative
        to the U.S. Dollar. The Mexican government estimated that Mexico’s real GDP grew
        by 4.8% in 1998, 3.7% in 1999 and 6.6% in 2000.
  Beginning
        in January 2001, however, and increasing in the fourth quarter of 2001, amid
        concerns of a global economic slowdown and a recession in the United States,
        Mexico began to experience an economic slowdown marked by a decline in GDP.
        In
        2001, Mexico’s GDP shrank by 0.2% in real terms, while the inflation rate was
        4.4%, interest rates on 28-day CETES averaged 11.3% and the Peso appreciated
        approximately 5.0% in value relative to the U.S. Dollar. During 2002 and
        2003,
        as the United States and global economic slowdown continued, the Mexican
        real
        GDP growth rate was 0.8% and 1.4%, respectively, the annual inflation rate
        was
        5.7% and 4.0%, respectively, interest rates on 28-day CETES averaged 7.1%
        and
        6.2%, respectively, and the Peso lost approximately 13.7% and 7.8%,
        respectively, of its value relative to the U.S. Dollar. In 2004, several
        factors
        helped boost the Mexican economy including: the recuperation of the U.S.
        economy
        higher revenues generated from petroleum sales and an increase in remittances.
        During this period, Mexico’s GDP grew 4.2%, while inflation reached 5.2% and the
        interest rates on 28-day CETES averaged 6.8%. Even after a significant drop
        in
        exports, in particular, relating the auto industry and lower public and private
        investments, during 2005 the economy benefited from sharp increases in oil
        prices and global economic recovery, therefore, the country’s GDP for the year
        grew by 2.97%, inflation reached a low of 3.3% and the interest rate on 28-day
        CETES averaged 9.19%. During the first quarter of 2006, Mexico’s GDP grew 5.5%
        and inflation reached 0.9%.
  Although
        recent economic activity seems to be increasing in Mexico and the United
        States,
        the Mexican and the U.S. economies may not continue to grow at similar rates
        as
        they have done in the past, and the economic slowdown described above may
        continue and have a negative impact on our business and results of
        operations.
  We
        are a
        Mexican company and all of our business operations take place in Mexico.
        As a
        result, our business may be affected by the general condition of the Mexican
        economy. For each of the years ended on December 31, 2003, 2004 and 2005,
        approximately 99% of our consolidated net sales resulted from sales to parties
        located within Mexico. In the past, inflation has led to high interest rates
        and
        devaluations of the Peso. Inflation itself, as well as governmental efforts
        to
        reduce inflation, has had significant negative effects on the Mexican economy
        in
        general and on Mexican companies, including us. Inflation in Mexico decreases
        the real purchasing power of the Mexican population, and the Mexican
        government’s efforts to control inflation by tightening the monetary supply have
        historically resulted in higher financing costs as real interest rates have
        increased. Such policies have had and could in the future have an adverse
        effect
        on us.
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 Future
        economic slowdowns or developments in or affecting Mexico could impair our
        business, results of operations, financial condition, prospects and ability
        to
        obtain financing.
  ***Devaluation
        of the Peso Against the U.S. Dollar Could Adversely Affect Our Financial
        Condition and Results of Operations.*** We are
        affected by fluctuations in the value of the Peso against the U.S. Dollar.
        In
        2002, and according to the Noon Buying Rate for Mexican Pesos, as reported
        by
        the Board of Governors of the U.S. Federal Reserve Bank of New York, the
        Peso
        depreciated by approximately 13.7% due to pressures from an international
        environment with volatility and geopolitical concerns. In 2003, the war in
        Iraq,
        the uncertainty regarding the recovery of the U.S. economy and few advances
        in
        the expected legal structural reforms in Mexico also adversely impacted the
        Peso, resulting in a devaluation against the U.S. dollar of approximately
        7.8%.
        In 2004, high oil prices, higher remittance levels and a recovery in the
        U.S.
        economy led to a slight appreciation of the Peso against the U.S. dollar
        of
        0.8%. During 2005, this trend continued and the peso appreciated against
        the
        U.S. dollar by 4.7%. During the first quarter of 2006, however, the peso
        depreciated against the U.S. dollar by 2.5%, being affected by the combination
        of several factors, such as: increases in U.S. interest rates, decreases
        in the
        international commodities prices and political uncertainty regarding the
        upcoming presidential elections. Any future depreciation or devaluation of
        the
        Peso will likely result in price increases from our suppliers that would
        impact
        the purchasing capacity of the final consumers and lead to a reduction in
        our
        sales.
  Severe
        devaluation or depreciation of the Peso may also result in disruption of
        the
        international foreign exchange markets and may limit our ability to transfer
        or
        to convert Pesos into U.S. Dollars and other currencies for the purpose of
        obtaining imported goods. Devaluation or depreciation of the Peso against
        the
        U.S. Dollar may also adversely affect U.S. Dollar prices on our securities
        on
        the Mexican Stock Exchange, including the Ordinary Shares and, as a result,
        will
        likely affect the market price of the ADSs. Such fluctuations would also
        impact
        the conversion value of any cash dividends paid on the Ordinary Shares in
        Pesos,
        into U.S. Dollars in order to pay such dividend to the holders of our
        ADSs.
  ***High
        Levels of Inflation and High Interest Rates in Mexico Could Adversely Affect
        Our
        Financial Condition and Results of Operations.*** In
        recent years, Mexico has experienced high levels of inflation. The annual
        rate
        of inflation, as measured by changes in the NCPI, was 4.0% for 2003, 5.2%
        for
        2004, 3.3% for 2005 and 0.9% for the first quarter of 2006. High inflation
        rates
        can adversely affect our business and our results of operations in the following
        ways:
  ·
              inflation
                  can adversely affect consumer purchasing power, thereby adversely
                  affecting consumer demand for the products we distribute; and·
              to
                  the extent inflation exceeds price increases, our prices and revenues
                  will
                  be adversely affected in “real” terms.
 
 Mexico
        also has, and could have, high real and nominal interest rates. The interest
        rates on 28-day CETES averaged approximately 6.2%, 6.8% and 9.1% for 2003,
        2004
        and 2005, respectively, and 7.6% for the first quarter of 2006. Accordingly,
        if
        we need to incur Peso-denominated debt in the future, it could be at higher
        interest rates than those mentioned above.
  ***The
        Political Situation in Mexico Could Negatively Affect our Operating
        Results.*** Mexico
        has experienced political changes in recent years. Instability affects Mexico’s
        business and investment climate as well as the performance of Mexican
        securities, including our securities. As a Mexican company with substantially
        all of our assets and operations in Mexico, the political environment in
        Mexico
        has a significant impact on our financial condition and results of
        operations.
  In
        July
        2000, presidential and congressional elections took place, and Vicente Fox
        Quesada, a member of the *Partido
        Acción Nacional (“PAN”* )
        was
        elected President. His victory ended more than 70 years of presidential rule
        by
        the *Partido
        Revolucionario Institucional (“PRI”)* .
        President Fox assumed office on December 1, 2000. While the transition from
        the previous administration was smooth, President Fox has faced many economic
        and political challenges derived mainly from the large opposition in Congress
        as
        well as by the constant political struggles among the main political parties
        who
        have failed to approve important reforms. In July 2003, congressional elections
        took place in Mexico and President Fox continued to face a substantial
        opposition in Congress. This legislative gridlock has slowed the progress
        of key
        legal reforms that the Fox administration is promoting, which could have
        an
        adverse effect on us, including our business, financial condition and results
        of
        operations. In 2004 and 2005, in general, the political situation remained
        largely the same, with the differences between the Legislative and Executive
        branches continuing to obstruct reforms. During the last months of 2005,
        and the
        beginning of 2006, the lead-up to the presidential election, which will take
        place on July 2, has distracted attention from much-needed structural reforms.
        There are five presidential candidates contending in this election. The three
        major candidates are: Mr. Felipe Calderón, from the currently ruling, right-wing
        party, *PAN* ;
        Mr.
        Andrés López, from the *Partido
        de la Revolución Democrática (“PRD”),* a
        left-wing party; and Mr. Roberto Madrazo, from the PRI. According to recent
        surveys, the two leading candidates for the presidency are Mr. Calderón and Mr.
        López, while third place is occupied by Mr. Madrazo.
   7
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 ***If
        Foreign Currency Exchange Controls and Restrictions are Imposed, Investors
        Would
        Be Exposed to Foreign Currency Exchange Risk.*** In the
        past, the Mexican economy has experienced balance of payments deficits,
        shortages in foreign currency reserves and other issues that have affected
        the
        availability of foreign currencies in Mexico. The Mexican government does
        not
        currently restrict or regulate the ability of persons or entities to convert
        Pesos into U.S. Dollars. However, it has done so in the past and could do
        so
        again in the future. We cannot assure you that the Mexican government will
        not
        institute a restrictive foreign currency exchange control policy in the future.
        Any such restrictive foreign currency exchange control policy could
        (i) affect the ability of the depositary of our ADSs to convert dividends,
        which are payable in Pesos, into U.S. Dollars for purposes of making
        distributions to the holders of our ADSs, (ii) prevent or restrict access
        to U.S. Dollars, (iii) should we incur any U.S. Dollar-denominated debt in
        the future, affect our ability to service such debt and (iv) have an
        adverse effect on our business and financial condition.
  ***Developments
        in Other Emerging Market Countries May Adversely Affect Our Business or the
        Market Price of Our Securities.*** The
        market price of securities of Mexican companies is, to varying degrees, affected
        by economic and market conditions in other emerging market countries. Although
        economic conditions in such countries may differ significantly from economic
        conditions in Mexico, investors’ reactions to developments in such countries may
        have an adverse effect on the market price of securities of Mexican companies,
        including ours. In late October of 1997, prices of Mexican securities dropped
        substantially, precipitated by a sharp drop in the price of securities traded
        in
        the Asian markets. Similarly, prices of Mexican securities were adversely
        affected by the economic crises in Russia and Brazil in the second half of
        1998
        and, to a lesser extent, the economic crisis in Argentina in 2002. During
        2005,
        the index of the Mexican Stock Exchange increased by 37.8%, as did the average
        index for emerging markets, including Latin America, Asia and Emerging Europe.
        The considerable growth of the Mexican exchange was supported by high economic
        growth worldwide and low interest rates. There can be no assurance that the
        market price of our securities will not be adversely affected by future events
        elsewhere, especially in other emerging markets countries.
  **Risk
        Factors Relating to Regulations in Mexico to which our Business is
        Subject**
  ***Mexican
        Antitrust Laws and Regulations May Affect Our Ability to do
        Business.*** Mexico’s
        federal antitrust law, or *Ley
        Federal de Competencia Económica* ,
        and its
        regulations, or *Reglamento
        de la Ley Federal de Competencia Económica* ,
        may
        affect some of our activities. In particular, these laws and regulations
        may
        adversely affect our ability to acquire and sell businesses, or to enter
        into
        joint ventures with competitors due to our market share in some of the
        industries in which we operate and the reduced number of participants in
        those
        markets.
  ***Changes
        in Mexican Legislation May Negatively Affect Our Operations and
        Revenue.*** Existing
        laws and regulations could be amended, the manner in which laws and regulations
        are enforced or interpreted could change, and new laws or regulations could
        be
        adopted. Such changes could materially adversely affect our operations and
        our
        revenue. On December 30, 2005, Mexico's Federal Congress enacted a new federal
        statute that, upon its effectiveness 180 days from its enactment, will amend
        and
        restate the existing Mexican Securities Market Law in its entirety. The new
        Mexican Securities Market Law enhances disclosure requirements and corporate
        governance standards for Mexican listed companies through the refinement
        of
        existing concepts (such as the functions, duties and liabilities of management,
        directors and audit committees) and the introduction of new concepts, such
        as
        corporate practice committees (in the case of companies like ours, comprised
        of
        independent directors), institutional investors and safe harbors from public
        offering requirements. The new law also provides minority shareholders of
        Mexican listed companies with improved information rights and legal remedies.
        In
        order to comply with the new legal regime applicable to and governing public
        issuers in Mexico upon the effectiveness of the new Mexican Securities Market
        Law, we will be required to amend our bylaws, modify our audit committee
        to
        consist exclusively of independent board members and form a corporate practices
        committee. These changes, the implementation of the new regulations or any
        other
        future laws or regulations may have a material adverse effect on our operations
        and revenue.
   8
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            of Contents
 
 ***Our
        Ability to Increase the Prices of Some Products Is Regulated by the Mexican
        Government.*** Our
        historical operating performance has been significantly affected by the Mexican
        government’s control of prices in the pharmaceutical sector. Prices of
        pharmaceuticals continue to be subject to approval by the Mexican government.
        As
        a result, our suppliers, and, in turn, we may not be able to increase
        pharmaceutical prices at or above the rate of inflation, which would
        substantially limit the growth of our pharmaceutical-related revenues. Since
        1990, the Mexican government has deregulated pharmaceutical prices to some
        extent, and prices have increased in the Mexican pharmaceutical market as
        a
        result of this deregulation. However, we cannot assure you that the Mexican
        government will continue to deregulate pharmaceutical prices, or, if so,
        that
        our ability to increase prices will continue or result in the improvement
        of our
        operating performance.
  ***Any
        Value-Added Tax Imposed on Prescription Drugs May Adversely Affect Our Business,
        Financial Condition and Results of Operations.*** Unlike
        the HBA/other products, entertainment products, general merchandise and other
        products and office products we distribute, the prescription drugs we distribute
        are not currently subject to a 15% value-added tax. In April 2001, a proposal
        was filed with the Mexican Congress requesting a substantial amendment to
        Mexican tax laws. One of the reforms contemplated by this proposal was an
        increase in the value-added tax for prescription drugs from 0% to 15%. Although
        that bill was not passed by the Mexican Congress, the current Government
        has
        continued to file similar proposals, and the future Government may also choose
        to do so. If prescription drugs become subject to a value-added tax in excess
        of
        the currently applicable 0% rate, the prices paid by consumers for prescription
        drugs would likely increase by the percentage amount of the value-added tax
        rate. While any price increases resulting from the imposition of a higher
        value-added tax would be non-recurring, we still believe that these price
        increases would adversely impact consumer demand for these products and result
        in a decrease in related revenues. To the extent any of these price increases
        adversely impact revenues related to prescription drugs, our business, financial
        condition and results of operations could be adversely affected. We cannot
        assure you that the proposal containing this request or other similar proposals
        will not be filed again with the Mexican Congress and, if such proposal were
        enacted into law, will not adversely affect our business, financial condition
        or
        results of operations.
  **Item
        4.** **Information
        on the Company**
  **History
        and Development of the Company**
  Grupo
        Casa Saba, S.A. de C.V. is a *sociedad
        anónima de capital variable* ,
        or
        stock corporation with variable capital, which was organized under the laws
        of
        the United Mexican States on November 16, 1982. Our deed of incorporation
        was registered with the Public Registry of Commerce in Mexico City on January
        10, 1983 under Commercial Folio Number 55,635. Pursuant to the terms of our *estatutos
        sociales* ,
        or
        bylaws, our corporate existence shall continue until 2099. Our principal
        executive offices are located at Paseo de la Reforma, No. 215, Colonia Lomas
        de
        Chapultepec, C.P. 11000, D.F., Mexico. Our telephone number at that address
        is
        (52 55) 5284-6600. Grupo Casa Saba’s authorized representative in the United
        States is Puglisi & Associates and is located at 850 Library Avenue, Suite
        204, P.O. Box 885, Newark, Delaware 19714, (302) 738-6680.
  Grupo
        Casa Saba was founded as a pharmacy in 1892, and is currently one of the
        leading
        multi-channel, multi-product national wholesale distributors in Mexico,
        operating through one of Mexico’s largest nationwide distribution networks of
        its type. We distribute pharmaceutical products, health, beauty aids and
        consumer goods, general merchandise, publications, office and other products.
        The majority of these products are distributed by us on a non-exclusive basis.
        With over 110 years of experience, we serve the majority of Mexico’s pharmacies,
        mass merchandisers, retail and convenience stores, supermarkets and other
        specialized channels nationwide.
  On
        February 1, 2000, Xtra Inmuebles, S.A. de C.V., or Xtra Inmuebles, an
        entity beneficially owned and controlled by our controlling shareholder,
        acquired 225,606,457 of our Ordinary Shares on the Mexican Stock Exchange
        through a tender offer. Immediately thereafter, all of those Ordinary Shares
        were acquired from Xtra Inmuebles by our controlling shareholder.
  9
 Table
            of Contents
  Following
        the completion of our financial restructuring and the tender offer, our
        controlling shareholder, by means of a shareholder vote, amended our bylaws,
        replaced our incumbent Board of Directors with nine of his appointees, elected
        a
        new management, including a new Chief Executive Officer and Chief Financial
        Officer, among others, and changed the corporate name of our Company from
        Grupo
        Casa Autrey, S.A. de C.V. to Grupo Casa Saba, S.A. de C.V. For a description
        of
        our financial restructuring and subsequent refinancing of our restructured
        indebtedness, see “Item 5. Operating and Financial Review and Prospects—Indebtedness.”
For
        a description of our controlling shareholder and his current ownership stake
        in
        our Company, see “Item 7. Major Shareholders and Related Party
        Transactions—Principal Shareholders.”
  We
        refinanced our restructured indebtedness in December 2000 through a term
        loan
        facility from Banco Nacional de Mexico, S.A., or Banamex, and further refinanced
        this indebtedness in June 2001 through a term loan facility with Scotiabank
        Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank
        Inverlat, or Scotiabank Inverlat. On August 18, 2003, with resources from
        our
        operations, we repaid the outstanding amounts under the long-term loan facility
        with Scotiabank Inverlat established in June 2001. In 2004, with resources
        from
        our operations, we repaid entirely our short-term loan facilities to end
        the
        year with a net debt of Ps. -497 million. See “Item 5. Operating and Financial
        Review and Prospects—Indebtedness” and Note 8 to our audited consolidated
        financial statements. During 2005, we did not incur in any additional debt,
        so
        that our net debt figure by year-end amounted to Ps. -714 million.
  Our
        consolidated net sales for the year ended on December 31, 2005 totaled Ps.
        21,874 million. As of December 31, 2005, our total assets were Ps. 9,833
        million. We have 22 distribution centers in Mexico. In 2005, 99% of our
        consolidated net sales were made in Mexico.
  Our
        operations are currently organized into four operating business divisions:
        the
        Private Pharmaceutical Products business division, which we refer to as “Private
        Pharma” (82.9% of our total net sales in 2005); the Government Pharmaceutical
        business division, which we refer to as “Government Pharma” (3.7% of our total
        net sales in 2005); the Health, Beauty Aids, Consumer Goods, General Merchandise
        and Other Products business division, which we refer to as “HBCG/Other Products”
business division (9.8% of our total net sales in 2005); and the Publications
        business division (3.6% of our consolidated net sales in 2005).
  **Organizational
        Structure**
  The
        following table sets forth our significant subsidiaries and our direct or
        indirect percentage equity ownership in such subsidiaries as of May 31,
        2006:
  **Name
                  of Subsidiary****(1)**
              **Jurisdiction
                  of Incorporation**
              **Percentage
                  Ownership****(2)**Casa
                  Saba, S.A. de C.V.(3)
              Mexico
              99.9%Drogueros,
                  S.A. de C.V.(4)
              Mexico
              99.9%Grupo
                  Mexatar, S.A. de C.V.(5)
              Mexico
              99.9%Centennial,
                  S.A. de C.V.(6)
              Mexico
              99.9%Inmuebles
                  Visosil, S.A. de C.V.(7)
              Mexico
              99.9%Publicaciones
                  CITEM, S.A. de C.V.(8)
              Mexico
              99.9%Transportes
                  Marproa, S.A. de C.V.(9)
              Mexico
              99.9%Servicios
                  Corporativos Saba, S.A. de C.V.(10)
              Mexico
              99.9%Distribuidora
                  Casa Saba, S.A. de C.V.(11)
              Mexico
              99.9%Other
                  companies(12)
              Mexico
              99.9%
 ____________________
 
 (1)
              With
                  the exception of Casa Saba, S.A. de C.V., none of our operating
                  subsidiaries is a “significant subsidiary” within the meaning of Rule
                  1-02(w) of Regulation S-X of the Securities Act of
                  1933.(2)
              Percentage
                  of equity owned by us directly or indirectly through subsidiaries
                  or
                  affiliates.(3)
              Direct
                  subsidiary through which we distribute pharmaceutical products
                  to private
                  and government clients.(4)
              Indirect
                  subsidiary through which we distribute pharmaceutical products
                  to private
                  and government clients.(5)
              Indirect
                  subsidiary through which we distribute office and electronic products,
                  including keyboards, audio and television equipment and related
                  accessories.
    10
 Table
            of Contents
 
 (6)
              Indirect
                  subsidiary through which we distribute general merchandise and
                  other
                  products.(7)
              Indirect
                  subsidiary through which we lease real property to our other subsidiaries.
                  Inmuebles Visosil, S.A. de C.V. owns substantially all of the capital
                  stock of Drogueros, S.A. de C.V., another indirect subsidiary of
                  Grupo
                  Casa Saba.(8)
              Direct
                  subsidiary through which we distribute publications.(9)
              Direct
                  subsidiary through which we deliver products to our distribution
                  centers
                  throughout Mexico. We place centralized purchase orders for all
                  of our
                  distribution centers directly with suppliers, who deliver these
                  centralized purchase orders to Transportes Marproa, S.A. de C.V.,
                  or
                  Marproa. Marproa then distributes customized orders to each of
                  our 22
                  distribution centers throughout Mexico. Marproa also provides freight
                  services to third parties at market rates.(10)
              Indirect
                  subsidiary that provides administrative, legal, accounting, tax
                  planning,
                  financial counseling and other professional services to Casa Saba,
                  S.A. de
                  C.V.(11)
              Direct
                  subsidiary that provides logistical and transportation services
                  to Casa
                  Saba, S.A. de C.V.(12)
              Real
                  estate and service companies.
 
 **Capital
        Expenditures**
  The
        table
        below sets forth our capital expenditures, investments and acquisitions for
        the
        years ended December 31, 2003, 2004 and 2005. Our capital expenditure
        program is focused on new investments in information technology and in vehicles
        for our distribution fleet and technology and computer equipment. For a
        discussion of how we funded our capital expenditures, investments and
        acquisitions in 2005, as well as a more detailed description of our capital
        expenditures, investments and acquisitions, see “Item 5. Operating and Financial
        Review and Prospects—Liquidity and Capital Resources—Overview” and “—Capital
        Expenditures.”
  
 **Year
                    ended December 31**,**2003**
                
                **2004**
                
                **2005****(Millions
                    of constant Pesos as of December 31, 2005)**Distribution
                    fleet
                
                Ps.
                36.8
                
                Ps.
                36.9
                
                Ps.
                45.8Technology
                    and computer
                  equipment
                
                
                21.4
                
                
                9.9
                
                
                38.0Acquisitions
                
                
                0.0
                
                
                0.0
                
                
                4.0Other
                    general capital
                  expenditures
                
                
                0.7
                
                
                1.0
                
                
                0.4**Total
                    capital expenditures**
                
                Ps.
                58.9
                
                Ps.
                47.8
                
                Ps.
                88.2
 
 We
        expect
        that, in 2006 our main capital expenditures will be related to information
        technology investments and developments and the renewal of our distribution
        fleet. In fact, in March of 2006 we signed a strategic alliance with IBM
        and SAP
        to attain a technological renewal that will allow us to increase our competitive
        advantage as well as the efficiency of our execution processes. We expect
        to
        fund the capital expenditures for 2006 with internal funds. In the event
        that we
        require additional funds, we may access our short-term revolving credit
        facilities.
   11
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            of Contents
   **Business
        Overview**
  Grupo
        Casa Saba was founded as a pharmacy in 1892, and is currently one of the
        leading
        multi-channel, multi-product national wholesale distributors in Mexico,
        operating through one of Mexico’s largest distribution networks of its type. We
        distribute pharmaceutical products, health, beauty aids and consumer goods,
        publications, general merchandise, office and other products. We distribute
        the
        majority of these products on a non-exclusive basis. With over 110 years
        of
        experience, we supply the majority of Mexico’s pharmacies, mass merchandisers,
        retail and convenience stores, supermarkets and other specialized channels
        nationwide.
  We
        currently distribute over 16,000 different products, including
        approximately:
  ·
              5,500
                  pharmaceutical products;·
              4,600
                  health and beauty products;·
              950
                  general merchandise and other products, such as food, toiletries
                  and
                  electronics; and·
              5,400
                  publications.
 We
        distribute these products throughout Mexico through our nationwide distribution
        network, to clients in the following segments:
  ·
              more
                  than 17,600 pharmacies owned by private individuals;·
              approximately
                  3,250 privately owned chain pharmacies and over 650
                  government
                pharmacies;·
              approximately
                  2,200 regional and national supermarkets;·
              approximately
                  850 magazine stores, approximately 200 racks and 161 nationwide
                  agents;·
              over
                  70 department stores; and·
              approximately
                  200 major wholesalers and more than 1,200 convenience
                  stores.
 Our
        core
        business is the wholesale distribution of pharmaceutical products. The following
        table shows our sales by business division, as a percentage of net sales
        for the
        last three years:
 **Year
                      Ended December 31,****2003**
                  
                  **2004**
                  
                  **2005**Private
                      Pharmaceuticals(1)
                  
                  
                  83.5
                  %
                  
                  83.6
                  %
                  
                  82.9
                  %Government
                      Pharmaceuticals
                  
                  
                  2.7
                  %
                  
                  3.0
                  %
                  
                  3.7
                  %HBCG/Other
                      Products
                  
                  
                  10.5
                  %
                  
                  9.9
                  %
                  
                  9.8
                  %Publications
                  
                  
                  3.3
                  %
                  
                  3.5
                  %
                  
                  3.6
                  %**Total**
                  
                  
                  100.0
                  %
                  
                  100.0
                  %
                  
                  100.0
                  %
 ____________________
 (1)For
          a brief description of the
          types of products included within the term “pharmaceutical products” for
          purposes of this annual report, as well as a discussion of the differences
          between the pharmaceutical markets in Mexico and the United States, see
          “—Pharmaceutical Industry,” below in this item.
 
 We
        seek to distribute
        pharmaceutical products on a “full-line/full-service” basis. We distribute a
        wide array of pharmaceutical and other products of the kinds listed above,
        as
        well as provide our clients with a range of value-added services, including
        multiple daily deliveries and emergency product replacement services. In
        our
        HBCG/Other Products business division, we distribute certain products on
        an
        exclusive basis while also providing our clients with specialized value-added
        services on a product-by-product basis, including merchandising, marketing
        support and other customer counseling services.
   12
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            of Contents
 
 We
        purchase the products we distribute from a wide variety of suppliers, the
        majority of which are located in Mexico. We place purchase orders on an ongoing
        basis, negotiating quantity and price periodically rather than committing
        to
        contractual terms. In our distribution of pharmaceutical products, we generally
        are not a “demand creator,” since we do not advertise products or suggest or
        provide substitute products for those ordered.
  Our
        principal strengths are our nationwide distribution network, through which
        we
        are able to deliver products within 12 to 24 hours from the time of order,
        our
        state-of-the-art technology, our commitment to customer service and our
        well-trained and experienced personnel. In addition, as a result of our
        continued use of new technologies since the early 1990s, we have increased
        our
        operating efficiency and distribution capacity.
  Mexico’s
        vast and mountainous terrain and old road network connecting small towns
        present
        a difficult environment for distribution. This is further complicated in
        Mexico
        City and the surrounding areas by traffic congestion. We believe that we
        will
        continue to overcome these constraints with our strategically located
        distribution centers near Mexico’s major population centers.
  As
        of
        December 31, 2005, we distributed products to our clients nationwide through
        a
        distribution network consisting of 22 distribution centers, representing
        over
        110,000 square meters of warehouse space. Using a fleet of over 900 vans,
        trucks
        and cars, we filled more than 5 million orders in 2005, averaging more than
        400,000 orders per month. For a list of our distribution centers and their
        locations, see “—Property, Plant and Equipment,” below in this
        item.
  **Business
        Strategy**
  Since
        the
        acquisition of our Company in February 2000, we have been operating under
        the
        direction of our current management. See “Item 4. Information on the
        Company— History
        and Development of the Company.” Under the direction of our current management,
        we are focused on enhancing the value of Grupo Casa Saba by:
  ·
              maintaining
                  a continuous contact with clients and suppliers to enhance the
                  supply
                  chains in which we
                participate;·
              raising
                  participation with government institutions and state health
                  institutions;·
              developing ambitious
                  internal savings and operating efficiencies programs to maximize
                  our
                operations’
                  profitability;·
              complementing
                  our existing businesses through our Internet solutions;·
              implementing
                  information technology solutions and renovating our transportation
                  fleet;
                  and·
              capitalizing
                  on our favorable capital structure.
 As
        a
        result of these measures, as of December 31, 2005, we:
  ·
              increased
                  our operating profit margin from 3.88% in 2004 and to 4.09% in
                  2005;·
              canceled,
                  created and reduced some of the distribution routes to increase
                  their
                  profitability;·
              achieved sales
                  growth, in particular 27.8% in our Government Pharma
                  division;·
              reviewed,
                  and in some cases changed, the commercial terms of several of our
                  clients
                  and suppliers and,
                when
                  required, discontinued unprofitable operations;·
              maintained
                  a healthy financial structure, which allowed us to close the year
                  with a
                  solid cash balance,
                of
                  Ps. 714 million, and to increase our dividend distribution by 9.09%;
                  and·
              increased
                  our net income in 2005 by 8.6% to Ps. 728.2 million.
   13
 Table
            of Contents
 
 During
        2005, we continued implementing strict cost and expense controls to achieve
        greater efficiencies in our distribution network and increases in our
        profitability levels.
  ***Maintaining
        Continuous Contact with Clients and Suppliers***
  We
        are
        well aware that a continuous contact with our clients and a solid knowledge
        of
        the markets in which we operate are key to find new ways to increase our
        sales
        and further develop our core pharmaceutical business. Therefore, during 2005,
        we
        focused our efforts on working closely with our clients and suppliers in
        order
        to detect their specific needs and customize our service to meet such
        requirements. All these efforts were accomplished under our minimum
        profitability parameters.
  ***Focusing
        Efforts in Raising Participation with Government Institutions and State Health
        Institutions***
  During
        2005, we focused our efforts in increasing operations with government
        institutions, including PEMEX and state health institutions. Since most of
        our
        government sales rely on bidding processes which require targeted and
        specialized efforts, enhancing our government sales department was key to
        increasing our participation in these processes. Also, our increased presence
        in
        state health institutions allowed for higher sales in this segment. Mainly
        as a
        result of these strategies, the Government Pharma division grew by 27.8%
        with
        respect to the year 2004.
  ***Developing
        Internal Savings and Operating Efficiencies Programs to Maximize Our Operations’
Profitability***
  During
        2005, we continued implementing our profitability focused strategy involving
        the
        ongoing review and negotiation of commercial terms with our suppliers and
        clients to obtain better profitability levels, even if this led us, as it
        occasionally did, to discontinue sales that did not comply with these
        parameters.
  Likewise,
        diverse efficiency and continuous cost-savings programs were successfully
        implemented, such as route reengineering and optimization of distribution
        centers, among others.
  The
        strategies and actions implemented have yielded good results. Operating expenses
        registered a 0.14% decline in this fiscal year with respect to 2004 and,
        as a
        percentage of sales, decreased from 6.42% in 2004 to 6.23% in 2005, a reduction
        of 19 basis points. Consequently, our operating margin increased from 3.88%
        in
        2004 to 4.09% in 2005.
  ***Complementing
        Our Existing Businesses Through Our Internet
        Solutions***
  We
        continued to use an online distribution and information website, *www.farmaservicios.com* ,
        which
        we currently make available to our clients free of charge. Clients that log
        on
        to *www.farmaservicios.com* are
        able
        to communicate and/or negotiate the terms of their distributorship arrangements
        directly with us, as well as place and track their orders and shipments online.
        In addition, these clients have access to a wide range of additional services,
        including news and industry information, free e-mail, business advice and
        a
        variety of special promotions. We believe that *www.farmaservicios.com* is
        a
        value-added service that provides our clients with a quicker and more convenient
        way to link their demand to our inventory and place and track their orders
        unlike other traditional distribution channels. See “— Information Technology
        Systems” below in this item. We will continue with our efforts to develop
        Internet-based solutions for our clients and suppliers, as we believe it
        allows
        us to provide a value-added service that complements our existing
        business.
  
 14
 Table
            of Contents
  
 ***Implementing
        Information Technology Solutions and Renovating Our Transportation
        Fleet***
  At
        Grupo
        Casa Saba, we manage over 16,000 products, which requires excellent efficiency
        and systematization in the fulfillment and delivery of orders. To assure
        the
        optimal operation of its infrastructure, Grupo Casa Saba continuously renews
        its
        distribution fleet and invests in the upgrading and modernization of its
        logistics and information systems.
  In
        March
        of 2006, Grupo Casa Saba signed an agreement with IBM and SAP through which
        it
        expects to attain a technological renewal that will increase its competitive
        advantages as well as the efficiency of its execution processes. Grupo Casa
        Saba
        believes that the state-of-the-art technology systems that it will develop
        jointly with IBM and SAP will allow the Company to offer the best product
        distribution to its clients and suppliers nationwide.
  With
        this
        investment in technology, Grupo Casa Saba will obtain a system with
        state-of-the-art technology that is flexible, tolerant of failures and
        with the latest in backup procedures and disaster recovery, all of which
        assures
        the continuous processing of client transactions nationwide.
  ***Capitalizing
        on Our Favorable Capital Structure***
  Our
        healthy financial structure, free of cost-bearing liabilities since 2004,
        and a
        growing cash flow generation have allowed us to access market opportunities,
        improve our profitability levels and enhance the flexibility of our
        operations.
  Our
        capital structure has also allowed us to reduce interest expense by 57.70%
        in
        2005 compared to the year 2004 and to increase our dividend payment by 25%
        when
        comparing June 2006 with June 2005, months when the dividends were
        paid. We intend to preserve our improved financial position and to capitalize
        on
        our ability to react quickly to market opportunities, as well as to support
        our
        growth strategy.
  **Operations**
  Our
        operations are currently organized into four operating business divisions:
        the
        Private Pharma business division, the Government Pharma business division,
        the
        HBCG/Other Products Division and the Publications business division. Please
        see
“Item 5. Operating and Financial Review and Prospects—Results of Operations” and
        Note 13 of our financial statements included elsewhere in this annual report
        for
        a breakdown of our consolidated net sales by business division for the
        three-year period ended on December 31, 2005.
  **Private
        and Government Pharma Business Divisions**
  ***Pharmaceutical
        Industry Overview***
  In
        Mexico, pharmaceuticals are available to the public through both private
        and
        government distribution channels. The Mexican government plays a significant
        role in the market for pharmaceuticals. In Mexico, pharmaceutical products
        consist of prescription pharmaceutical products that may be sold only in
        licensed pharmacies and “over-the-counter” pharmaceuticals that may be sold
        without a prescription in licensed pharmacies. For purposes of this annual
        report, prescription pharmaceutical products include “over-the-counter”
pharmaceuticals.
  The
        *Secretaría de Salud*, or the Mexican Ministry of Health, oversees the
        provision of public health care through hospitals in Mexico, pharmacies and
        clinics operated by various governmental agencies and state-owned institutions.
        Distribution of pharmaceuticals within the public sector is largely undertaken
        by each governmental agency through direct purchases from manufacturers during
        yearly bidding programs based primarily on price.
  Based
        on
        information from IMS Health, A.G. and our internal data, we estimate that
        approximately 90% of private sector pharmaceutical sales are placed through
        wholesalers, which in turn sell primarily to retail pharmacies. The remaining
        10% of private sector pharmaceutical sales are placed directly by manufacturers
        to a few large pharmaceutical retail chains that purchase sufficiently large
        volumes to have direct access to the laboratories. Most manufacturers have
        adopted a “wholesaler only” policy because it is the most cost-efficient method
        of distributing their products. Nearly all of the individual pharmaceutical
        purchases take place at retail pharmacies and are either paid for by individuals
        or through private health insurance. The following table shows annual sales
        and
        average unit prices in U.S. Dollars and growth rates for the private sector
        of
        the Mexican pharmaceutical market:
   15
 Table
            of Contents
   **Year
                  Ended December 31,**(1)**2003**
              
              
              **2004**
              
              
              **2005**Sales
                  in millions(2)
              
              U.S.$7,061.7
              
              
              U.S.$7,721.3
              
              
              U.S.$9,009.7Sales
                  in millions of units(3)
              
              1,005.0
              
              
              972.6
              
              
              992.9Average
                  unit price
              
              U.S.$7.03
              
              
              U.S.$7.94
              
              
              U.S.$9.07Growth
                  in average unit price
              
              2.6%
              
              
              12.9%
              
              
              14.2%
 ____________________
 
 (1)
              Statistics
                  based on information made publicly available by IMS Health, A.G.
                  for
                  private sector data and our
                estimates.(2)
              Revenues
                  based on prices charged by wholesalers to retailers.(3)
              In
                  Mexico, pharmaceutical products are distributed in pre-packaged
                  doses or
                  units, which may vary in size
                from
                  year to year.
  **Industry
        Prices**
  As
        a
        result of government regulation, Mexican pharmaceutical prices are lower
        than in
        other countries such as the United States. We believe that price increases
        of
        pharmaceutical and over-the-counter products in Mexico continue to represent
        an
        area of possible future revenue growth for us. Prior to 1990, the Mexican
        government determined pharmaceutical prices and did not increase pharmaceutical
        prices at the rate of inflation, thereby limiting the growth of our revenues
        from the distribution of these products. As of 1990, the Mexican government,
        acting through the *Secretaría
        de Comercio y Fomento Industrial* ,
        or
        Ministry of Commerce and Industrial Promotion, now known as the *Secretaría
        de Economía* ,
        or
        Ministry of Economy, and the *Cámara
        Nacional de la Industria Farmacéutica* ,
        or
        National Chamber of the Pharmaceutical Industry, known as *Canifarma* ,
        entered
        into a series of agreements to deregulate the prices of domestically
        manufactured pharmaceutical products, which constitute most of the
        pharmaceutical products we sell. In order to obtain the benefits of these
        agreements, many Mexican pharmaceutical manufacturers have agreed with Canifarma
        to continue submitting price increase proposals for approval by the Ministry
        of
        Economy. Under current practice, any manufacturer seeking a price increase
        must
        file a request before the Ministry of Economy, outlining the reasons for
        the
        price increase. The most important factors considered by the Ministry of
        Economy
        are the minimum wage increase, the inflation rate, the exchange rate and
        the
        amount of foreign direct investment that the manufacturer commits to its
        Mexican
        facilities. If the Ministry of Economy does not respond within 30 days, the
        increase is automatically granted. *Canifarma* and the
        Ministry of Economy continuously engage in negotiations regarding the level
        of
        price increases for individual products and for the pharmaceutical sector
        as a
        whole. In the case of new pharmaceutical products, the manufacturer is required
        to file a request for a price increase before the Ministry of Economy, which
        outlines the price for the new product and the rationale behind the chosen
        price. Since 1990, prices have increased above the rate of inflation. However,
        in 2002 the price per unit decreased by 1.7% “in dollar terms” compared with
        2001, reflecting in part the devaluation of approximately 13.7% that the
        Peso
        suffered in 2002. In 2003, the average price per unit increased 2.6% “in dollar
        terms” versus 2002, affected by the 5.7% devaluation of the Peso and the low GDP
        growth rate of 1.4% posted by the Mexican economy. In 2004, the 12.9% growth
        in
        average unit price was largely due to the slight 0.8% appreciation of the
        Peso
        versus the U.S. Dollar as well as the 3.2% decrease in the number of units
        sold
        in the market. During 2005, the 14.2% increase in average unit price resulted
        from price increases in Peso terms and the 4.7% appreciation of the Peso
        against
        the U.S. Dollar.
  The
        devaluation of the Peso may affect our ability to increase the prices of
        some of
        our products. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to
        Political and Economic Developments in Mexico.”
 The
            government institutions that purchase products from us include:
  ·*ISSSTE*
          -
          The Instituto de Seguridad y Servicios Sociales para los Trabajadores del
          Estado, the health and social security institution for Mexican federal
          government employees;
  16
 Table
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  ·  *PEMEX* - The
        hospitals and pharmacies of Petróleos Mexicanos, the Mexican national oil
        Company. Our sales to PEMEX in 2000 accounted for 4.8% of our total net sales
        and we had 100% of the PEMEX contracts. Due to new conditions in our PEMEX
        contract, sales to PEMEX during 2001 accounted for 3.5% of our total net
        sales
        and we were awarded with approximately 60% of the total PEMEX contracts to
        serve
        different hospitals in four specific regions of Mexico. During 2002, sales
        to
        PEMEX represented approximately 4.0% of our total sales, 19.4% higher than
        in
        2001. In 2003, mainly due to a lower participation in contracts with PEMEX,
        sales in our Government Pharma Division decreased 29.2% with respect to 2002.
        Our lower participation in PEMEX contracts reflects changes in the terms
        and
        conditions of the contracts, including changes in the type of products and
        prices included compared to previous years. In 2004, we were able to increase
        our participation in various governmental institutions, including PEMEX.
        As a
        result, Government Pharma sales increased 10.1%, and the participation of
        this
        division to the Group’s total net sales reached 3.0%. This trend continued
        during 2005, so that the annual sales for the division grew by 27.8%. We
        cannot
        assume that we will be awarded contracts with PEMEX similar to those we have
        had
        in previous years:
  ·  *IMSS* -
        The
        hospitals and pharmacies of the *Instituto
        Mexicano del Seguro Social* ,
        the
        health and social security institution for Mexican employees of private
        companies;and
  ·  *State
        Health Institutions* -
        Health
        institutions in several states through bidding processes.
  ***Private
        Sector Pharmaceutical Distribution (Private Pharma)***
  Our
        customers in the private sector consist primarily of over 17,600 privately
        owned
        pharmacies, as well as national and regional pharmaceutical and supermarket
        chains (comprising approximately 5,450 stores) and the pharmacies associated
        with private hospitals. We were the first nationwide wholesale distributor
        of
        pharmaceuticals to enter the private sector market in Mexico, and since the
        1960s we have been one of only two wholesalers providing national coverage.
        We
        believe that our coverage of customers is one of the highest in the industry
        and
        that we cater to a majority of retailers nationwide.
  According
        to IMS Health, A.G. and our estimates, in 2003, 2004 and 2005, Grupo Casa
        Saba
        and Nadro, Mexico’s only other nationwide pharmaceutical distributor, together
        accounted for approximately 54% of prescription and over-the-counter
        pharmaceutical sales through private sector wholesale pharmaceutical channels
        in
        Mexico (this figure does not include the sale of similar and generic products).
        Mexico has adopted individual dosage packaging where pharmaceuticals are
        distributed in pre-packaged dosages rather than in bulk. Retail customers
        demand
        a rapid and continuous supply of pharmaceutical products. As a result, inventory
        turnover is quite high. Consequently, shortages and stock-outs are common
        and
        pharmacies are forced to rely on multiple suppliers. We have sought to overcome
        these market constraints by maintaining a superior distribution network.
        Through
        more than 110 years of experience, we have developed sophisticated
        transportation and inventory logistics which enable us to distribute our
        products between 12 and 24 hours from the time of order nationwide. We believe
        that we are able to fill the highest rate of orders in the industry and plan
        to
        maintain a state-of-the-art distribution network to continue to improve our
        distribution capabilities.
  ***Public
        Sector Pharmaceutical Distribution (Government
        Pharma)***
  Since
        the
        Mexican government generally buys directly from manufacturers through IMSS
        and
        ISSSTE, it is able to buy at prices that are substantially lower than those
        for
        private entities. Our sales to IMSS, ISSSTE, State Health Institutions, and
        PEMEX are not in bulk and, therefore, are not at bulk prices. Instead, we
        deliver pharmaceutical products to ISSSTE Tiendas, the supermarket pharmacies
        operated by ISSSTE, at prices comparable to those prices we charge our large
        private sector customers. We are able to sell our pharmaceutical products
        to
        approximately 260 ISSSTE Tiendas at private sector prices because we can
        provide
        them with additional services and increased efficiency. Since our sales to
        ISSSTE Tiendas are not through the usual public sector channels, we classify
        them as private sector sales. Sales to PEMEX are at prices substantially
        lower
        than those for the private sector. Sales to IMSS are made also at prices
        substantially lower than those for the private sector and in many cases depend
        on the negotiations made with the laboratories over each specific
        product.
   17
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 ***Value-Added
        Pharmaceutical Services***
  We
        believe that we distinguish ourselves from our competitors, in part, by the
        wide
        range of value-added services we provide our customers in addition to our
        products. For example, we provide pharmacies with suggested retail price
        lists
        that are updated immediately upon notice of price changes from our suppliers.
        These price lists are the only notices used by pharmacies to adjust their
        prices. We also provide inventory, purchasing management, price updates and
        advisory services to our customers through direct personal computer links
        between us and individual pharmacies using *www.farmaservicios.pdv* ,
        our
        proprietary point-of-sale system. See “—Technology Information Systems—Pharmacy
        Personal Point-of-Sale Computers” below in this item. Also, we offer our
        customers an immediate product replacement service. If any item from a
        customer’s order is out of stock, *www.farmaservicios.pdv* adds the
        client’s name together with the specific out of stock item to the product
        replacement list. This ensures that the product will be delivered to the
        client
        as soon as it is received at one of our distribution centers, without requiring
        the client to reorder the product.
  We
        also
        offer our customers a series of specialized services, including training,
        conferences and trade fairs. Some services to customers are supported by
        a
        monthly pharmaceutical publication, “ *Farmservicios
        Editorial* ,”
        formerly “ *Correo
        Farmacéutico* ,”
a
        monthly magazine and product catalog. We have already established an online
        distribution and information site for our clients and suppliers, *www.farmaservicios.com* ,
        which
        we currently make available to them free of charge. Clients that log on to *www.farmaservicios.com* are able
        to communicate directly with us, and to place and track their orders and
        shipments online. In addition, these clients also have access to a wide range
        of
        additional services, including news and industry information, free e-mail,
        business advice and a variety of special promotions, also *www.farmaservicios.com* links to *www.farmaservicios.pdv* .
        See
“—Information Technology Systems” below in this item.
  **Health,
        Beauty Aids, Consumer Goods, General Merchandise and Other**
  Prior
        to
        2004, we used to break out the divisions of General Merchandise and Other
        Products and Office Products. However, in 2004, as part of a strategic business
        decision, the Group decided to unite all three divisions under the name of
        Health, Beauty Aids, Consumer Goods, General Merchandise and Other or HBCG/Other
        Products. The decision was made due to the diminishing participation of the
        General Merchandise and Other products as well as Office Products within
        the
        Group’s sales, which together accounted for less than 1.5% of the Group’s total
        net sales.
  We
        distribute health and beauty aids (HBA), various consumer products and
        electronic products that are typically sold through supermarkets, convenience
        stores, specialty stores and pharmacies in Mexico. The products distributed
        in
        this division consist principally of basic toiletries, food products, consumer
        goods and electronics, some of which are distributed on an exclusive basis,
        such
        as:
  ·
              Mexsana
                  talcum powders from Schering-Plough (since 1999);·
              Coppertone
                  suntan lotions (since 1999);·
              Brunswick
                  Sea Food products (since 1994);·
              Canderel
                  and Nutra Sweet products (since 1999);·
              Cure
                  Band bandaids (since 2002);·
              Merisant
                  chocolates (since 2003);·
              Lander
                  lotions (since 2003);·
              Toblerone
                  chocolates (since 2001);·
              Alo
                  coffee (since 2005);·
              Lipovitan
                  energizing beverage (since 2002);
   18
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 ·
              Planet
                  Pop, pork chips for microwave oven (since 2005);·
              The
                  Sensual Tea (since 2004); and·
              Pringles
                  potato chips (since 2005).
 As
        of May
        2006, we stopped distributing Veet waxing products and General Mills products,
        and added to our distribution on an exclusive basis, Chapstick lip balm and
        Sin
        Agua liquid hand sanitizer.
  In
        some
        cases, we enter into short-term exclusive distribution agreements on a
        preliminary, experimental basis, in order to test the real demand for specific
        products. If upon the termination of these agreements, we conclude that there
        is
        no significant demand for a specific product, we cease the distribution of
        such
        product. For this reason, in the normal course of business, products we
        distribute one year may not be distributed the next year. We are permanently
        seeking to enter into distribution agreements to distribute HBA, other consumer
        products, general merchandise and other products at acceptable margin levels.
        We
        cannot assure you that we will enter into distribution agreements to distribute
        any or all of these products at acceptable margin levels.
  In
        the
        HBCG/Other Products business division, in some cases, we provide manufacturers
        with highly specialized integrated services. These services range from
        purchasing, planning, centralized sales, merchandising, collections, execution
        of promotions and product information.
  We
        anticipate that the market in Mexico for health and beauty aids, consumer
        goods,
        general merchandise and other products will continue to grow due to the young
        profile of the Mexican population. We believe that as the Mexican population
        continues to grow, and as consumers’ disposable income increases, this division
        could account for increases in the demand for our products.
  We
        distribute general merchandise and other products that are generally sold
        through grocery stores, supermarkets, convenience stores, major warehouses
        and
        pharmacies in Mexico. Prior to 2002, we referred to these products as
        non-perishable food/consumer products. The general merchandise products we
        distribute consist primarily of packaged and canned foods, candies, chocolates
        and freezer products, among others. The other products we distribute consist
        of
        over-the-counter products, household cleansers, toiletries, Casio electronic
        products and Disney licensed products, among others. General merchandise
        and
        other products we distribute are mostly products sold on an exclusive basis
        in
        specified areas pursuant to contractual arrangements.
  Since
        August 2000, we have distributed office and electronic products from Casio,
        including keyboards, calculators, audio and television equipment and related
        accessories, through Mexatar, which we acquired Mexatar in December 1998.
        As part of our business strategy, the distribution of electronic products
        will
        continue only until our existing inventory of such products lasts. There
        can be
        no assurance that we will enter into a distribution agreement with Casio
        or any
        other supplier of similar products, or if so, that the terms will be favorable
        to us.
  **Publications**
  We
        distribute books and magazines, a large majority of which we distribute on
        an
        exclusive basis, through our publishing subsidiary, Publicaciones Citem,
        S.A. de
        C.V., or Citem, which is among the leading distributors of weekly magazines
        in
        Mexico. We are also one of the leading suppliers of self-service store chains,
        as well as the exclusive supplier of Wal-Mart Mexico’s VIPS and Portón
        restaurant chains in Mexico City. In 2002, we co-published children’s books with
        approximately 23 international publishers. However, due to our restructuring
        process, Citem did not enter into any co-publishing agreement during 2003,
        2004,
        nor 2005. There can be no assurance that we will enter into new co-publishing
        agreements in the future.
  We
        believe that Citem is one of the leading magazine distributors in Mexico,
        selling primarily through 161 nationwide agents, 850 book stores as well
        as
        through three firms affiliated with the *Union
        de Voceadores* ,
        or
        Union of Newspaper Boys, in Mexico City. Citem also distributes entertainment
        products through other establishments, including supermarkets, convenience
        stores, racks and magazine newsstands in airports, libraries and hotels.
        In
        addition, Citem offers one of the most efficient forces of rack-jobbers,
        or
        shelf-keeping merchandisers, to VIPS and Portón, that keep the shelves of more
        than 200 stores across Mexico duly organized. Citem also distributes products
        to
        15 export clients, consisting mainly of magazines wholesalers in North, Central
        and South America.
   19
 Table
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  Revenues
        from publication sales to export clients in the United States, Central America,
        South America and the Caribbean accounted for approximately 54%, 17%, 20%
        and 9%
        of our total export sales in 2001, respectively. In 2002 and 2003, we continued
        our international operations in the United States, Central America, South
        America and the Caribbean. These areas represented 54%, 11%, 7% and 28%,
        respectively, of our total publication export sales in 2002, while in 2003
        these
        sales accounted for 68%, 5%, 17%, and 10% of our total publication export
        sales,
        respectively. By the end of 2004, exports to the United States accounted
        for 62%
        of our annual publication export sales while Central America represented
        13%,
        South America represented 22% and the Caribbean represented 3%. During 2005,
        exports of publications to the United States accounted for 62.6% of our annual
        publication export sales, while Central America represented 10.4%, South
        America
        represented 24.0% and the Caribbean represented 3.0%.
  In
        2001,
        Citem secured the distribution of new publications, expanding its client
        base
        with the distribution of albums and stickers from leading licensors and
        publishers in the market. Despite the economic slowdown and supported by
        new
        contracts for distributing publications, Citem increased its total net sales
        during 2001 by 1.7%. To improve its infrastructure and increase its operating
        profitability, in the last quarter of 2001 Citem moved its distribution center
        from Mexico City to the State of Mexico.
  In
        the
        second half of 2002, Citem started an administrative and operational
        restructuring to achieve higher levels of profitability. This process involved
        changes in its catalog of products, client base, personnel and distribution
        units and methods, among other changes. As a result, several magazines and
        books
        were eliminated from its supplier base, generating a decrease in Citem’s sales
        of 8.5% compared to sales in 2001. The restructuring process continued during
        2003 and, therefore, sales in the year decreased by 12.9%. However, in the
        last
        quarter of 2003 the restructuring processes started to show positive results,
        reflecting an increase in Citem’s sales of 11.6%. This increase reflects Citem’s
        new client and product bases in which the inclusion of new titles are improving
        sales and operating results. During 2004, due to the above-mentioned
        restructuring factors, Citem’s sales rose by 6.2% as a result of having a more
        solid editorial base which included highly demanded magazine titles. In 2005,
        Citem’s sales rose by 7.8% as a result of a solid market positioning, the
        penetration in new markets, a substantial editor base and the inclusion of
        new
        titles.
  **Exclusive
        Distribution Agreements**
  In
        the
        areas of HBCG/Other Products and Publications, exclusive distribution agreements
        are typically limited to specific products, channels and geographic areas.
        Some
        of our exclusive distribution agreements can be terminated without cause,
        by
        means of proper notice, given by either party. We do not anticipate the imminent
        termination of any of these agreements, other than those that we decide to
        terminate if the products distributed are not sufficiently profitable. Before
        entering into exclusive distribution arrangements, we require that each
        prospective supplier agrees to advertise its services and offer a specific
        number of promotions and trade discounts to ensure that the supplier is seeking
        to take a leading position in the Mexican market. We provide manufacturers
        with
        highly specialized integrated services, ranging from purchasing, planning,
        centralized sales, merchandising, collections, execution of promotions and
        the
        provision of information.
  We
        are
        currently seeking to enter into exclusive distribution agreements that will
        allow us to distribute products, particularly in our HBCG/Other Products
        and
        Publications business divisions at acceptable margin levels. We cannot assure
        you that we will enter into distribution agreements to distribute any or
        all of
        these products at acceptable margin levels.
  **Purchasing**
  We
        order
        all of our products on an ongoing basis, negotiating quantity and price
        periodically, rather than committing to contractual terms. While the majority
        of
        our suppliers are Mexican companies, we do purchase some products from
        international manufacturers. We negotiate exchange risks by purchasing these
        products in Pesos or setting a limit on our exchange risk exposure.
   20
 Table
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 In
        previous years, each of our distribution centers placed its own orders on
        a
        weekly basis, directly to suppliers. These orders were placed through our
        computerized order system, Electronic Document Interchange, or EDI. Suppliers
        delivered orders directly to the distribution warehouse that placed the order,
        or to our transportation subsidiary, Marproa. Suppliers typically delivered
        bulk
        orders directly to the distribution warehouse that placed the order. In the
        second half of 2000, we centralized our purchasing to improve our financial
        results and increase the efficiency of our operations. As a result, all of
        our
        orders for all of our distribution centers are placed through our centralized
        system.
  Deliveries
        of non-Mexican products are performed through Mexican customs near the U.S.
        border, and are typically made directly from the supplier to a Mexican customs
        agent. Once the customs agent concludes the importing procedure, the products
        are sent to our distribution center by ground transportation.
  Marproa
        is a common carrier that also provides freight services to third parties
        at
        market rates. From Marproa, we make deliveries several times a week to each
        of
        our 22 distribution centers.
  Maintaining
        good relationships with our suppliers and publishers is important to our
        competitive success because of the tight inventory policies prevalent in
        the
        pharmaceutical industry in Mexico. We are committed to making rapid and timely
        deliveries to our customers.
  We
        have
        also installed EDI, which enables us to communicate electronically with our
        suppliers and customers. For example, we use EDI for order placement, order
        confirmation and price changes. See “—Information Technology Systems” below in
        this item.
  ***Pharmaceutical
        Products***
  We
        purchase pharmaceutical products from over 200 laboratories and manufacturers.
        Most of these suppliers are located in Mexico City and its surrounding areas.
        Purchases are made through purchase orders from time to time, on an as-needed
        basis. More than two-thirds of the suppliers that manufacture pharmaceuticals
        products in Mexico are owned primarily by large multinational companies.
        Purchases made from these suppliers represent more than 80% of our Private
        Pharma and Government Pharma business divisions’ purchases. Companies such as
        Sanofi, Pfizer and, Roche are among our major suppliers.
  ***Health
        Beauty, Consumer Goods, General Merchandise and Other
        Products***
  We
        purchase health, beauty, consumer goods, General Merchandise and Other Products
        from more than 100 suppliers located primarily in Mexico. We purchased our
        catalog of over 950 general merchandise and other products from a wide range
        of
        suppliers, including Nutrasweet, Brunswick and Pringles. In some cases, we
        negotiate directly with our suppliers in other countries and directly import
        the
        products through a customs agent. Products imported are delivered to our
        warehouses from the customs agent after complying with all the legal
        requirements, which in some cases depend on the type of product. We purchased
        office products and electronic products from Casio, pursuant to a distribution
        agreement, including keyboards, calculators, audio and television equipment
        and
        related accessories through our subsidiary Mexatar. In line with our business
        strategy to focus on profitability, we are currently distributing keyboards,
        digital cameras and various electronics products, such as watches, only
        until we run out of our existing inventory. There can be no assurance that
        we
        will enter into a different distribution agreement with Casio or any other
        supplier, or if so, under terms favorable to us.
  ***Publications***
  Our
        Publications business division distributes, through Citem, magazines, books,
        albums and stickers from leading licensors and publishers in the market.
        Nearly
        all products purchased as of today may be returned to the publisher. In 2003,
        while going through an administrative and operative restructuring as described
        above, Citem distributed over 6,200 publications purchased from over 280
        publishers. In 2004, Citem distributed over 5,900 publications, purchased
        from
        over 290 publishers, and during 2005 the Company distributed over 5,400
        publications from approximately 280 publishers. Currently, Citem is distributing
        only publications (magazine and books titles) that meet a minimum profit
        requirement. Purchases are made through our centralized administration. As
        a
        result of this profitability strategy, certain titles were incorporated to
        or
        eliminated from Citem’s catalog of products.
  21
 Table
            of Contents
  **Competition**
  ***Pharmaceutical
        Products***
  Our
        primary competitor in the private pharmaceutical distribution business is
        Nadro,
        Mexico’s only other national pharmaceutical distributor. According to IMS
        Health, A.G. and our estimates, in 2004 and 2005 Grupo Casa Saba and Nadro
        together accounted for over 54% of prescription and over-the-counter
        pharmaceutical sales through private sector wholesale pharmaceutical channels
        in
        Mexico (this figure does not include the sale of similar and generic products).
        Our other primary competitor is Marzam, S.A. de C.V., a large Mexican regional
        distributor. Our other competitors include approximately twelve regional
        distributors, some of which own chains of pharmacies. We believe that our
        distribution services are superior to those of regional distributors due
        to the
        speed with which we distribute our products, as well as the quality, catalog
        of
        products and value-added services we provide.
  In
        the
        government pharmaceutical distribution business, government entities acquire
        products through bidding programs in which wholesalers and laboratories
        participate directly. These bidding processes are open to the public and,
        therefore, we face competition as we do in the private sector.
  ***Health,
        Beauty, Consumer Goods, General Merchandise and Other
        Products***
  Our
        competition in the Health, Beauty, Consumer Goods, General Merchandise and
        Other
        Products business division is similar to the competition we face in our
        distribution of pharmaceutical products. We compete primarily with manufacturers
        that deliver directly to supermarkets, some pharmaceutical chains and with
        various regional distributors. In addition, Nadro and other regional wholesalers
        also distribute health, beauty, consumer goods, general merchandise and other
        products.
  Our
        principal competitors in the general merchandise and other products market
        segment are manufacturers that deliver directly to supermarkets and some
        regional distributors. We compete directly with many middle wholesalers and
        product-specialized wholesalers that distribute to convenience stores,
        independent grocery stores and “mom and pop” stores. In the lines that we
        distribute exclusively, we face no competition from other
        wholesalers.
  We
        continue to distribute office and electronic products from Casio, and face
        competition from regional and other wholesalers. We only expect to continue
        distributing these products while inventories last, given that we do not
        see
        this as a strategic business.
  ***Publications***
  In
        Mexico, where the majority of Citem’s sales are made, our principal competitors
        in our publications product line include:
  ·
              Intermex,
                  a company owned by Televisa, which primarily distributes its own
                  publications;·
              Codyplirsa,
                  which primarily distributes popular magazines nationwide; and·
              DIMSA,
                  which distributes primarily English-language publications.
 **Payments
        and Collections**
  Most
        of
        our sales are made on credit, with customers signing promissory notes for each
        invoice indicating the delivery of a product. Cash-on-delivery terms are
        mainly
        used with new clients or those whose credit has been temporarily suspended.
        We
        negotiate the number of days of credit that we will extend to our clients
        on a
        case-by-case basis. The determination of the number of days that we will
        extend
        credit to a particular client depends on a number of factors, including the
        client’s creditworthiness, as well as the length and nature of the client’s
        relationship with us. The determination of the number of days that we will
        extend credit to a particular client also depends on our current business
        strategy. For example, in connection with our efforts to increase sales to
        particular sectors of the market, in the past we extended credit to clients
        in
        these sectors on more favorable terms than those offered to our overall client
        base and, as a result, the maturity of accounts receivable due from clients
        in
        these sectors was slightly higher than the average maturity of accounts
        receivable due from our overall client base in some periods. We are constantly
        adapting our collection methods to market and general economic conditions.
        The
        average maturity of accounts receivable due from our overall client base
        was 64
        days in 2003, 63 days in 2004 and 68 days in 2005.
  22
 Table
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  Although
        we are continuously seeking to reduce the average maturity of our accounts
        receivable and maintain an aggressive collection policy for delinquent accounts
        receivable in connection with our efforts to improve our financial results
        and
        the efficiency of our operations, we could, in the future, decide to extend
        credit to clients in particular sectors on more favorable terms than those
        offered to our overall client base. See “Item 4.”
  The
        following chart sets forth the average commercial maturity of accounts
        receivable due from various sectors of the market.
  **Credit
                  terms**
              **Days**Pharmacies
              35Supermarkets
                  and local wholesalers
              35Government
              45Publications
                  to wholesalers
              40Publications
                  to retailers (1)
              45
 ____________________
 (1)
              National
                  retail chains are centralized.
 
 **Information
        Technology Systems**
  We
        periodically acquire and use new technologies to increase our efficiency
        and
        distribution capabilities. All dealings with suppliers, leasers, banks and
        insurance companies, as well as our treasury are centralized. We believe
        that
        our technology information systems have been, and will continue to be,
        instrumental in our ability to provide value-added services to our
        clients.
  In
        March
        2006, Grupo Casa Saba signed an agreement with IBM and SAP through which
        it will
        attain a technological renewal that will increase its competitive advantage
        as
        well as the efficiency of its execution processes. Grupo Casa Saba considers
        that the state-of-the-art technology systems that it will develop jointly
        with
        IBM and SAP will allow the Company to offer the best product distribution
        to its
        clients and suppliers nationwide.
  With
        this
        investment in technology, Grupo Casa Saba will obtain a system with
        state-of-the-art technology that is flexible, tolerant of failures and
        with the latest in backup procedures and disaster recovery, all of which
        assures
        the continuous processing of client transactions nationwide.
  ***Retail
        Order Computers***
  A
        substantial part of our sales representatives use portable hand-held computer
        terminals to take and process orders. These orders are transmitted via telephone
        lines to a central computer at each distribution center. The orders are then
        printed and separated by route and filled according to a departure schedule.
        We
        continually upgrade our systems to increase the effectiveness of our ordering
        system, installing individual workstations in more locations, tracking the
        orders of customers and suppliers in the systems network and ensuring the
        accurate fulfillment of those orders.
  ***Pharmacy
        Personal Point-of-Sale Computers***
  We
        have
        developed a point-of-sale software known as *www.farmaservicios.pdv.* ,
        which
        is a PC-based application that has been designed to meet the needs of our
        pharmacy customers. *www.farmaservicios.pdv* has
        point-of-sale, inventory control and Internet capabilities to update and
        synchronize data using web technology. Clients that use *www.farmaservicios.pdv* can
        access and synchronize point-of-sale inventory and other databases through
        our
        business-to-business website, *www.farmaservicios.com* .
        Pharmacies that use our system are linked to our inventory control and order
        placement systems, which allow these pharmacies to order items electronically,
        view current product prices and track promotional discounts and outstanding
        orders. Additionally, through this system, we can also assist customers with
        their own inventory control and business management. Depending
        on the customer’s particular needs, *www.farmaservicios.pdv* can
        operate on a stand-alone PC or in a network environment. The pharmacy owners
        purchase the PCs and related hardware and we provide the software package.
        We
        charge an annual license fee for this software. Management believes that *www.farmaservicios.pdv* will
        continue to be an important factor in developing customer loyalty and improving
        overall customer service to our primary client base, pharmacies. As of December
        31, 2005, more than 2,350 *www.farmaservicios.pdv* systems
        were operating at customer locations.
   23
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 ***Automatic
        Picking Technology***
  We
        were
        the first Mexican wholesaler to install automated pickers in our distribution
        centers. An automated picker is a computerized robot that matches an order
        number with an order number previously submitted by one of our sales
        representatives, selects the appropriate item(s) ordered and deposits the
        item(s) in a box for delivery. Each automated picker processes approximately
        50%
        of the total units sold out of each distribution center where one is located
        and
        is significantly more efficient than a team of experienced workers. The
        automated pickers operate at high speed with extremely high accuracy and
        include
        error correction features. As of December 31, 2005, 4 of our 22 distribution
        centers had automated pickers. The installation of additional automated pickers
        in our distribution centers currently without automation will depend upon
        whether we deem the cost to be justifiable.
  ***Computerized
        Purchase Order Placement System***
  We
        have
        developed and continue to update an automatic inventory control and order
        placement system. This system utilizes inventory optimization software to
        track
        historic demand for products and to forecast future demand. The system also
        seeks to optimize inventory levels and order sizes at each distribution center
        through a “just-in-time” inventory approach.
  ***Back-Office
        and Accounting Services***
  In
        2000,
        we finished transferring all of our back-office information systems over
        to a
        multidimensional database that operates using a software program called BaaN.
        The database provides us with a strong analytical tool for decision-making
        that
        affects all aspects of our operations. BaaN is an integrated back-office
        and
        accounting system that currently manages our General Ledger, Accounts
        Receivable, Accounts Payable, Fixed Assets Control System and Treasury, as
        well
        as other financial information. During 2005, we continued to update all of
        our
        back-office information systems in order to improve our internal processes
        as
        well as our administrative reports.
  ***Software***
  We
        license *www.farmaservicios.pdv* to our
        clients for an annual fee. We also operate with software designed by third
        parties with which we have entered into license agreements.
  **Regulation**
  Our
        business is primarily regulated by the*Ley General de Salud* ,
        or
        General Health Law, and the accompanying regulations. Two federal agencies
        under
        the executive branch of the Mexican government, the Mexican Ministry of Health
        and the Mexican Ministry of Economy, regulate the pharmaceuticals industry.
        We
        must obtain an authorization from the Mexican Ministry of Health to distribute
        prescription drugs and over-the-counter pharmaceuticals on the wholesale
        level.
        We believe that we have obtained all necessary authorization and permits
        required for the operation of our business and we do not foresee any revocation,
        cancellation or termination of such authorizations and permits.
  The
        Ministry of Economy regulates both the wholesale and retail prices of
        prescription and over-the-counter pharmaceutical products. Mexican law requires
        us to sell all prescription and over-the-counter products at a price equal
        to or
        lower than the price approved by the Ministry of Economy for each product.
        The
        Ministry of Economy periodically receives and, if appropriate, approves revised
        price lists submitted by manufacturers on a product-by-product
        basis.
  24
 Table
            of Contents
  **Property,
        Plant and Equipment**
  As
        of May
        31, 2006, our principal properties consisted of 22 distribution centers,
        complete with all of the equipment necessary to operate these centers, and
        approximately 15 other properties, which are not currently in use. The majority
        of our fixed assets are wholly owned and free of any major liens or
        encumbrances. We also own a fleet of over 900 vans, trucks and cars which
        we use
        to distribute products to our customers.
  As
        of May
        31, 2006, our distribution centers represented approximately 100,000 square
        meters of warehouse space. From these centers, we filled more than 5 million
        orders in 2004, averaging more than 400,000 orders per month. All of our
        distribution centers are strategically located near Mexico’s major population
        centers.
  The
        following table shows our current distribution centers and their locations
        in
        alphabetical order, as of May 31, 2006:
  **Distribution
                  Center’s Name**
              **Location
                  (City, State)**1.
              Taxqueña
              Mexico
                  City, Distrito Federal2.
              Chihuahua
              Chihuahua,
                  Chihuahua3.
              Coatzacoalcos
              Coatzacoalcos,
                  Veracruz4.
              Culiacán
              Culiacán,
                  Sinaloa5.
              Guadalajara
              Guadalajara,
                  Jalisco6.
              Hermosillo
              Hermosillo,
                  Sonora7.
              Juárez
              Ciudad
                  Juárez, Chihuahua8.
              La
                  Laguna
              Gómez
                  Palacio, Durango9.
              León
              León,
                  Guanajuato10.
              Centennial
              Tlalnepantla,
                  Mexico11.
              Monterrey
              Monterrey,
                  Nuevo León12.
              Morelia
              Morelia,
                  Michoacán13.
              Peninsular
              Mérida,
                  Yucatán14.
              Citem
              Tlalnepantla,
                  Mexico15.
              Puebla
              Puebla,
                  Puebla16.
              Reynosa
              Reynosa,
                  Tamaulipas17.
              Tampico
              Tampico,
                  Tamaulipas18.
              Tijuana
              Tijuana,
                  Baja California19.
              Tláhuac
              Mexico
                  City, Distrito Federal20.
              Tuxtla
              Tuxtla
                  Gutiérrez, Chiapas21.
              Vallejo
              Mexico
                  City, Distrito Federal22.
              Veracruz
              Veracruz,
                  Veracruz
 
 In
        connection with our cost-cutting program and our efforts to consolidate our
        operations and improve our profitability in the fourth quarter of 2001, we
        relocated our distribution center “Casa Saba Centro” located in Mexico City,
        Federal District to Taxqueña, also within Mexico City. We also relocated “Citem”
from Taxqueña to Tlalnepantla in the State of Mexico. In 2003, 2004 and 2005 we
        did not make any location changes to our distribution centers.
  Item
        5.Operating
        and Financial Review and Prospects
  The
        following discussion should be read in conjunction with our audited consolidated
        financial statements and the accompanying notes included elsewhere in this
        annual report. Our audited consolidated financial statements have been prepared
        in accordance with Mexican GAAP, which differ in some significant respects
        from
        U.S. GAAP. Note 16 to our audited consolidated financial statements provides
        a
        description of the principal differences between Mexican GAAP and U.S. GAAP,
        and
        describes differences in presentation between the statement of changes in
        financial position under Mexican GAAP and the requirements under U.S. GAAP
        for a
        statement of cash flows. Note 16 to our audited consolidated financial
        statements provides a description of our profit sharing, income taxes and
        goodwill under U.S. GAAP. Note 17 to our audited consolidated financial
        statements provides a partial reconciliation to U.S. GAAP of net income and
        total stockholders’ equity.
   25
 Table
            of Contents
 
 Mexican
        GAAP requires that our audited consolidated financial statements recognize
        certain effects of inflation. In accordance with Mexican GAAP, except as
        otherwise indicated, financial data for all periods presented in our audited
        consolidated financial statements in this annual report have been restated
        in
        constant Pesos as of December 31, 2005.
  **Overview**
  During
        the 2005 fiscal year, Grupo Casa Saba successfully consolidated the results
        of a
        series of strategies aimed at increasing productivity, profitability and
        sales.
        We also participated in the vitality showed by the private pharmaceutical
        market, which maintained a solid performance throughout the year.
  Among
        the
        main strategies implemented during the year were the continuous contact with
        clients and suppliers to enhance the supply chains in which we participate.
        We
        also focused our efforts in raising our participation with government
        institutions and state health institutions, and undertook ambitious internal
        savings and operating efficiencies programs which allowed us to maximize
        our
        operations’ profitability. Among these continuous cost-savings programs, it is
        worth mentioning the reengineering of routes and optimization of distribution
        centers.
  As
        a
        result of these efforts, our sales increased by 2.98% during the year 2005,
        with
        increases in the sales of our Government Pharma division of 27.8%, and in
        our Publications division of  7.79%. The Private Pharma division registered
        a 2.05% increase in sales, while in the Health, Beauty, Consumer Goods, General
        Merchandise and Other division there was an increase in sales of
        0.9%.
  In
        terms
        of profitability, our gross profit rose by 3.15% with respect to 2004, while
        the
        gross margin for the year amounted to 10.3%, 3 basis points higher than for
        the
        year 2004. Furthermore, our operating expenses for 2005 registered a 0.14%
        decrease with respect to 2004, accounting for 6.2% of sales, compared with
        the
        6.4% they represented in 2004. Higher sales figures and a reduction in
        expenses are the main factors supporting the 8.6% growth in operating income
        and
        the 8.6% growth in net income for the 2005 fiscal year.
  As
        in
        2004, Grupo Casa Saba had no cost-bearing liabilities during the 2005 fiscal
        year, and finished the period with a cash balance of Ps. 714
        million.
  Given
        the
        Group’s solid financial structure, the generation of cash flow and the existing
        self-sufficiency to finance required investments, an annual cash dividend
        has
        been distributed among shareholders since 2003. In June 2006, a cash dividend
        in
        the amount of Ps. 150 million, or Ps. 0.5651 per share, was paid, representing
        a
        25.0% increase from the dividend paid in 2005. In June 2005, a cash
        dividend for Ps.120 million, equivalent to Ps. 0.4521 per share, was paid,
        representing a 9.10% increase from the dividend paid in 2004.
  **Effects
        of Economic and Mexican Governmental Factors on Our Results of
        Operations**
  Our
        operations and assets are located in Mexico. As a consequence, our results
        of
        operations may be significantly affected by the general condition of the
        Mexican
        economy, Mexican inflation, interest rates and political developments in
        Mexico.
        See “Item 3. Risk Factors Relating to Economic and Political Developments in
        Mexico.”
  ***Economic
        Situation***
  In
        2001
        due to a slowdown in the international economic environment, Mexico’s GDP
        decreased by 0.2% and inflation declined to 4.4%. This economic slowdown
        continued in 2002 and Mexico’s GDP increased by 0.8% and annual inflation
        reached 5.7%. In 2003, the concerns about the recovery of the U.S. economy
        continued, the war with Iraq took place and there were no major advances
        in the
        structural reforms expected in Mexico. The combination of these factors affected
        Mexico’s GDP which grew in the period by 1.4%, while inflation declined to 4.0%
        and the interest rates on 28-day CETES averaged 6.2%. In 2004 several factors
        helped to boost the Mexican economy, including the recuperation of the U.S.
        economy, higher revenues generated from petroleum sales and an increase in
        remittances. During this period, Mexico’s GDP grew by 4.2%, while inflation
        reached 5.2% and the interest rates on 28-day CETES averaged 6.8%. Even after
        a
        significant drop in exports, in particular, relating to the auto industry
        and
        lower public and private investments, during 2005 the economy benefited from
        sharp increases in oil prices and global economic recovery, therefore, the
        country’s GDP for the year grew by 2.97%, inflation reached a low of 3.3% and
        the interest rate on 28-day CETES averaged 9.19%. During the first quarter
        of
        2006, Mexico’s GDP grew by 0.9%, inflation reached 0.9% and the interest rates
        on 28-day CETES averaged 7.6%.
 
 26
 Table
            of Contents
   For
        each
        of the years ended on December 31, 2003, 2004 and 2005, approximately 99%
        of our
        consolidated net sales resulted from sales to parties located within Mexico.
        In
        the past, inflation has led to high interest rates and devaluations of the
        Peso.
        Inflation itself, as well as governmental efforts to reduce inflation, has
        had
        significant negative effects on the Mexican economy in general and on Mexican
        companies, including us, in particular. One result of inflation in Mexico
        is the
        decrease in the real purchasing power of the Mexican population, which can
        lead
        to a decrease in the demand for the products we distribute. In addition,
        the
        Mexican government’s efforts to control inflation by tightening the monetary
        supply have historically resulted in higher financing costs as real interest
        rates have increased. Such policies have had and could have an adverse effect
        on
        our business, financial condition and results of operations.
  ***Currency
        Fluctuations***
  Although
        we currently do not have any U.S. Dollar-denominated indebtedness and do
        not
        expect to incur any U.S. Dollar-denominated indebtedness in the near term
        in
        connection with our current business plan, we may need to do so in the future.
        Substantially all of our revenues are and will continue to be Peso-denominated.
        As a result, should we incur any substantial U.S. Dollar-denominated
        indebtedness, we would be adversely affected by decreases in the value of
        the
        Peso against the U.S. Dollar, which would most likely result in net foreign
        exchange losses. In 2005, based on changes in the Noon Buying Rate for Mexican
        Pesos as reported by the Board of Governors of the U.S. Federal Reserve Bank
        of
        New York, the Peso appreciated by approximately 4.7% against the U.S. Dollar.
        In
        the first quarter of 2006, the Peso depreciated by approximately 2.6% against
        the U.S. Dollar. Any future depreciation or devaluation of the Peso will
        likely
        result in price increases from our suppliers which could impact the purchasing
        capacity of the final consumers, causing a reduction in our net
        sales.
  Severe
        devaluation or depreciation of the Peso may also result in the disruption
        of the
        international foreign exchange markets. This may limit our ability to transfer
        or to convert Pesos into U.S. Dollars and other currencies for the purpose
        of
        making timely payments of principal and interest on any non-Peso-denominated
        indebtedness we may incur in the future, which could, in turn, affect our
        ability to obtain foreign services and products. Devaluation or depreciation
        of
        the Peso against the U.S. Dollar may also adversely affect U.S. Dollar prices
        for our securities on the Mexican Stock Exchange, including the Ordinary
        Shares
        and, as a result, will likely affect the market price of the ADSs. Such
        fluctuations would also impact the conversion value of any cash dividends
        paid
        on the Ordinary Shares in Pesos into U.S. Dollars.
  ***Inflation
        and Interest Rates***
  In
        recent
        years, Mexico has experienced high levels of inflation. The rate of inflation
        on
        an annualized basis, as measured by changes in NCPI, was 4.0%, 5.2% and 3.3%
        for
        2003, 2004 and 2005, respectively. High inflation rates can adversely affect
        our
        business and our results of operations by adversely affecting consumer
        purchasing power, thereby adversely affecting consumer demand for the products
        we distribute. In addition, to the extent inflation exceeds our price increases
        or to the extent we do not increase our prices, high inflation rates can
        adversely affect our prices and revenues by adversely affecting our prices
        in
“real” terms.
  Mexico
        has had, and is expected to continue to have, high real and nominal interest
        rates. The interest rates on 28-day Mexican government treasury bonds averaged
        approximately 6.2%, 6.8% and 9.1% for 2003, 2004 and 2005, respectively.
        In the
        first quarter of 2006, the 28-day CETES averaged 7.6%. Accordingly, if we
        need
        to incur Peso-denominated indebtedness in the future, it will most likely
        be at
        higher interest rates than in the United States.
   27
 Table
            of Contents
 **Introduction
          to Our Operations**
  The
          following table sets forth the real price increases and unit volume growth
          for
          our Private Pharma division, our core business division, for the years
          indicated:
 **Year
                        Ended December 31,****2003**
                    
                    **2004**
                    
                    **2005****Total
                        Private Pharmaceuticals Market:**Real
                        Unit Price Increases
                    
                    
                    7.6
                    %
                    
                    
                    6.6
                    %
                    
                    
                    6.2
                    %Growth
                        in Units
                    
                    
                    1.7
                    %
                    
                    
                    -3.2
                    %
                    
                    
                    2.1
                    %**Grupo
                        Casa Saba Private Pharmaceutical Products:**Real
                        Unit Price Increases
                    
                    
                    4.2
                    %
                    
                    
                    7.2
                    %
                    
                    
                    7.4
                    %Growth
                        in Units
                    
                    
                    1.5
                    %
                    
                    
                    -6.8
                    %
                    
                    
                    -5.0
                    %**Market
                        Share of Grupo Casa Saba****(1)****:**
                    
                    
                    27.9
                    %
                    
                    
                    26.0
                    %
                    
                    
                    24.0
                    %**Inflation****(2)**
                    
                    
                    4.0
                    %
                    
                    
                    5.2
                    %
                    
                    
                    3.3
                    %
  _________________(1)
                Based
                    on information from IMS Health, A.G. and Grupo Casa Saba estimates.
                    This
                    market share does not include purchases made by government
                  institutions
                    and sales in the private pharmaceutical market from*similares*,
                    generics and*impulso*.
                    Also, includes an estimate made by IMS of sales that
                  are
                    not done through wholesalers.(2)
                Based
                    on the changes in the NCPI.
  For
        a
        more detailed description of the Mexican private pharmaceutical market and
        our
        private pharmaceutical business, see “Item 4. Information on the
        Company—Business Overview—Pharmaceutical Industry.”
  The
        following table sets forth our net sales by division and the corresponding
        growth rates for each of our business divisions for the years indicated.
        This
        financial data is restated in constant Pesos as of December 31,
        2005.
  **Year
                      Ended December 31,****2003**
                  
                  **2004**
                  
                  **2005****(Millions
                      of constant Pesos as of December 31, 2005)****Pharmaceuticals:****Private
                      sector**
                  
                  
                  Ps.
                      17,732.7
                  
                  
                  Ps.17,758.4
                  
                  
                  Ps.
                      18,121.9%
                      Growth
                  
                  
                  5.8
                  %
                  
                  0.1
                  %
                  
                  2.1
                  %**Government**
                  
                  
                  579.4
                  
                  
                  638.1
                  
                  
                  815.4%
                      Growth
                  
                  
                  -29.2
                  %
                  
                  10.1
                  %
                  
                  27.8
                  %**Health,
                      Beauty, Consumer Goods, General Merchandise and Other
                      Products**
                  
                  
                  2,224.1
                  
                  
                  2,122.8
                  
                  
                  2,142.0%
                      Growth
                  
                  
                  0.9
                  %
                  
                  -4.6
                  %
                  
                  0.9
                  %**Publications**
                  
                  
                  693.6
                  
                  
                  736.3
                  
                  
                  794.5%
                      Growth
                  
                  
                  (12.9)
                  %
                  
                  6.2
                  %
                  
                  7.8
                  %**Total**
                  
                  
                  Ps.
                      21,229.8
                  
                  
                  Ps.
                      21,255.5
                  
                  
                  Ps.
                      21,873.8Total
                      % Growth
                  
                  
                  3.2
                  %
                  
                  0.1
                  %
                  
                  2.9
                  %
 
  28
 Table
            of Contents
   The
        following table sets forth the net sales for each of our business divisions
        and
        our results of operations as a percentage of our total net sales for the
        years
        indicated:
  **Year
                  Ended December 31,****2003**
              
              
              
              **2004**
              
              
              **2005****Pharmaceuticals:**Private
              
              
              83.5
              %
              
              
              83.6
              %
              
              
              82.9
              %Government
              
              
              2.7
              %
              
              
              3.0
              %
              
              
              3.7
              %**Health,
                  Beauty, Consumer Goods, General Merchandise and Other
                  Products**
              
              
              10.5
              %
              
              
              9.9
              %
              
              
              9.8
              %**Publications**
              
              
              3.3
              %
              
              
              3.5
              %
              
              
              3.6
              %100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %**Cost
                  of Sales**
              
              
              90.1
              %
              
              
              89.7
              %
              
              
              89.7
              %**Gross
                  Profit**
              
              
              9.9
              %
              
              
              10.3
              %
              
              
              10.3
              %**Operating
                  expenses**:Selling
                  expenses
              
              
              2.5
              %
              
              
              2.7
              %
              
              
              2.5
              %Administrative
                  expenses
              
              
              3.7
              %
              
              
              3.7
              %
              
              
              3.7
              %6.2
              %
              
              
              6.4
              %
              
              
              6.2
              %**Operating
                  income**
              
              
              3.8
              %
              
              
              3.9
              %
              
              
              4.1
              %**Comprehensive
                  cost of financing, net**
              
              
              0.2
              %
              
              
              0.0
              %
              
              
              0.0
              %**Other
                  income**
              
              
              (0.2
              )%
              
              
              (0.2
              )%
              
              
              (0.2
              )%**Income
                  tax and employee profit sharing**
              
              
              0.8
              %
              
              
              0.9
              %
              
              
              0.9
              %**Net
                  income**
              
              
              2.9
              %
              
              
              3.2
              %
              
              
              3.3
              %100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
 
  **Results
        of Operations**
  *In
        accordance with Mexican GAAP, Peso amounts presented below for 2003, 2004
        and
        2005 are reflected in constant Pesos as of December 31, 2005.*
  ***Year
        Ended December 31, 2005 Compared to Year Ended December 31,
        2004***
  ***Total
        Net Sales.*** Net
        sales increased by 2.9% to Ps. 21,873.8 million for the year ended December
        31,
        2005 as compared to the same period for 2004, mainly due to the vitality
        of the
        private pharmaceutical market, our increased participation in government
        institutions and the growth in our publications division. Net sales in our
        HBCG/Other Products business division increased slightly by 0.9% to Ps. 2,142.0
        million as compared to Ps. 2,122.8 million for the year ended December 31,
        2004,
        primarily due to the decision of some clients not to acquire this type of
        products through Grupo Casa Saba.
  During
        the first half of the year, our strategy of focusing on profitability affected
        our sales performance, since we did not do business with suppliers that did
        not
        meet our minimum profitability requirements. During the second half of the
        year,
        however, we incorporated some of these product lines back into our catalog
        under
        better commercial conditions. Overall, we believe this strategy delivered
        positive results, since our 2005 operating income grew by 8.6% with respect
        to
        2004.
  ***Net
        Private Pharma Sales.*** Net
        sales
        from our Private Pharma business division increased by 2.1%, from Ps. 17,758.4
        million for the year ended December 31, 2004 to Ps. 18,121.9 million for
        the
        year ended December 31, 2005.
  This
        increase reflects the vitality of the private pharmaceutical market as well
        as a
        the impact of not distributing, during the first half of the year, products
        from
        suppliers that did not meet our new minimum profitability requirements. As
        the
        private pharmaceutical market posted better results than our Private Pharma
        business division for the year ended December 31, 2005, we experienced a
        decrease in our market share.
  Our
        Private Pharma business division continued to account for most of our sales,
        in
        spite of a slight decrease as a percentage of total sales, from 83.6% for
        the
        year ended December 31, 2004 to 82.9% for the same period in 2005.
   29
 Table
            of Contents
 
 ***Net
        Government Pharma Sales.*** Net
        sales from our Government Pharma business division increased considerably,
        by
        27.8% as compared to Ps. 638.1 million for the year ended December 31, 2004,
        totaling Ps. 815.4 million for the same period in 2005. This increase resulted
        primarily from our efforts in raising our participation with government
        institutions, including PEMEX, and state health institutions. As a result
        of
        this increase, net sales in our Government Pharma business division for the
        year
        ended December 31, 2005 represented 3.7% of total net sales, compared to
        3.0%
        for the same period in 2004. Since sales to PEMEX and other government
        institutions depend on bidding processes, there can be no assurance that
        we will
        be awarded similar contracts in the future. See “Item 4. Information on the
        Company—Business Overview—Pharmaceutical Industry—Industry Prices.”
  ***Net
        Health, Beauty, Consumer Goods, General Merchandise and Other Products
        Sales.*** Net
        sales from our Health, Beauty, Consumer Goods, General Merchandise and Other
        Products ****** business
        division increased slightly, by 0.9%, to Ps. 2,142.0 for the year ended December
        31, 2005 compared to Ps. 2,122.8 million for the same period in 2004. This
        increase was mainly due to other products’ lines,
        such as
        food products, which registered increases in sales as a result of solid
        commercial efforts, both of new and traditional products, which was partially
        offset by the decision of some clients not to acquire some products of Health
        and Beauty through Grupo Casa Saba. Net sales for this division decreased
        as a
        percentage of total net sales to 9.8% for the year ended December 31, 2005
        as
        compared to 9.9% for the same period in 2004.
  ***Net
        Publications Sales.*** Net
        sales in our Publications business division increased by 7.8% to Ps. 794.5
        million for the year ended December 31, 2005 from Ps. 736.3 million for the
        year
        ended December 31, 2004. This result is the outcome of the strong market
        positioning of this division, a solid editorial base, the inclusion of new
        titles and the penetration in new markets. Net sales from our Publications
        division represented 3.6% of our total net sales for the year ended December
        31,
        2005, increasing slightly from 3.5% for the year ended December 31,
        2004.
  ***Gross
        Profit.*** Cost of
        sales for the year ended December 31, 2005 amounted to Ps. 19,616.6 million,
        a
        2.9% increase from the Ps. 19,067.4 million for the same period for 2004.
        This
        is mainly the result of the 2.9% increase in sales. As a result, our gross
        margin for the fiscal year 2005 improved slightly by 3 basis points, to 10.3%,
        and our gross profit increased by 3.2%, to Ps. 2,257.2 million for the year
        ended December 31, 2005 from Ps. 2,188.2 million for the same period in
        2004.
  ***Operating
        Expenses.*** Operating expenses for the year ended December 31, 2005 amounted to Ps. 1,361.9
        million, registering a decrease of 0.14% as compared to Ps. 1,363.8 million
        for
        the same period in 2004. This is the result of improved operations efficiency
        and continuous cost-savings programs, such as route reengineering and
        optimization of distribution centers, among others. Consequently, operating
        expenses as a percentage of total net sales represented 6.2% for the year
        ended
        December 31, 2005, vis-à-vis the 6.4% they accounted for in the same period of
        2004.
  ***Operating
        Income.*** Operating income for the year ended December 31, 2005 was Ps. 895.2 million,
        reflecting a 8.6% increase from Ps. 824.4 million for the same period in
        2004.
        Our operating margin for the year ended December 31, 2005 increased 21 basis
        points to 4.1%, from the 3.9% figure for the year ended December 31, 2004,
        primarily due to the increase in sales and the reduction in operating
        expenses.
  ***Comprehensive
        Cost of Financing, Net.*** Pursuant
        to Mexican GAAP, we report four items within this line item: interest expense,
        interest income, foreign exchange (gain) loss and (gain) loss on net monetary
        position.
  Foreign
        exchange losses (or gains) arise primarily from U.S. Dollar-denominated
        positions or loans as the Peso devalues or appreciates against the U.S. Dollar.
        In the past, we have borrowed in U.S. Dollars upon a determination that money
        market conditions generated a favorable cost-benefit tradeoff in comparison
        to
        borrowing in Pesos. The gain or loss on the net monetary position incorporates
        the effect of inflation on monetary assets and liabilities. Monetary gains
        arise
        from holding a net monetary liability position during periods of inflation,
        while monetary losses arise from holding a net monetary asset position during
        periods of inflation.
  Our
        comprehensive cost of financing, net for the year ended December 31, 2005
        registered a gain of Ps. 1.6 million. This gain is primarily the result
        of higher interest income and lower interest expense with respect to
        those reported in 2004. It is worth noting that interest paid mainly represent
        banking fees.  The exchange loss net, due to the operations registered in
        2005 and the Peso exchange rate, increased from Ps. 0.2 million in 2004 to
        Ps.
        2.7 million in 2005.  Due to the monetary position registered and
        the inflation in 2005, the gain on monetary position reported in 2004 of
        Ps. 8.3 million changed to a loss of Ps. 9.9 million in 2005.  These last
        two effects were offset by the reduction in interest expenses as well as
        by the
        increase in interest income.
   30
 Table
            of Contents
 
 ***Income
        Taxes, Assets Tax and Employee’s Statutory
        Profit-Sharing.*** Provisions for taxes and employees’ statutory profit-sharing ( *Participación
        de las Trabajadores en la Utilidad* ,
        or
“ *PTU* ”)
        for
        the year ended December 31, 2005 were Ps. 207.0 million, an increase of 9.4%
        compared to Ps. 189.2 million for the year ended December 31, 2004, mainly
        due
        to a higher provision for income taxes. With respect to pre-tax income,
        provision for taxes and employee profit-sharing was 22.1% of pre-tax income
        for
        the year ended December 31, 2005, compared to 22.0% for the year ended December
        31, 2004. Income tax for the year ended December 31, 2005 was Ps. 307.7 million
        and income tax offset by prior year tax loss carryforwards was Ps. 188.3
        million. For the year ended December 31, 2005, we did not pay any asset tax
        and
        deferred income tax was Ps. 88.4 million. Employee profit-sharing and deferred
        employee profit-sharing for the year ended December 31, 2005 accounted for
        Ps.
        0.8 million.
  In
        July
        2000, the Mexican Institute of Public Accountants, or MIPA, issued Statement
        54,
“Bulletin D-4 Interpretations,” which clarified a number of issues concerning
        the application of Bulletin D-4. Bulletin D-4, which relates to accounting
        for
        deferred taxes, became effective on January 1, 2000. Bulletin D-4 requires
        us to
        calculate deferred income taxes by using the comprehensive asset and liability
        method. Pursuant to this method, deferred income taxes are calculated by
        applying the applicable income tax rate to the temporary differences between
        the
        accounting and tax values of assets and liabilities as of the date of the
        relevant financial statements. Bulletin D-4 will continue to impact our
        effective tax rates in future periods. See Notes 3(k), 9 and 16(b) to our
        audited consolidated financial statements.
  ***Net
        Income.*** Net
        income for the year ended December 31, 2005 was Ps. 728.2 million, increasing
        by
        8.6% from Ps. 670.4 million for the year ended December 31, 2004. Net profit
        as
        a percentage of sales, or net margin, for the year ended December 31, 2005
        was
        3.3%, 18 basis points higher than the margin for the same period in
        2004.
  ***Year
        Ended December 31, 2004 Compared to Year Ended December 31,
        2003***
  ***Total
        Net Sales*** .
        Net
        sales increased by 0.12% to Ps. 21,255.5 million for the year ended December
        31,
        2004 as compared to the same period for 2003, mainly due to the positive
        performance of our Private Pharma, Government Pharma and Publications business
        divisions. Net sales in our HBCG/Other Products business division decreased
        by
        4.6% to Ps. 2,122.8 million as compared to Ps. 2,224.1 million for the year
        ended December 31, 2003, primarily due to lower market participation.
        Principally, net sales were mainly affected by general competition and the
        non-distribution of product lines from suppliers that did not meet our new
        minimum profitability requirements. The distribution of most of the products
        in
        our Private Pharma business division that had ceased to be distributed was
        reestablished as commercial terms were renegotiated. Though our new business
        strategy of focusing on profitability affected the sales performance of the
        Group since we halted operations with clients that did not meet our minimum
        profitability requirements and ceased to distribute certain product lines,
        we
        believe that the results of this strategy were generally positive as operating
        profit and net income grew by 2.8% and 7.1%, respectively.
  ***Net
        Private Pharma Sales.*** Net
        sales
        from our Private Pharma business division increased by 0.14% from Ps. 17,732.7
        million for the year ended December 31, 2003 to Ps. 17,758.4 million for
        the
        year ended December 31, 2004. This slight increase primarily reflects the
        non-distribution of products from suppliers that did not meet our new minimum
        profitability requirements, new profitability-focused commercial terms utilized
        with certain of our clients and increased competition. We are currently
        distributing most of the products that we stopped distributing during our
        profitability analysis under new commercial terms. As the private pharmaceutical
        market posted better results than our Private Pharma business division for
        the
        year ended December 31, 2004, we experienced a decrease in our market share.
        Our
        Private Pharma business division continued to account for most of our sales,
        increasing its percentage of total sales slightly from 83.5% for the year
        ended
        December 31, 2003 to 83.6% for the same period in 2004.
  ***Net
        Government Pharma Sales.*** Net
        sales from our Government Pharma business division increased by 10.1% as
        compared to Ps. 579.4 million for the year ended December 31, 2003, totaling
        Ps.
        638.1 million for the same period in 2004. This increase resulted primarily
        from
        our increased commercial and promotional efforts as well as our increased
        participation in different government institutions, including PEMEX. As a
        result
        of this increase, net sales in our Government Pharma business division for
        the
        year ended December 31, 2004 represented 3.0% of total net sales, compared
        to
        2.7% for the same period in 2003. Since sales to PEMEX depend on the bidding
        processes, there can be no assurance that we will be awarded similar contracts
        in the future. See “Item 4. Information on the Company—Business
        Overview—Pharmaceutical Industry—Industry Prices.”
   31
 Table
            of Contents
 
 ***Net
        Health, Beauty, Consumer Goods, General Merchandise and Other Products
        Sales.*** Net
        sales from our Health, Beauty, Consumer Goods, General Merchandise and Other
        Products ****** business
        division decreased by 4.6% to Ps. 2,122.8 million for the year ended December
        31, 2004 compared to Ps. 2,224.1 million for the same period in 2003. This
        decrease was mainly due to the change in the market position of this division
        and the rebalancing of our product catalog, including the decrease in the
        contribution of office supplies to total net sales and the addition and
        elimination of certain food products lines. Net sales for this division
        decreased as a percentage of total net sales to 9.9% for the year ended December
        31, 2004 as compared to 10.5% for the same period in 2003.
  ***Net
        Publications Sales.*** Net
        sales in our Publications business division increased by 6.2% to Ps. 736.3
        million for the year ended December 31, 2004 from Ps. 693.6 million for the
        year
        ended December 31, 2003. This increase is mainly due to the continuation
        of the
        restructuring process that was started in the second half of 2002, which
        resulted in a modified management structure for the division and the elimination
        of titles and clients that were not sufficiently profitable. In addition,
        during
        2004 this business division had a more solid editorial and client base,
        distributing highly demanded magazine titles and did not co-publish any books.
        However, the division continued to distribute books from its inventory. Net
        sales from our Publications division represented 3.5% of our total net sales
        for
        the year ended December 31, 2004, increasing slightly from 3.3% for the year
        ended December 31, 2003.
  ***Gross
        Profit.*** Cost of
        sales for the year ended December 31, 2004 was Ps. 19,067.4 million, reflecting
        a decrease of 0.3% as compared to Ps. 19,119.2 million for the same period
        for
        2003, due to primarily to the implementation of the new commercial and operative
        strategies to increase profitability levels. As a result, our gross margin
        increased from 9.94% for the year ended December 31, 2003 to 10.29% for the
        same
        period in 2004, and gross profit increased by 3.7% to Ps. 2,188.2 million
        for
        the year ended December 31, 2004 from Ps. 2,110.5 million for the same period
        in
        2003.
  ***Operating
        Expenses.*** Operating expenses for the year ended December 31, 2004 were Ps. 1,363.8
        million, reflecting an increase by 4.2% as compared to Ps. 1,308.4 million
        for
        the same period in 2003. In general, the increase was mainly due to increases
        in
        salaries. As total net sales increased by only 0.1%, operating expenses as
        a
        percentage of total net sales increased from 6.2% for the year ended December
        31, 2003 to 6.4% for the same period in 2004.
  ***Operating
        Income.*** Operating income for the year ended December 31, 2004 was Ps. 824.4 million,
        reflecting a 2.8% increase from Ps. 802.1 million for the same period in
        2003.
        Our operating margin for the year ended December 31, 2004 increased 10 basis
        points to 3.88% from the year ended December 31, 2003, primarily due to the
        increase in the Group’s gross margin.
  ***Comprehensive
        Cost of Financing, Net.*** Pursuant
        to Mexican GAAP, we report four items within this line item: interest expense,
        interest income, foreign exchange (gain) loss and (gain) loss on net monetary
        position.
  Foreign
        exchange losses (or gains) arise primarily from U.S. Dollar-denominated position
        or loans as the Peso devalues or appreciates against the U.S. Dollar. In
        the
        past, we have borrowed in U.S. Dollars upon a determination that money market
        conditions generated a favorable cost-benefit tradeoff in comparison to
        borrowing in Pesos. The gain or loss on the net monetary position incorporates
        the effect of inflation on monetary assets and liabilities. Monetary gains
        arise
        from holding a net monetary liability position during periods of inflation,
        while monetary losses arise from holding a net monetary asset position during
        periods of inflation.
  Our
        comprehensive cost of financing, net for the year ended December 31, 2004
        was
        Ps. 16.3 million, a decrease of 67.6% compared to Ps. 50.3 million for the
        same
        period in 2003. This lower comprehensive cost of financing, net was mainly
        the
        result of lower interest payments, which decreased 55.29% compared to the
        prior
        year, and an increase in interest earned which grew 89.13% versus the previous
        year.
  ***Income
        Taxes, Assets Tax and Employee’s Statutory
        Profit-Sharing.*** Provisions for taxes and employees’ statutory profit-sharing for the year ended
        December 31, 2004 were Ps. 189.2 million, an increase of 16.0% compared to
        Ps.
        163.1 million for the year ended December 31, 2003. With respect to pre-tax
        income, provision for taxes and employee profit-sharing, was 22.0% of pre-tax
        income for the year ended December 31, 2004 compared to 20.7% for the year
        ended
        December 31, 2003. Income tax for the year ended December 31, 2004 was Ps.
        59.8
        million and income tax offset by prior year tax loss carryforwards was Ps.
        (38.3) million. For the year ended December 31, 2004, we paid Ps. 10.7 million
        in asset tax and deferred income tax was Ps. 147.2 million. Employee
        profit-sharing and deferred employee profit sharing for the year ended December
        31, 2004 accounted for Ps. 9.8 million.
   32
 Table
            of Contents
 
 ***Net
        Income.*** Net
        income for the year ended December 31, 2004 was Ps. 670.4 million, increasing
        by
        7.1% from Ps. 626.0 million for the year ended December 31, 2003. Net profit
        as
        a percentage of sales, or net margin, for the year ended December 31, 2004
        was
        3.2%, 20 basis points higher than that for the same period in 2003.
  **Aggregate
        Contractual Obligations**
  Below
        is
        a table containing a description of Casa Saba’s aggregate contractual
        obligations.
  **Tabular
        Presentation of Aggregate Contractual Obligations [UPDATE]**
  Contractual
                                Obligations
                            Payments
                                due by periodTotal
                            Less
                                than 1 year
                            1-3
                                years
                            3-5
                                years
                            More
                                than 5 yearsLong-Term
                                Debt (1)
                            -
                            -
                            -
                            -
                            -Capital
                                Lease Obligations (2)
                            -
                            12,779
                            -
                            -
                            -Operating
                                Leases (3)
                            -
                            -
                            -
                            -
                            -Purchase
                                Obligations (4)
                            -
                            -
                            -
                            -
                            -Other
                                Long-Term Liabilities Reflected on Our Balance Sheet
                                Under Mexican GAAP
                                (5)
                            87,707
                            -
                            -
                            -
                            87,707Total
                            100,486
                            12,779
                            -
                            -
                            87,707
 _________________
 (1)
              Current
                  Maturities of Long-Term Debt (see Note 8 to our audited consolidated
                  financial statements).(2)
              Includes
                  leasing obligations of Information Technology equipment and transport
                  equipment from Hewlett-Packard, Capital and Paragon.(3)
              Not
                  applicable.(4)
              Not
                  applicable.(5)
              Includes
                  reserve for retirement pensions and seniority premiums. The maturity
                  of
                  this obligation will occur in accordance with the disclosure in
                  Note 3(j)
                  to our audited consolidated financial statements.
 **Non-Exchange
        Traded Contracts Accounted for at Fair Value**
  All
        financial assets and financial liabilities derived from any type of financial
        instrument are recognized in our balance sheet at fair value. The valuation
        effect is recognized as income for the year. Revenues and expenses generated
        by
        financial instruments are recognized in the income statement when
        accrued.
  In
        accordance with Bulletin C-2 “Financial Instruments” issued by the MIPA, Casa
        Saba’s financial instruments are comprised mainly of cash and cash equivalents,
        accounts receivable and payable not related to its commercial activities,
        bank
        loans, and long-term debt. We are not party to any derivative or other similar
        instruments at this time. As of December 31, 2003, 2004 and 2005, the carrying
        value of financial instruments shown in the balance sheet approximates their
        fair value due to their short-term nature.
  **Off-
        Balance Sheet Agreements**
  We
        currently do not have any off-balance sheet arrangements that have or are
        reasonably likely to have a current or future effect on our financial
        statements, financial condition, results of operations, liquidity, capital
        expenditures or capital resources that are material to investors, except
        commitments referred in Note 14e) to our financial statements.
  33
 Table
            of Contents
 **Critical
          Accounting Policies**
  ***Application
          of critical accounting policies***
  Preparing
          our consolidated financial statements requires that we make certain estimates
          and use certain assumptions to determine the valuation of some assets and
          liabilities and disclose our contingent assets and liabilities at the date
          of
          our financial statements and the reported amount of revenues and expenses
          incurred during the reporting periods. We base our estimates and judgments
          on
          our experience and on various other reasonable factors that together form
          the
          basis for making judgments about the carrying values of our assets and
          liabilities. Our actual results may differ from these estimates under different
          assumptions or conditions. We evaluate our estimates and judgments on an
          on-going concern basis. Our significant accounting policies are described
          in
          Note 3 to our audited consolidated financial statements. We believe our
          most
          critical accounting policies that imply the application of estimates and/or
          judgments are:
  ***(a)
          Allowance for doubtful accounts***
  The
          allowance for doubtful accounts represents our estimate of the probable
          loss
          inherent in all receivables by considering the general historical trend
          of
          payment performance of customers and factors surrounding the specific customer’s
          credit risk. On a periodic basis, we analyze the recoverability of our
          accounts
          receivable in order to determine whether, due to credit risk or other factors,
          some receivables may not be recovered. If we determined such a situation
          exists,
          book value related to the non-recoverable assets is adjusted and expensed
          through an increase in the allowance for doubtful accounts. This determination
          requires substantial management judgment. Final losses from doubtful accounts
          may differ from our estimated reserve.
  ***(b)
          Estimate for slow-moving inventory***
  Periodically,
          we analyze the recoverability of our inventories in order to determine
          whether,
          due to certain factors or conditions, certain products in our inventories
          may
          not be available or useable for sale purposes. If such a situation exists
          book
          value related to the non-recoverable assets is adjusted and expensed
          through an increase in the estimate for slow-moving inventory. As a result,
          final losses from slow-moving inventory could differ from our estimated
          reserves.
  ***(c)
          Property and equipment***
  Our
          balance sheets reflect amounts of long-lived assets (mainly fixed assets
          and
          goodwill) associated with our operations throughout Mexico. Many of these
          assets
          have resulted from past acquisitions, which have required us to reflect
          these
          assets at their market value at the dates of acquisition. Subsequently,
          we
          restate the value of long-lived assets by applying the “adjustments due to
          changes in the general price level method” by using the National Consumer Price
          Index to value those assets, as permitted by Mexican GAAP. We believe this
          method more accurately presents the fair value of the assets than historical
          cost or other methods accepted by Mexican GAAP.
  As
          we
          discuss in Note 3 to our audited consolidated financial statements, effective
          2004, in accordance with Bulletin C-15, “Impairment of the value of long-lived
          assets and their related disposal” (Bulletin C-15) issued by the IMCP, we
          periodically assess the restated value of our long-lived tangible and intangible
          assets, including goodwill, to establish whether factors such as the occurrence
          of significant adverse events, changes in the business environment and/or
          changes in expectations with respect to operating income for each business
          unit
          or subsidiary indicate that the carrying value of those assets may not
          be
          recovered. This determination requires substantial judgment. The impairment
          loss
          is determined by the excess of carrying value of long-lived assets over
          recovery
          value thereof which considers net present value of cash flows estimated
          to be
          generated by those assets. The impairment loss, if any, is recorded in
          income in
          the period when such an assessment is carried out, unless the indications
          mentioned are of a temporary nature. Bulletin C-15 contemplates the reversal
          of
          the recognition of impairment. Property and equipment to be disposed of
          are
          recorded as the lower between carrying value and the fair market value
          thereof,
          less sale related costs. Additionally, we review the useful lives assigned
          to
          these long-lived assets for depreciation or amortization purposes, as the
          case
          may be, when applicable. This determination is subjective and is an integral
          part of the determination of whether impairment has occurred. Property
          and
          equipment are depreciated on the restated value thereof by using the
          straight-line method and by considering the estimated remaining useful
          lives of
          fixed assets. The estimated useful lives represent the period we expect
          the
          fixed assets to remain in service and to generate revenues by considering
          their
          operation conditions.
  34
 Table
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 At
          2004
          and 2005 fiscal year end, the Group completed the fair value based impairment
          test on its property and equipment. As a result, the fair value of those
          long-lived assets was equivalent to or greater than the carrying value
          thereof
          recorded at those dates. Accordingly, no impairment charges resulted from
          the
          assessment performed on the carrying value of property and
          equipment.
  While
          we
          believe that our estimates are reasonable, different assumptions could
          materially affect our evaluations. Our evaluations throughout the year
          and up to
          the date of this annual report did not lead to any impairment of long-lived
          assets. We can give no assurance that our expectations will not change
          as a
          result of new information or developments.
  The
          provisions of Bulletin C-15 are virtually identical to SFAS 144, “Accounting for
          the impairment or disposal of long-lived assets” adopted by us on January 1,
          2002 under U.S. GAAP.
  ***(d)
          Intangible assets and goodwill***
  As
          we
          discuss in Note 3) to our audited consolidated financial statement, we
          apply
          Bulletin C-8, “Intangible Assets” (Bulletin C-8) issued by the MIPA.
          Accordingly, our intangible assets refer to costs incurred and/or rights
          or
          privileges acquired that generate specific future economic benefits over
          which
          the Group has control. Consequently: (i) development costs are capitalized
          as
          intangible assets under certain circumstances; (ii) preoperating costs
          are
          expensed when incurred; (iii) intangible assets acquired through a business
          combination are accounted for individually at the fair value as of the
          acquisition date and reported separately, unless their cost cannot be reasonably
          determined. In that event, they are accounted for collectively as goodwill.
          The
          Group’s goodwill arises from acquiring shares of capital stock of subsidiary
          companies at a price exceeding the fair value of the net assets acquired
          at the
          acquisition date.
  Intangible
          assets with a defined economic useful life are amortized over their useful
          life
          by using the straight-line method, unless there is no market for those
          assets.
          In that event, they are reduced to the amount of goodwill or to zero. In
          addition, intangible assets with an undefined economic useful life including
          goodwill are subject to a periodic impairment valuation, by following the
          provisions referred to in paragraph (g) above.
  At
          2004
          and 2005 fiscal year end, the Group completed the fair value based impairment
          test on its goodwill. As a result, the Group recorded an operating expense
          for
          goodwill impairment in the amount of Ps.24,683 (Ps. 23,888 historical Mexican
          pesos) and Ps. 44,921, respectively.
  While
          we
          believe that our estimates are reasonable, different assumptions could
          affect
          our evaluation. Our evaluation throughout the fiscal year up to the date
          of this
          annual report did not lead to any significant impairment of goodwill. We
          can
          give no assurance that our expectations will not change as a result of
          new
          information or developments.
  The
          provisions of Bulletin C-8 are virtually identical to SFAS 142, “Goodwill and
          other intangible assets”, adopted by us on January 1, 2002 under U.S.
          GAAP.
  ***(e)***  ***Labor
          obligations***
  Our
          labor
          obligations are comprised of retirement pensions and seniority premiums
          derived
          from defined benefit plans for all our employees and, beginning in 2005,
          certain
          severance benefits to employees upon termination of the employer/employee
          relationship when they complete that employment relationship prior to retirement
          age. The determination of our obligations and the net periodic cost is
          dependent
          on our selection of certain assumptions used by independent actuaries in
          calculating such amounts. Projected benefit obligations, unamortized items,
          and
          the net periodic cost applicable to labor obligations are determined by
          using
          the "projected unit credit method".  We
          evaluate our assumptions at least annually. We describe our labor obligations
          in
          Note 3 to our audited consolidated financial statements and include the
          discount
          rate, expected long-term rate of return on plan assets and rates of increase
          in
          compensation costs. The Group has created a fund placed in an irrevocable
          trust
          in a financial institution to meet the labor obligations derived from defined
          benefits. Fund assets consisted of investments in equity securities, as
          well as
          investments in fixed income securities that are traded on the Mexican Stock
          Market.
 
 35
 Table
              of Contents
 
 In
          accordance with Mexican GAAP, actual results that differ from our assumptions
          (actuarial gains or losses) are accumulated and amortized over future periods
          by
          considering probable labor lives of our employees and, therefore, generally
          affect our recognized expenses and recorded obligations in such future
          periods.
          While we believe that our assumptions are appropriate, significant differences
          in our actual experience or significant changes in our assumptions may
          materially affect our retirement pensions, seniority premiums and certain
          severance benefits to employees.
  ***(f)***  ***Income
          taxes***
  We
          record
          the provision for both income tax and employee profit sharing based on
          the
          amount payable determined based on taxable income which is obtained as
          provided
          for in the applicable provisions of the Income Tax Law in effect.
  The
          deferred income tax effect is determined by applying the “comprehensive asset
          and liability method” in accordance with Mexican GAAP and U.S. GAAP. The income
          tax rate in effect is applied to the temporary differences between the
          accounting and tax values of assets and liabilities as of the date of the
          relevant financial statements, as well as the amount of the tax loss
          carryforwards.  In
          the
          event of any change in the income tax rate effective subsequent to the
          fiscal
          year end, the income tax rate that will be affected at the time it is estimated
          that the temporary differences are realized will be applied. Asset tax
          paid in
          the current year and in prior years that may be recoverable is recognized
          as a
          deferred income tax asset under certain circumstances. The deferred employee
          profit sharing effect is determined under same method.
  We
          periodically perform a valuation allowance to determine the amount of the
          deferred income tax/employee profit sharing asset that will be recorded,
          in the
          event that it is likely that a certain portion or the entire deferred income
          tax/employee profit sharing asset may not be realized. The valuation allowance
          is determined based on historical taxable income, projected future taxable
          income and the expected timing of the reversal of existing temporary
          differences. Any reduction in the deferred income tax asset amount is recorded
          in the income statement and/or the stockholders’ equity by considering the
          nature of the temporary item. If our estimates and related assumptions
          change in
          the future, we may be required to record additional valuation allowance
          against
          our deferred tax assets, resulting in additional income tax
          expense.
  In
          addition, our tax position is subject to different laws that require certain
          interpretation and application. It is possible that the relevant taxing
          authorities may review our tax position and might challenge our interpretation
          and application regarding certain tax criteria. Although we have been successful
          in sustaining our tax criteria, no assurance can be given that we will
          be
          continue to be as successful as we have been in the past. Significant judgment
          is required to appropriately assess the amounts of the income tax liability
          and/or asset.
  On
          December 1, 2004, an amendment to the Mexican Income Tax Law was published
          and
          became effective as of January 1, 2005. Under this amendment:
  (i)
                The
                    statutory income tax rate will be 30% for 2005 and will be reduced
                    by one
                    percentage point per year through 2007, when the rate will be
                    28%.(ii)
                The
                    tax deduction for inventories will be made through cost of sales,
                    and the
                    inventory balance as of December 31, 2004, will be taxable effective
                    2005,
                    not exceeding 2012, based on specific criteria provided for in
                    the Income
                    Tax Law.(iii)
                Paid
                    employee profit sharing will be deductible from income tax,
                    and(iv)
                The
                    limit on stockholders’ participation in taxable income or loss from
                    Mexican subsidiaries will be eliminated for tax consolidation
                    purposes.
 
  36
 Table
              of Contents
  ***(g)***  ***Provisions,
          contingent assets and liabilities and commitments***
  We
          recognize provisions when present, legal or assumed, obligations are unavoidable
          and will require the disbursement of economic resources or can be reasonably
          estimated. Significant obligations or losses related to contingencies are
          periodically evaluated. They are only accounted for when it is likely that
          present obligations will require the disbursement of economic resources
          and
          there are reasonable elements for their quantification. Commitments are
          not
          recognized unless they result in a loss. Actual results may differ from
          our
          estimates under different assumptions or conditions.
  ***(h)***  ***Tax
          and legal contingencies***
  We
          are
          subject to various claims and contingencies related to tax and legal proceedings
          as described in Note 14) to our consolidated financial statements. Due
          to their
          nature, such legal proceedings involve inherent uncertainties including,
          but not
          limited to, court rulings, negotiations between affected parties and
          governmental actions. Management periodically assesses the probability
          of loss
          for such contingencies and accounts for a liability and/or discloses the
          relevant circumstances, as appropriate. If the potential loss from any
          claim or
          legal proceeding is considered probable and the amount can be reasonably
          estimated, we account for a liability for the estimated loss.
  **Indebtedness**
  As
          of
          December 31, 2005 and as of June 15, 2005, we had no outstanding
          debt.
  As
          of
          June 15, 2006, we had arranged for short-term loan revolving credit lines
          for a
          total aggregate principal amount of Ps. 1,220 million with the following
          banks:
          Scotiabank-Inverlat, Santander-Serfin and Banamex. These facilities may
          each be
          accessed depending on our cash flow requirements. Grupo Casa Saba did not
          provide specific warranties for these facilities. The loans made under
          these
          facilities bear interest at variable rates depending on the Equilibrium
          Interbank Interest Rate (TIIE) published periodically by Banco de México, S.A.
          plus a maximum of approximately 80 basis points. The basis points which
          will be
          added to TIIE depend on negotiations and prevailing market conditions.
          As of
          this date, and despite the payout of a Ps. 150 million dividend payment
          on June
          21, 2006, we do not have any cost-bearing liabilities.
  **Liquidity
          and Capital Resources**
  ***Overview***
  Historically,
          our cash and capital requirements have been satisfied through cash from
          operations and bank loans. We plan to continue to satisfy our cash and
          capital
          expenditure requirements primarily through cash from our operations. If
          deemed
          necessary, we can access our revolving credit facilities totaling an aggregate
          principal amount of up to Ps. 1.2 billion. Net working capital (current
          assets
          minus current liabilities) as of December 31, 2005 was Ps. 4,219.6 million
          compared to Ps. 3,639.5 million as of December 31, 2004.
  Our
          cash
          flows are subject to seasonal fluctuations and market conditions. To maintain
          a
          larger winter inventory and to support inventory for the two or more weeks
          of
          holidays in December, during which suppliers do not make sales or deliveries,
          our accounts payable and inventories typically increase at year-end. After
          reaching their highest levels in December, our inventories gradually decrease
          to
          what we estimate is a normal operational level of approximately 50 inventory
          days. Our inventories, net as of December 31, 2005, were Ps. 3,590.1
          million or 6.0% lower than the Ps. 3,817.6 million they amounted to on
          December
          31, 2004. As of December 31, 2005, our inventory days were 65.9 days, 6.2
          days
          lower than the 72.1 days registered for the year ended December 31, 2004.
          As of
          December 31, 2004, our inventory days were 9.7 days higher than the 62.4
          days
          registered for the year ended December 31, 2003. Accounts Receivable for
          the
          year ended December 31, 2005 registered 68.5 days while accounts payable
          accounted for 74 days for the same period. Accounts Receivable for the
          year
          ended December 31, 2004 registered 62.7 days while accounts payable accounted
          for 79.6 days for the same period. For the year ended December 31, 2003,
          inventory days were 62.4, account receivable days reached 69.1 and accounts
          payable days were at 73.1.
  37
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  ***Accounts
          Receivable***
  As
          of
          December 31, 2005, due to higher sales, a different sales mix, a highly
          competitive environment and commercial negotiations with clients, accounts
          receivable net increased to Ps. 4,161.8 million or 12.5% compared to Ps.
          3,700.3
          million as of December 31, 2004. Accounts receivable days as of December
          31,
          2005 increased 5.8 days to 68.5 days from 62.7 days for 2004. As of December
          31,
          2003, accounts receivable days were 69.1.
  For
          a
          description of the nature and amounts of accounts receivable due from current
          and former related parties, see “Item 7. Major Shareholders and Related Party
          Transactions—Related Party Transactions” and Notes 3(f), 4 and 7 to our audited
          consolidated financial statements.
  ***Trade
          Accounts Payable***
  As
          of
          December 31, 2005, trade accounts payable decreased to Ps. 4,030.4 million
          or
          4.4% compared to Ps. 4,217.2 million as of December 31, 2004. As a result,
          our
          trade accounts payable days decreased to 74.0 in 2005 compared to 79.6
          days for
          the year ended December 31, 2004. As of December 31, 2003, our trade accounts
          payable days were 73.1.
  For
          a
          description of the nature and amounts of trade accounts payable owed to
          current
          and former related parties, see “Item 7. Major Shareholders and Related Party
          Transactions—Related Party Transactions” and Note 7 to our audited
          consolidated financial statements.
  ***Capital
          Expenditures***
  Our
          capital expenditures during 2005 were approximately Ps. 88.2 million, which
          consisted of Ps. 45.8 million for the purchase of transport and delivering
          equipment, Ps. 38.0 million for technology and computer
          equipment, particularly the acquisition of new software licenses and Ps.
          4.4 million for other general expenditures. These expenditures were mainly
          funded with internal resources. For 2006 we expect to fund our capital
          expenditures needs with internal funds. In the event that we require additional
          funds, we may access our short-term revolving credit facilities.
  Our
          capital expenditures during 2004 were approximately Ps. 47.8 million, which
          consisted of Ps. 36.9 million for the purchase of transport and delivering
          equipment, Ps. 9.9 million for technology and computer equipment and Ps.
          1.0
          million for other general expenditures.
  In
          2003,
          our capital expenditures amounted to Ps. 58.9 million, which consisted
          of Ps.
          21.4 million for the purchase of technology and computer equipment, Ps.
          36.8
          million for the purchase of vehicles for our distribution fleet and Ps.
          0.7
          million for other general expenditures. As in previous periods, these
          expenditures were financed with bank borrowings and cash on hand.
  38
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  ***Trend
          Information***
  During
          2005, we continued with our strategy of profitable growth and successfully
          implemented a number of operating efficiencies programs to maximize the
          profitability of our operations. We applied profitability requirements
          to our
          clients and suppliers, even when this meant discontinuing operations with
          certain clients and suppliers that did not meet the minimum parameters that we
          requested from them. In terms of our cost-saving programs, we successfully
          reengineered routes and optimized our distribution centers. These measures
          allowed for a 8.6% growth in operating income and a 21-basis points improvement
          in our operating margin.
  We
          believe that our profitability strategy will allow us to continue growing
          our
          divisions with acceptable margin levels and will continue to focus our
          efforts
          on increasing profitability in the different markets in which we operate.
          In
          addition to these measures, we continue to be committed to operating under
          strict expense controls.
  The
          Mexican private pharmaceutical market has solid growth fundamentals which
          lead
          us to expect sustained annual growth over the coming years. The main factors
          supporting this expected growth are Mexico’s demographic structure (adults are
          continuously increasing their participation in Mexico’s total population) and
          the increase in the life expectancy of the Mexican population. The combination
          of these two factors generate natural growth in the demand for healthcare
          services and pharmaceutical products.
  With
          respect to our non-pharmaceutical or HBCG/other products related business
          divisions, we expect that higher levels of economic growth will increase
          demand,
          allowing us to generate positive results in the upcoming years. We believe
          that
          the more solid client and editorial base of our Publication business division
          has, and will, allow it to generate better sales and operating results,
          particularly if Mexico has a better economic performance than in previous
          years.
  **Accounting
          Pronouncements and Related Effects**
  **Under
          Mexican GAAP**
  The
          following new accounting pronouncements have been issued under Mexican
          GAAP, the
          application of which is required as indicated.
  Effective
          June 2004, the Research and Development Board of Financial Information
          Standards
          (CINIF -Spanish acronym) replaced the Accounting Principles Board (APB)
          of the
          MIPA in the duty of developing financial information standards (NIF-Spanish
          acronym) related to economic and governmental entities, conduct research
          processes, as well as issue and disseminate those standards, and to attain
          greater concurrence with International Financial Reporting Standards
          (IFRS).
  To
          that
          end, CINIF started by reviewing the theoretical concepts contained in Mexican
          GAAP and establishing a Conceptual Framework to support the development
          of
          financial reporting standards and to serve as a reference in solving issues
          arising in the accounting practice. The Conceptual Framework is formed
          by eight
          financial reporting standards, which comprise the NIF-A series. The NIF-A
          series, together with NIF B-1, were issued on October 31, 2005. Their provisions
          are effective for years beginning January 1, 2006, superseding all existing
          Mexican GAAP series A bulletins. To date NIFs are summarized as
          follows:
  ·
                NIF
                    and its interpretations;·
                APB
                    Bulletins transferred to the CINIF on May 31, 2004 that have
                    not been
                    amended, substituted, or annuled by the new NIFs; and·
                IFRS
                    that are supplementary guidance to be used when Mexican GAAP
                    does not
                    provide primary guidance.
 
 Management
          deems that this substitution does not change the financial information
          previously presented by the Group.
   39
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   The
          most
          significant established by these standards are as follows:
  ·
                
                In
                    addition to the statement of changes in financial position, NIF
                    A-3
                    includes the statement of cash flows, which should be issued
                    when required
                    by a particular standard.·
                
                NIF
                    A-5 includes a new classification for revenues and expenses:
                    ordinary and
                    extraordinary. Ordinary revenues and expenses are derived from
                    transactions or events thar are within the normal course of business
                    or
                    that are inherent in the entity’s activities, whether frequent or not;
                    extraordinary revenues and expenses refer to unusual transactions
                    and
                    events, whether frequent or not.·
                
                NIF
                    A-7 requires the presentation of comparative financial statements
                    for at
                    least with the preceding period. Through December 31, 2004, the
                    presentation of prior years’ financial statements was optional. The
                    financial statements must disclose the authorized date for their
                    issuance,
                    and the name of the officers or administrative body authorizing
                    the
                    related issuance.·
                
                In
                    October 2005, the CINIF issued NIF B-1, “Accounting changes and
                    corrections of errors”, intended to establish specific presentation and
                    disclosure rules of accounting changes and corrections of errors.
                    NIF B-1
                    sets forth the retrospective application of the effects of changes
                    and
                    correction of accounting errors to evaluate the financial information
                    as
                    if the change had not existed or the error had not been committed.
                    Application of the NIF is mandatory for accounting changes and
                    corrections
                    of errors recognized, effective January 1,
                    2006.
 
 The
          Group
          is presently evaluating the fully effect this adoption will have on its
          consolidated financial statements.
   **Under
          U.S. GAAP**
  The
          following new accounting standards have been issued under U.S. GAAP, the
          application of which is required as indicated.
  In
          November 2004, FASB issued Statement 151, “Inventory Cost”, an amendment of ARB
          No. 43, Chapter 4, which is effective for inventory costs incurred during
          fiscal
          years beginning after June 15, 2005. The amendments made by Statement 151
          will
          improve financial reporting by clarifying that abnormal amounts of idle
          facility
          expense, freight, handling costs and wasted material (spoilage) should
          be
          recognized as current-period charges and by requiring the allocation of
          fixed
          production overheads to inventory base on the normal capacity of the production
          facilities. Adoption of this Statement had not an impact on the Group’s
          consolidated financial statement.
  In
          December 2004, FASB issued Statement 153, “Exchanges of Nonmonetary Assets”, an
          amendment of APB Opinion No. 29. This Statement is effective for nonmonetary
          asset exchanges occurring in fiscal periods beginning after June 15, 2005.
          This
          Statement eliminates the exception to fair value for exchanges of similar
          productive assets and replaces it with a general exception for exchange
          transactions that do not have commercial substance, that is, transactions
          that
          are not expected to result in significant changes in the cash flow of the
          reporting entity. Adoption of this Statement had not an impact on the Group’s
          consolidated financial statement.
  In
          December 2004, the Financial Accounting Standard Board (FASB) issued Statement
          123 (revised 2004), “Share-Based Payment” (Statement 123(R)). Statement 123(R)
          requires that the compensation cost relating to share-based payment transactions
          be recognized in financial statements. The cost will be measured based
          on the
          fair value of the instruments issued. Statement 123 (R) covers a wide range
          of
          share-based compensation arrangements including share options, restricted
          share
          plans, performance-based awards, share appreciation rights and employee
          share
          purchase plans. Statement 123 (R) replaces Statement 123, “Accounting for
          Stock-Based Compensation”, and supersedes Opinion 25, “Accounting for Stock
          Issued to Employees”. As originally issued in 1995, Statement 123 established as
          preferable the fair-value-based method of accounting for share-based payment
          transactions with employees. However, that Statement permitted entities
          the
          option of continuing to apply the guidance in Opinion 25, as long as the
          footnotes to the financial statements disclosed what net income would have
          been
          had the preferable fair-value-based method been used. We will be required
          to
          apply Statement 123 (R) as of the first interim reporting period that begins
          after June 15, 2005, and we plan on using the modified-prospective method,
          effective July 1, 2005. The Group deems that adoption had no impact on
          its
          consolidated results and financial position.
   40
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 In
          June
          2005, the FASB published SFAS No. 154, “Accounting changes and Error Corrections
          a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No. 154),
          which changes the requirements for the accounting for and reporting of
          a change
          in accounting principle and redefines restatement as the revising of a
          previously issued financial statement to reflect the correction of an error.
          SFAS No. 154 requires retrospective application to prior periods financial
          statements of changes in accounting principles, unless it is impracticable
          to
          determine the period-specific effects of the cumulative effect of the change.
          This Statement also carries forward without change the guidance contained
          in
          Opinion 20 for reporting the correction of an error in a previously issued
          financial statement and a change in accounting estimate. This statement
          does not
          change the transition provisions of any existing accounting pronouncement.
          SFAS
          No. 154 will be effective for accounting changes and corrections of errors
          made
          in fiscal years beginning after December 15, 2005. The Group is currently
          considering the impact that adoption will have on its consolidated results
          and
          financial position.
  NIF
          B-1
          "Accounting Changes and Error Corrections”, issued by MIPA, which is similar to
          SFAS No. 154, will be effective for accounting changes and corrections
          of errors
          made in fiscal years beginning after January 1, 2006.
  In
          June
          2005, the FASB issued Emerging Issues Task Force (EITF) Issue No. 05-06,
          “Determining the Amortization Period for Leasehold Improvements”. EITF Issue No.
          05-06 indicates that for operating leases, leasehold improvements that
          are
          placed in services significantly after and not contemplated at or near
          the
          beginning of the lease term should be amortized over the shorter of the
          useful
          life of the assets or a term that includes required lease periods and renewals
          that are deemed to be reasonably assured at the date the leasehold improvements
          are purchased. Leasehold improvements acquired in a business combination
          should
          be amortized over the shorter of the useful life of the assets or a term
          that
          includes required lease periods and renewal that are deemed to be reasonably
          assured at the date of acquisition. EITF Issue No. 05-06 is effective for
          leasehold improvements that are purchased or acquired in reporting periods
          beginning after June 28, 2005. The Group deems that adoption had no impact
          on
          its consolidated results and financial position.
  In
          September 2005, the Board ratified the consensus reached by the Task Force
          regarding EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory
          with the Same Counterparty”. This guidance addresses the circumstances under
          which two or more inventory transactions with the same counterparty should
          be
          considered as a single non-monetary transaction with the scope of APB Opinion
          29, “Accounting for Non-Monetary Transactions”. The Task Force reached a
          consensus that non-monetary exchange whereby an entity transfers finished
          goods
          inventory in exchange for the receipt of raw materials or work-in-progress
          inventory within the same line of business is not considered as an exchange
          transaction to facilitate sales customers as described in APB Opinion 29
          paragraph 20(b) and therefore should be recognized by the entity at fair
          value
          if it is determinable within reasonable limits and the transaction has
          commercial substance. All other non-monetary exchanges of inventory within
          the
          same line of business should be recognized at the carrying amount of the
          inventory transferred. The Task Force agreed that this consensus should
          be
          applied to transactions completed in reporting periods beginning after
          March
          2006. The Group does not expect the application of EITF 04-13 to have a
          material
          impact on its consolidated financial statements.
  In
          October 2005, the FASB issued FASB Staff Position (FSP) No. FAS 13-1,
“Accounting for Rental Costs Incurred during a Constuction Period”. This
          Statement requires rental costs associated with operating leases that are
          incurred during a construction period to be recognized as a rental expense.
          FSP
          FAS 13-1 is effective for reporting periods beginning after December 15,
          2005.
          The transition provisions of FSP No. FAS 13-1 permit early adoption and
          retrospective application of the guidance. The Group deems that adoption
          had no
          impact on its consolidated results and financial position.
  On
          November 3, 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of
          Other-Than-Temporary Impairment and Its Application to Certain Investments”.
          This FASB Staff Position (FSP) addresses the determination as to when an
          investment is considered impaired, whether the impairment is other than
          temporary, and the measurement of an impairment loss. This FSP also includes
          accounting consideration subsequent to the recognition of an
          other-than-temporary impairment and requires certain disclosures about
          unrealized losses that have not been recognized as other-than-temporary
          impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for
          Certain Investments in Debt and Equity Securities”, and SFAS No. 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations”, and
          APB Opinion No.18, “The Equity Method of Accounting for Investments in Common
          Stock”. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and
          the Group complied with the new disclosure requirements in its consolidated
          financial statements The Group does not expect the comprehensive application
          of
          EITF 03-01 to have a material impact on its consolidated financial
          statements.
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 In
          February 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          155, “Accounting for certain Hybrid Financial Instruments” (SFAS 155). SFAS 155
          permits fair value measurement for any hybrid financial instrument that
          contains
          an embedded derivative that would otherwise require bifurcation and separate
          accounting. An irrevocable election may be made at inception to measure
          such a
          hybrid financial instrument at fair value, with changes in fair value recognized
          through income. Such an election needs to be supported by concurrent
          documentation. SFAS 155 is effective for fiscal years beginning after September
          15, 2006, with early adoption permitted. The Group deems that adoption
          will not
          have impact on its consolidated results and financial position.
   Item
          6.Directors,
          Senior Management and Employees
  **Board
          of Directors**
  The
          following table sets forth the names of our directors, their dates of birth,
          their principal occupation, their business experience, including other
          directorships, and their years of service as directors, as elected for
          a
          one-year term by our shareholders at our annual shareholders’ meeting held on
          April 29, 2005.
 
 **Directors**
                  **Name
                    and Date of Birth**
                **Principal
                    Occupation**
                **Business
                    Experience**
                **First
                    Elected**Isaac
                    Saba Raffoul
                  (10/17/23)
                Chairman
                    of the Board
                President
                    and Director -
                  Xtra
                    Inmuebles, S.A. de C.V.
                February
                    2000Moisés
                    Saba Ades
                  (07/12/63)
                Vice
                    Chairman of the Board
                Director
                    - Xtra Inmuebles, S.A. de C.V.
                February
                    2000Alberto
                    Saba Ades
                  (07/09/65)
                Vice
                    Chairman of the Board
                Director
                    - Xtra Inmuebles, S.A. de C.V.
                February
                    2000Manuel
                    Saba Ades
                  (11/03/67)
                Vice
                    Chairman of the Board and Chief Executive Officer
                Director
                    - Xtra Inmuebles, S.A. de C.V.
                February
                    2000Gabriel
                    Saba D’jamus
                  (07/27/69)
                Deputy
                    Chief Executive Officer
                Executive
                    Director - Grupo Comercial Hotelera, S.A. de C.V.
                February
                    2000Agustín
                    Rodríguez Legorreta
                  (02/11/63)
                Director
                Investor
                    Advisor -Internacional de Capitales, S.A. de C.V.
                February
                    2000Raúl
                    Fernández Diaque
                  (05/16/63)
                Director
                Investor
                    Advisor -Internacional de Capitales, S.A. de C.V.
                February
                    2000
 
 On
          April
          27, 2006, the Board and the Audit Committee accepted Agustín Rodríguez
          Legorreta’s and Raúl Fernández Diaque’s resignations and elected as
          Directors José Ellstein Japchik (12/08/34), Chairman of the Board Fariel, S.A.
          de C.V. and Gabriel Alarcón Velázquez (02/23/37), Member of the Board Banco de
          Comercio.
  Francisco
          Fuentes Ostos is the Secretary of our Board of Directors. Moises Saba Ades,
          Alberto Saba Ades and Manuel Saba Ades are sons of Isaac Saba Raffoul.
          Gabriel
          Saba D’jamus is the nephew of Isaac Saba Raffoul. Manuel Saba Ades, Moises Saba
          Ades and Alberto Saba Ades are cousins of Gabriel Saba D’Jamus. Isaac Saba
          Raffoul, Alberto Saba Ades and Manuel Saba Ades are also members of the
          Board of
          Directors of Grupo Xtra, S.A. de C.V. and alternate members of the Board
          of
          Directors of Ixe Grupo Financiero, S.A. de C.V., and Finamex Casa de Bolsa,
          S.A.
          de C.V., Grupo Financiero Finamex. Our directors are not party to a service
          contract with us, and there are no arrangements pursuant to which any of
          them
          was elected as a director of the Company.
  Set
          forth
          below are the names of the alternate members of our Board of Directors.
          The
          alternate members of our board were elected for a one-year term by our
          shareholders at our annual shareholders’ meeting, which was held on
          April 29, 2005.
   42
 Table
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   **Name
                    and Date of Birth**
                **Principal
                    Occupation**
                **Business
                    Experience**
                **First
                    Elected**Iván
                    Moguel Kuri
                  (01/31/63)
                Tax
                    Adviser to Grupo Casa Saba, S.A. de C.V.
                Partner
                    - Chevez, Ruiz, Zamarripa y Cia, S.C.
                February
                    2000Alejandro
                    Sadurni Gómez
                  (10/8/59)
                Chief
                    Financial Officer
                Former
                    Chief FinancialOfficer ofAdministration -INMAS, S.A. de
                    C.V.
                February
                    2000
  The
          management of our business is vested in our Board of Directors. Our bylaws
          provide that the number of seats on our Board of Directors shall be determined
          by our shareholders at a general ordinary shareholders’ meeting held for the
          purpose of appointing and electing directors; *provided, however*, that
          in no case shall our Board of Directors consist of less than five directors.
          Our
          bylaws also provide that our shareholders may, but are not required to,
          nominate
          and elect corresponding alternate directors for each current director.
          Our
          current Board of Directors has seven directors and two alternate directors.
          Directors and alternate directors are elected for one-year terms by our
          shareholders at each annual shareholder’s meeting, and each serves until a
          successor is elected and takes office. In order to have a quorum for a
          meeting
          of the Board of Directors, a majority of the directors must be present.
          In
          accordance with the Mexican Securities Market Law as amended on June 1,
          2001, we
          have amended our bylaws to reflect the changes in such law, and as a result
          of
          such amendments, 25% of the members of our Board of Directors qualify as
          “independent directors” in Mexico. Under Mexican law, a person will not qualify
          as an “independent director” if he or she is, among other things:
  ·
                one
                    of our employees or managers;·
                a
                    controlling shareholder;·
                a
                    director, executive officer or relative of a controlling shareholder,
                    or
                    entities controlled or managed by a controlling shareholder;
                    or·
                a
                    significant client, supplier, debtor or creditor, or member of
                    the board
                    of directors or executive officer of any of these
                    entities.
 
 Our
          bylaws, as amended, also provide that the Chairman of the Board of Directors
          shall have the casting vote in the event of a tie. The Board of Directors
          is
          required to meet at least once a quarter. The Chairman, 25% of the directors
          or
          any examiner may call for a meeting of the Board of Directors. Also, our
          amended
          bylaws provide that the Board of Directors must approve all transactions
          that
          are outside the ordinary course of business as well as transactions that
          are to
          be entered into between us and any of our shareholders, our managers or
          other
          related individuals as set forth in the amendments to the Mexican Securities
          Market Law. Likewise, the Board of Directors must approve any purchase
          or sale
          that represents 10% or more of our assets, the grant by us of guarantees
          exceeding 30% percent of our assets and other transactions representing
          more
          than 1% of our assets, in addition to any shareholder approval required
          by our
          bylaws or otherwise.
  In
          addition, each holder or group of holders representing at least 10% of
          a series
          of shares has the right to appoint one director and a corresponding alternate
          director. Pursuant to the Mexican Securities Market Law and our bylaws,
          holders
          of at least 10% of our voting stock are also entitled to appoint a director
          and
          a corresponding alternate director.
  **Committees
          of Our Board of Directors**
  We
          have
          an Executive Committee, whose members are Messrs. Manuel, Alberto and Moises
          Saba Ades, who were all reelected by the shareholders at our annual
          shareholders’ meeting held on April 27, 2005. Under our bylaws, the Executive
          Committee is permitted to act on matters that are not legally reserved
          for the
          Board of Directors.
  In
          accordance with Mexican Securities Market Law, as amended, we also have
          an Audit
          Committee. During 2005, the members of such Committee were Messrs. Agustín
          Rodríguez Legorreta, Raúl Fernández Diaque and Manuel Saba Ades. On July 7,
          2005, Mr. Manuel Saba Ades announced his resignation as member of the Audit
          Committee in order to comply with the provisions of the securities statutes
          applicable to us. Until April of 2006, such Committee was formed by Messrs.
          Agustín Rodríguez Legorreta and Raúl Fernández Diaque who were members of the
          Board of Directors until April of 2006. Since April 27, 2006, the Audit
          Committee has been formed by Messrs. José Ellstein Japchik and Gabriel Alarcón
          Velázquez, independent members of the Board of Directors.
   43
 Table
              of Contents
   Both
          the
          Chairman and a majority of the members of the Audit Committee are independent
          directors. Our examiners ( *comisarios* )
          must be
          invited to attend all Audit Committee meetings. Among other duties and
          responsibilities, the Audit Committee must:
  ·
                prepare
                    an annual report regarding its activities for submission to the
                    Board of
                    Directors and to our shareholders at our annual shareholders’
                    meeting;·
                prepare
                    and render statements to the Board of Directors as to the fairness
                    of
                    transactions and arrangements with related parties; and·
                retain
                    independent experts to render fairness opinions in connection
                    with
                    material transactions and arrangements with related parties.
 **Examiner**
  Pursuant
          to the Mexican Corporations Law and the Mexican Securities Market Law,
          as
          amended, we must have at least one *comisario* ,
          or
          examiner, who is elected by our shareholders at our annual general ordinary
          shareholders’ meeting. In accordance with the amendments to the Mexican
          Securities Market Law, every 10% holder, or group of holders, of a series
          of our
          shares may elect an examiner ( *comisario* )
          and a
          corresponding alternate examiner at the annual general ordinary shareholders’
meeting. The primary role of the examiners is to report to our shareholders
          at
          the annual ordinary general shareholders’ meeting the accuracy of the financial
          information presented to shareholders by the Board of Directors. In accordance
          with Mexican law, the examiners receive monthly reports from the Board
          of
          Directors regarding material aspects of our affairs, including our financial
          condition and are invited to attend any meeting of the Board of Directors
          and
          the Audit Committee. The examiners are also authorized to:
  ·
                call
                    ordinary or extraordinary general meetings;·
                place
                    items on the agenda for meetings of shareholders or the Board
                    of
                    Directors;·
                attend
                    meetings of shareholders, the Board of Directors, or the Audit
                    Committee;
                    and·
                generally
                    monitor our affairs.
 Our
          current examiner is Manuel Sainz Meixueiro and our current alternate examiner
          is
          Jose Antonio Guzmán Durán.
  **Executive
          Officers**
  The
          following table sets forth the names of our executive officers, their dates
          of
          birth, their current position, their prior business experience, and the
          year in
          which they were first appointed to their current position.
 
 **Name
                    and Date of**
                  **Birth**
                **Current
                    Position**
                **Business
                    Experience**
                **First
                    Appointed**Manuel
                    Saba Ades
                  (11/03/67)
                Chief
                    Executive Officer and Vice Chairman of the Board
                President
                    and Director -Xtra Inmuebles, S.A. de C.V.
                February
                    2000Gabriel
                    Saba D’jamus
                  (07/27/69)
                Deputy
                    Chief Executive Officer
                Executive
                    Director - Grupo Comercial Hotelera, S.A. de C.V.
                February
                    2000Alejandro
                    Sadurni Gomez
                  (10/08/59)
                Chief
                    Financial Officer
                Former
                    Chief Financial Officer of Administration - INMAS, S.A. de
                    C.V.
                February
                    2000Ricardo
                    Ríos Cardenas
                  (01/02/55)
                North
                    Region Operations and Sales Director
                Deputy
                    Personal Assistant of the President of the United Mexican
                    States
                December
                    2000Oscar
                    Gutiérrez Melgar (17/04/67)
                South
                    Region Operations and Sales Director
                Former
                    Manager of Drogueros, S.A. de C.V.
                November
                    1985
 
 44
 Table
              of Contents
 
 Jesus
                    Guerra de Luna
                  (05/29/61)
                General
                    Counsel
                Legal
                    Manager - Grupo Casa Autrey, S.A. de C.V.
                June
                    1995Jose
                    Norberto Mouret
                  (03/30/52)
                Human
                    Resources Director
                Human
                    Resources Director - Taesa
                October
                    1999Fernando
                    Torres Suarez
                  (09/21/64)
                Purchasing
                    Director
                Commercial
                    Director - Farmacias Benavides
                April
                    2001Jorge
                    Luis García
                  (09/12/61)
                Chief
                    Information Officer
                Former
                    Manager - Grupo Casa Autrey, S.A. de C.V.
                May
                    1992
 
 **Compensation**
  Pursuant
          to our bylaws, all executive compensation must be approved by our Board
          of
          Directors on a yearly basis. For the year ended December 31, 2005, the
          aggregate
          compensation paid by us to our executive officers for services rendered
          in all
          capacities was approximately Ps. 28.5 million. Our directors do not receive
          any
          compensation for their services rendered in such capacity.
  **Share
          Ownership of Directors and Officers**
  Share
          ownership of our directors and executive officers is set forth in the table
          under the caption “Item 7. Major Shareholders and Related Party Transactions”.
          Except as set forth in the table, none of our directors or executive officers
          is
          the beneficial owner of more than 1% of any class of our capital stock
          or
          options representing the right to purchase more than 1% of any class of
          our
          capital stock.
  **Employees**
  As
          of
          December 31, 2005, we had 5,319 employees, 2,104 of which were sales
          representatives for our Pharmaceutical and HBCG/Other Products business
          divisions, 911 of which were administrative employees and 2,304 of which
          were
          operational employees. A significant majority of our employees, 82.9% as
          of
          December 31, 2005, are represented by unions. We believe that the relation
          with
          our employees and the unions to which they are affiliated is good. In 2005,
          the
          number of employees decreased by 0.9% compared to 2004.
  **Employee
          Profit Sharing**
  Under
          Mexican law, we are required to contribute 10% of our yearly taxable profits,
          as
          adjusted, to our employees. This contribution is distributed in May of
          each
          year. In addition, in the past we have customarily paid an annual Christmas
          bonus to our employees in an amount equal to between two (the minimum required
          by law) and five weeks’ salary, depending on seniority.
  **The
          Pension Fund**
  We
          recognize the labor obligations for retirement pensions and seniority premiums
          derived from defined benefit plans for all their employees in accordance
          with
          Mexico’s Federal Labor Law, as well as the schemes that have been established
          for each plan. Seniority premiums are granted for a voluntary separation
          of
          personnel who have completed at least 15 years of service and are calculated
          based on the number of years worked. Retirement pensions are granted to
          all
          personnel who have completed at least ten years of service and reached
          sixty-five years of age. We are required to pay certain severance benefits
          to
          employees that are dismissed without proper cause. These payments for
          non-substitute indemnification of retirement pensions are expensed when
          paid.
  Projected
          benefit obligations, unamortized items, and the net periodic cost applicable
          to
          retirement pensions and seniority premiums are determined by using the
          “projected unit credit method”, in conformity with Bulletin D-3, “Labor
          Obligations”, issued by the MIPA. This method is virtually identical to the
          method used under U.S. GAAP.
  We
          have
          created a fund placed in irrevocable trusts at a financial institution
          to meet
          the labor obligations referred to above. Contributions to these funds are
          determined annually by an actuarial calculation prepared by an accounting
          firm
          and approved by our Board of Directors. We believe that obligations under
          these
          trusts are closely monitored by their trustee.
   45
 Table
              of Contents
 
 During
          2003, 2004 and 2005 contributions to the fund based on actuarial computations
          amounted to Ps. 10.0, Ps. 10.4 and Ps.14.5 million, respectively (Ps. 10.9
          and
          10.7 and 14.5 million at fiscal year-end constant Pesos, respectively).
          As of
          December 31, 2003, 2004 and 2005, fund assets consisted primarily of investments
          in equity securities and fixed income securities issued by Mexican companies
          that are traded on the Mexican Stock Market.
  For
          information regarding the relevant information of the study performed by
          independent actuaries with regard to our retirement pension and seniority
          premiums, see Note 3(j)(ii) to our audited consolidated financial
          statements.
   **Item
          7.** **Major
          Shareholders and Related Party Transactions**
  We
          are
          not directly or indirectly owned or controlled by another corporation or
          by any
          foreign government.
  **Principal
          Shareholders**
  All
          information presented in this section regarding beneficial ownership of
          our
          capital stock is based on the number of Ordinary Shares outstanding as
          of May
          31, 2006, which was 265,419,360. As required by Mexican law, the number
          of
          Ordinary Shares outstanding is presented net of the number of repurchased
          Ordinary Shares held in our treasury as of May 31, 2006, which was 14,729,720.
          We repurchased these Ordinary Shares in the open market pursuant to our
          share
          repurchase program, as described under the caption “Item 9. Offer and Listing
          Details—Share Repurchases.” Currently, there are no arrangements known to us
          that could result in a change of control of the Company.
  As
          of
          May 31, 2006, our controlling shareholder directly and indirectly owned
          225,606,456 Ordinary Shares, representing 85% of our issued and outstanding
          capital stock. As of May 31, 2006, approximately 11.01% of our Ordinary
          Shares
          were held through ADSs.
  The
          following table shows information, as of May 31, 2006, regarding the
          ownership of our capital stock by each person known by us to own or beneficially
          own more than 5% of our outstanding capital stock and by each of our directors,
          executive officers and key employees.
  
 **Name**
                **Number
                    of Ordinary Shares Owned****(1)**
                **Percentage
                    Stake**Isaac
                    Saba Raffoul
                225,606,456
                85%Directors,
                    executive officers and key employees(2)
                225,606,456
                85%Total
                225,606,456
                85%
 ____________________
 
 (1)
                Does
                    not include Ordinary Shares directly held by funds advised by
                    Internacional de Capitales, S.A. de C.V., an investment advisory
                    firm that
                    renders investment advisory services to funds that invest in
                    securities of
                    Latin American and emerging market issuers. Shares held directly
                    by these
                    funds as of May 31, 2006 represented less than 3% of our issued and
                    outstanding capital stock as of that date. Agustin Rodriguez
                    Legorreta and
                    Raul Fernandez Diaque, two members of our Board of Directors,
                    render
                    investment advisory services to these funds in their capacity
                    as
                    investment advisors of Internacional de Capitales, S.A. de
                    C.V.(2)
                The
                    only director, executive officer and/or key employee who owns
                    Ordinary
                    Shares or ADSs is Isaac Saba Raffoul, our controlling shareholder.
                    The
                    listed amount is based on information provided by Mr. Saba.
 
 46
 Table
              of Contents
  
 **Acquisition
          of Our Company**
  On
          January 19, 2000, Xtra Inmuebles, an entity beneficially owned and controlled
          by
          our controlling shareholder, commenced a tender offer for up to 85% of
          our then
          outstanding Ordinary Shares on the Mexican Stock Exchange. Upon the completion
          of the tender offer on February 1, 2000, Xtra Inmuebles acquired 225,606,456
          Ordinary Shares, representing 85% of our then outstanding capital stock.
          Immediately thereafter, all of these Ordinary Shares were acquired from
          Xtra
          Inmuebles by our controlling shareholder. The completion of this tender
          offer
          was subject to the completion of our financial restructuring, which is
          briefly
          described under “Item 4—Information
          on the
          Company—History and Development of the Company.”
  Following
          the completion of the tender offer, our controlling shareholder, by means
          of a
          shareholder vote, amended our bylaws, replaced our incumbent Board of Directors
          with nine of his appointees, appointed new management, including a new
          Chief
          Executive Officer and Chief Financial Officer, among others, and changed
          the
          name of our Company from Grupo Casa Autrey, S.A. de C.V. to Grupo Casa
          Saba,
          S.A. de C.V. As part of our financial restructuring, the net proceeds received
          by certain members of the Autrey family from the tender offer were deposited
          into a special purpose trust in benefit of our creditors in order to repay
          a
          substantial portion of our restructured indebtedness. See “Item 4. Information
          on the Company—History and Development of the Company” and “Item 5. Operating
          and Financial Review and Prospects—Indebtedness.”
  **Related
          Party Transactions**
  In
          2005,
          we engaged in, and we may continue to engage in, transactions with related
          parties, including, without limitation, the transactions described below.
          Exclusively for purposes of this discussion, the term “related party” includes
          our affiliates, associates, directors, officers and principal shareholders,
          as
          well as affiliates of our directors, officers and principal shareholders,
          but
          does not include our consolidated subsidiaries. Conflicts of interest are
          inherent in transactions with related parties. See Note 7 to our audited
          consolidated financial statements for all of the information that we must
          make
          publicly available in Mexico regarding related party transactions.
  All
          related party transactions we engage in are previously submitted to the
          Audit
          Committee, and are subject to thorough evaluation, which results in the
          determination of the terms and conditions under which the transactions
          shall be
          carried out. During this evaluation period, the Audit Committee performs
          relevant market research and obtains quotations from several different
          non-related parties that render the exact or similar services to those
          intended
          to be performed by the related party with which the transaction is intended
          to
          be conducted. Once the research is concluded, the Audit Committee prepares
          the
          guidelines that must be observed in establishing the terms of the related
          party
          transactions and submits its evaluation to the Board of Directors and to
          our
          shareholders. This procedure enables the Company to obtain objective information
          as to competitive market prices and conditions and therefore, guarantees
          that
          the transactions entered with related parties are at all times entered
          into on
          an arm’s-length basis.
  ***Transactions
          and Arrangements With Affiliates and Related Parties of Our Directors,
          Officers
          and Principal Shareholders effective during 2005***
  ***Leases*** .
          In
          2001, we entered into a lease for office space with Xtra Inmuebles, S.A.
          de
          C.V., an entity owned and controlled by our controlling shareholder. During
          2005, we maintained our lease for office space with Xtra Inmuebles and
          do not
          have plans to terminate this agreement. In 2005, we expensed Ps. 4.8 million
          with respect to this lease. We believe that this lease was entered into
          the
          ordinary course of business, was made at arm’s length and is on terms no less
          favorable than those that could have been obtained from unaffiliated third
          parties. See Note 7 to our audited consolidated financial
          statements.
   47
 Table
              of Contents
   ***Services*** **.** In 2002,
          one of our subsidiaries, Servicios Corporativos Casa Saba, S.A. de C.V.,
          entered
          into an air transport service agreement with Aero Xtra, S.A. de C.V. an
          entity
          owned and controlled by our controlling shareholder. Services pursuant
          to this
          agreement were also provided to us in 2003, 2004 and 2005. In 2005, we
          expensed
          Ps. 11.4 million with respect to services rendered by Aero Xtra, S.A. de
          C.V.
          This contract was entered into in the ordinary course of business, and
          was made
          at arm’s-length on terms no less favorable than those that could have been
          obtained from unaffiliated third parties. See Note 7 to our audited consolidated
          financial statements.
  ***Legal
          and Advisory Services*** .
          During
          2005, Mijares, Angoitia, Cortés y Fuentes, S.C., a Mexican law firm, provided us
          with legal and advisory services, and we expect that this will continue
          to be
          the case in the future. Francisco Fuentes Ostos, a partner from the law
          firm of
          Mijares, Angoitia, Cortés y Fuentes, S.C., is the secretary of our Board of
          Directors. We believe that the fees we paid for these services were comparable
          to those that we would have had to pay a third party law firm for similar
          services.
  ***Tax
          Advisory Services*** .
          During
          2005, Chevez, Ruiz, Zamarripa y Cia, S.C., a tax advisory firm, provided
          us with
          tax advisory services, and we expect that this will continue to be the
          case in
          the future. Ivan Moguel Kuri, a partner from the tax advisory firm of Chevez,
          Ruiz, Zamarripa y Cia, S.C., is one of our directors. We believe that the
          fees
          we paid for these services were comparable to those that we would have
          had to
          pay a third party for similar services.
  As
          of
          December 31, 2004 and 2005, the receivable balances from all related parties, Aeroxtra,
          S.A. de C.V. million and Xtra Inmuebles, S.A. de C.V., were Ps. 3.8 million
          and
          Ps. 3.9 million, respectively. The
          receivable balance from Aeroxtra, S.A. de C.V. and Xtra Inmuebles, S.A.
          de C.V.
          represented prepaid flight services and the leasing of real property,
          respectively. During 2005, amounts paid to these related parties were expensed
          in the amounts of Ps. 11.4 million and Ps. 4.8 million,
          respectively.
  During
          2004 and 2005, we had no other related party agreements, except for the
          balances
          and transactions referred to above. We believe that all related party
          transactions were agreed upon on an arm’s-length basis.
   **Item
          8.** **Financial
          Information**
  See
“Item
          18- Financial Statements” and “Index to Consolidated Financial Statements”,
          which are incorporated herein by reference.
  **Material
          Legal Proceedings.**
  As
          of
          December 31, 2005, there were no existing material legal proceedings that
          could
          have a significant effect on the Company’s financial position or
          profitability.
  **Dividend
          Policy**
  Pursuant
          to Mexican law, decisions regarding the payment and amount of dividends
          are
          subject to approval of our shareholders, generally, but not necessarily,
          on the
          recommendation of the Board of Directors. Our controlling shareholder owns
          85%
          of our outstanding Ordinary Shares and, so long as he continues to own
          a
          majority of our outstanding shares, he will have the ability to determine
          whether we will declare and pay dividends, in cash or otherwise. See “Item 3.
          Key Information—Risk
          Factors—Risk
          Factors Related to our Securities—Our Controlling Shareholder Has the Ability to
          Restrict the Payment and Amount of Dividends”. We do not have a specific
          dividend policy. Depending on the results and condition of our business,
          dividends for a specific year would be paid to the extent such payment
          would not
          impair our ability to invest and grow. Therefore, any dividend payment
          would
          depend on the cash that the Company generates in a specific year as well
          as on
          the market conditions of our business.
  **Significant
          Changes**
  Since
          the
          date of our annual financial statements, no significant change in our financial
          information has occurred other than those changes described in “Item 5.
          Operating and Financial Review and Prospects—Trend Information”.
   48
 Table
              of Contents
   **Item
          9.** **Offer
          and Listing Details**
  ***Trading
          History of Ordinary Shares and ADSs***
  Since
          December 7, 1993, our Ordinary Shares have been listed and traded on the
          Mexican
          Stock Exchange under the symbol “SAB” and our American Depositary Shares, or
          ADSs, have been listed and traded on the New York Stock Exchange, or NYSE,
          also
          under the symbol “SAB”. The ADSs were issued pursuant to a Deposit Agreement,
          dated December 1, 1993, as amended, among us, Morgan Guaranty Trust Company
          of
          New York, as depositary, and the holders from time to time of our ADSs.
          Each ADS
          represents 10 Ordinary Shares. On December 11, 2002, we entered into an
          Amended
          and Restated Deposit Agreement pursuant to which The Bank of New York was
          appointed as successor depositary to Morgan Guaranty Trust Company of New
          York.
  The
          table
          below shows, for the five most recent full financial years ending December
          31,
          2005 and each month in the six month period ending May 31, 2006, the reported
          annual highest and lowest market prices in nominal Pesos for our Ordinary
          Shares
          on the Mexican Stock Exchange.
  **Pesos
                    per Ordinary Share****(1)****High**
                
                **Low**Year2001
                
                Ps.
                8.99
                
                Ps.
                3.692002
                
                Ps.
                12.40
                
                Ps.
                6.522003
                
                Ps.
                13.30
                
                Ps.
                10.002004:
                
                Ps.
                16.60
                
                Ps.
                12.70First
                    Quarter
                
                
                14.40
                
                
                12.80Second
                    Quarter
                
                
                14.70
                
                
                14.30Third
                    Quarter
                
                
                14.30
                
                
                12.70Fourth
                    Quarter
                
                
                16.60
                
                
                13.252005:
                
                Ps.
                20.50
                
                Ps.
                16.70First
                    Quarter
                
                
                20.50
                
                
                17.00Second
                    Quarter
                
                
                18.50
                
                
                16.70Third
                    Quarter
                
                
                18.25
                
                
                16.80Fourth
                    Quarter
                
                
                20.50
                
                
                18.002006:First
                    Quarter
                
                Ps.
                24.20
                
                Ps.
                16.95MonthDecember
                    2005
                
                Ps.
                19.50
                
                Ps.
                18.00January
                    2006
                
                
                18.70
                
                
                17.00February
                    2006
                
                
                19.20
                
                
                16.95March
                    2006
                
                
                24.20
                
                
                20.40April
                    2006
                
                
                24.50
                
                
                23.95May
                    2006
                
                
                24.10
                
                
                24.00June
                    (through June 15, 2006)
                
                
                24.05
                
                
                24.05
 ____________________
 (1)
                Source:
                    Infosel and Economática
   49
 Table
              of Contents
  The
          table
          below shows, for the five most recent full financial years ending December
          31,
          2005 and each month in the six month period ending May 31, 2006, the high
          and
          low sales prices in U.S. Dollars for our ADSs on the NYSE.
   **U.S.
                    Dollars per ADS****(1)****High**
                
                **Low**Year2001
                
                U.S.$
                $8.35
                
                U.S.$
                $5.052002
                
                U.S.$
                12.51
                
                U.S.$
                6.602003
                
                U.S.$
                12.50
                
                U.S.$
                9.402004:
                
                U.S.$
                14.99
                
                U.S.$
                10.70First
                    Quarter
                
                
                13.01
                
                
                11.40Second
                    Quarter
                
                
                13.00
                
                
                12.11Third
                    Quarter
                
                
                11.83
                
                
                10.70Fourth
                    Quarter
                
                
                14.99
                
                
                11.252005:
                
                U.S.$
                18.50
                
                U.S.$
                14.75First
                    Quarter
                
                
                18.50
                
                
                14.75Second
                    Quarter
                
                
                16.77
                
                
                14.80Third
                    Quarter
                
                
                17.29
                
                
                15.30Fourth
                    Quarter
                
                
                18.30
                
                
                17.102006:First
                    Quarter
                
                U.S.$
                22.60
                
                U.S.$
                16.52MonthDecember
                    2005
                
                U.S.$
                18.30
                
                U.S.$
                17.85January
                    2006
                
                
                18.09
                
                
                17.21February
                    2006
                
                
                18.72
                
                
                16.52March
                    2006
                
                
                22.60
                
                
                18.42April
                    2006
                
                
                22.45
                
                
                21.20May
                    2006
                
                
                22.44
                
                
                20.35June
                    (through June 15, 2006)
                
                
                21.44
                
                
                20.80
 ____________________
 (1)
                    Source: Bloomberg, Infosel and Economática
 Trading
          prices of our Ordinary Shares and our ADSs will be influenced by our results
          of
          operations, financial condition, cash requirements, future prospects and
          by
          economic, financial and other factors and market conditions. See “Item 3. Key
          Information—Risk Factors—Risk Factors Relating to Developments in
          Mexico—Economic and Political Developments in Mexico May Adversely Affect Our
          Business.” There can be no assurance that prices of our Ordinary Shares and our
          ADSs will, in the future, be within the ranges set forth above. As of December
          31, 2005, there were 265,419,360 Ordinary Shares issued and outstanding,
          approximately 10.5% of which were held in the form of ADSs.
  ***Trading
          on the Mexican Stock Exchange***
  **Overview**
  The
          Mexican Stock Exchange, located in Mexico City, is the only stock exchange
          in
          Mexico. Operating continuously since 1907, the Mexican Stock Exchange is
          organized as a corporation with variable capital, or *sociedad
          anónima de capital variable* .
          Securities are traded on the Mexican Stock Exchange from 8:30 a.m. to 3:00
          p.m.
          Mexico City time each business day. Since January 1999, all trading on
          the
          Mexican Stock Exchange has been conducted electronically. The Mexican Stock
          Exchange operates a system of automatic suspension of trading in shares
          of a
          particular issuer as a means of controlling excessive price or volume
          volatility. Under current regulations, this system applies to the ADSs.
          However,
          the Mexican Stock Exchange may take into account any suspension measures
          that
          may or may not have been taken by the New York Stock Exchange in respect
          of the
          ADSs, and may resolve not to impose a suspension of trading of our
          shares.
  Settlement
          is effected two trading days after a share transaction on the Mexican Stock
          Exchange. Deferred settlement, even by mutual agreement, is not permitted
          without the approval of the CNBV. Most securities traded on the Mexican
          Stock
          Exchange are on deposit with *S.D.
          Indeval, S.A. de C.V.* , *Institución
          para el Depósito de Valores, S.A. de C.V.* ,
          or
          Indeval, a privately owned securities depositary that acts as a clearinghouse,
          depositary and custodian, as well as a settlement, transfer and registration
          agent for Mexican Stock Exchange transactions, eliminating the need for
          physical
          transfer of securities.
  Although
          the Mexican Securities Market Law provides for the existence of an
          over-the-counter market, no such market for securities in Mexico currently
          exists.
   50
 Table
              of Contents
 ***Trading
          on the New York Stock Exchange***
  Since
          December 7, 1993, our ADSs have been listed on the NYSE. Each ADS
          represents 10 Ordinary Shares. The ADSs are evidenced by American Depositary
          Receipts, or ADRs. ADRs evidencing ADSs may be issued by The Bank of New
          York,
          as depositary, pursuant to the Amended and Restated Deposit Agreement dated
          as
          of December 11, 2002 among Grupo Casa Saba, The Bank of New York and all
          registered holders, from time to time, of the ADRs issued thereunder. An
          ADR may
          evidence any number of ADSs.
  As
          of May
          31, 2006, approximately 11.01% of the Ordinary Shares were publicly held
          through
          ADRs in the NYSE. Holders of ADRs have voting rights with respect to the
          underlying shares. In accordance with the ADR Amended and Restated Deposit
          Agreement, ADR holders must instruct the Depositary as to the manner in
          which
          the underlying shares are to be voted.
  ***Share
          Repurchases***
  In
          April
          1998 and April 1999, our shareholders approved the allocation of retained
          earnings from a reserve of Ps. 200.0 million and Ps. 500.0 million (Ps.
          304.2
          million and Ps. 565.2 million in constant Pesos as of December 31, 2005)
          to
          repurchase our Ordinary Shares on the Mexican Stock Exchange at the discretion
          of our Board of Directors. At our annual shareholders’ meeting, which was held
          on April 27, 2006, our shareholders did not approve the allocation of any
          amounts from retained earnings for share repurchases. Our share repurchase
          program has been authorized by the CNBV and all repurchases have been conducted
          in full compliance with Mexican law and the rules and regulations of the
          CNBV.
  Pursuant
          to our share repurchase program, we may repurchase Ordinary Shares on the
          Mexican Stock Exchange at the prevailing market price. Upon the repurchase
          of
          Ordinary Shares, we must reduce the number of Ordinary Shares outstanding
          by the
          number of Ordinary Shares repurchased. Pursuant to our share repurchase
          program,
          we repurchased 13,433,000 Ordinary Shares during 1998 and 3,003,720 Ordinary
          Shares during 1999. Since then, we have not repurchased any additional
          Ordinary
          Shares.
  When
          we
          resell repurchased Ordinary Shares on the Mexican Stock Exchange, we must
          increase the number of Ordinary Shares outstanding by the corresponding
          number
          of Ordinary Shares sold. We resold 1,438,000 Ordinary Shares during 1998
          and
          269,000 Ordinary Shares in 1999. As of December 31, 2005, 14,729,720 repurchased
          Ordinary Shares were held in our treasury. We are currently in the process
          of
          evaluating various alternatives regarding the resale or redemption of the
          Ordinary Shares held in our treasury.
  We
          have
          amended our bylaws to reflect certain changes to the Mexican Securities
          Market
          Law affecting share repurchases. For a description of the amendments relating
          to
          share repurchases, see “Item 10. Additional Information —Bylaws—Other
          Provisions—Share Repurchases.”
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  **Item
            10.** **** **Additional Information**
  ***Amendments
            to Mexican Securities Market Law***
  On
          December 30, 2005 a new Securities Market Law was enacted and published
          in the
          Official Gazette. The new Securities Market Law will be effective within
          180
          days following its publication and in some cases will allow 180 days for
          issuers
          to incorporate in their bylaws the new corporate governance requirements
          derived
          from this new law. The new law will introduce significant changes to the
          current
          regime, including:
  ·
                their
                    identification as*sociedad
                    anónima bursátil*(a
                    stock corporation with stock registered in the CNBV and listed
                    in the
                    Mexican Stock Exchange) and a new set of corporate governance
                    requirements;·
                the
                    redefinition of functions and structure of the Board of Directors,
                    including (i) the number of members of the Board of Directors,
                    up to 21
                    with at least 25% of these being independent members, and (ii)
                    the
                    independence status of the independent members of the Board of
                    Directors
                    will be qualified by the shareholders’ meeting and the CNBV will have the
                    authority to challenge such independence;·
                the
                    introduction of the general manager and senior management positions
                    as a
                    means for the Board of Directors to conduct the business;
 ·
                a
                    clear definition of fiduciary duties for members of the Board
                    of Directors
                    and its secretary, the chief executive officer and other executive
                    officers, including duty of care and duty of loyalty;·
                the
                    increase of liability standards for members of the Board of Directors
                    and
                    its secretary with respect to the operations and performance
                    of the
                    Company, including (i) the payment of damages and losses caused
                    as result
                    of their lack of care or loyalty and (ii) criminal sanctions
                    of up to ten
                    years for damages caused to the Company as a result of certain
                    illegal
                    acts involving willful misconducts. The liability actions may
                    be exercised
                    by the Company or by shareholders that represent 5% or more of
                    the capital
                    stock of the Company;·
                the
                    inclusion of sanctions applicable to senior management, shareholders
                    that
                    hold 10% or more of the capital stock of an issuer and external
                    auditors;·
                the
                    omission of the statutory auditor for the audit committee, the
                    corporate
                    governance committee and the external auditors, assigning to
                    each of these
                    specific obligations of surveillance and corporate
                    governance;·
                the
                    attribution of independent status to all the members of the audit
                    and
                    corporate governance committees, except in companies with controlling
                    shareholder[s] with 50% of the capital stock, such as the
                    Company;·
                the
                    increase of functions and responsibilities of the audit committee,
                    including (i) the evaluation of the performance of the external
                    auditors,
                    (ii) the review and discussion of the financial statements of
                    the Company
                    and advising the Board of Directors on the approval of such financial
                    statements; (iii) the surveillance of internal controls and internal
                    audit
                    procedures of the Company, (iv) the reception and analysis of
                    recommendations and observations made by the shareholders, members
                    of the
                    Board of Directors and senior management, and the authority to
                    take the
                    necessary actions, (v) the authority to call a shareholders meeting
                    and
                    include the items to be discussed in the meeting’s agenda and (vi) the
                    surveillance of the performance of the general manager; and·
                the
                    requirement that the shareholders meeting approve transactions
                    that represent 20% or more of the consolidated assets of the
                    Company
                    within one fiscal year; and the inclusion of a new set of rules
                    to obtain
                    authorization from the CNBV to execute public offerings.
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  ***Bylaws***
  In
          2003,
          as a result of the amendments to the Mexican Securities Market Law, all
          listed
          companies were required to incorporate certain provisions into their corporate
          bylaws. As a consequence, in December 2003, our shareholders approved the
          amendment of the bylaws of Grupo Casa Saba in order to comply with the
          new
          provisions. Most of the changes were related to corporate governance provisions
          and focused on the need to have independent directors.
  Set
          forth
          below is a brief summary of some significant provisions of our bylaws and
          applicable Mexican law. This description does not purport to be complete,
          and is
          qualified by reference in its entirety to our bylaws, which have been filed
          as
          an exhibit to this annual report and to Mexican law. For a description
          of the
          provisions of our bylaws relating to our Board of Directors, Executive
          Committee
          and statutory auditors, see “Item 6. Directors, Senior Management and
          Employees.”
  On
          December 30, 2005, Mexico's Federal Congress enacted a new federal statute
          that,
          upon its effectiveness 180 days from its enactment, will amend and restate
          the
          existing Mexican Securities Market Law in its entirety. The new Mexican
          Securities Market Law enhances disclosure requirements and corporate governance
          standards for Mexican-listed companies through the refinement of existing
          concepts (such as the functions, duties and liabilities of management,
          directors
          and audit committees) and the introduction of new concepts, such as corporate
          practices committees (comprised, in the case of companies such as us, of
          independent directors), institutional investors and safe harbors from public
          offering requirements. The new law also provides minority shareholders
          of
          Mexican-listed companies with improved information rights and legal remedies.
          In
          order to comply with the new legal regime applicable to and governing public
          issuers in Mexico upon the effectiveness of the new Mexican Securities
          Market
          Law, we will be required to amend our bylaws.
  **Organization
          and Register**
  Grupo
          Casa Saba, S.A. de C.V., is a *sociedad anónima de capital variable*, or
          limited liability stock corporation with variable capital, which was organized
          under the laws of the United Mexican States in accordance with the Mexican
          Corporations Law on November 11, 1982. Our deed of incorporation was registered
          with the Public Registry of Commerce of Mexico City, D.F., under Commercial
          Page
          ( *folio
          mercantil* )
          Number
          55,635. We have a general corporate purpose, the specifics of which can
          be found
          in Article Four of our bylaws, which includes, among others, the following:
          (i)
          to promote, incorporate, organize, exploit and participate in the capital
          stock
          and assets of all type of commercial or civil companies, associations or
          industrial, commercial, service or other concerns, both domestic and foreign,
          and participate in the management or liquidation thereof; (ii) to manufacture,
          produce, purchase, sell, process, distribute, export and import all types
          of
          products permitted by law and, generally, all types of domestic or foreign
          goods
          or merchandise, whether in the form of raw materials, semi-finished or
          finished products and whether pre-assembled or unassembled, and to trade
          them in
          any manner whatsoever either for our account or the account of others;
          (iii) to
          acquire, transfer and, generally, negotiate with all types of shares of
          stock,
          partnership interests and securities; (iv) provide, contract and receive
          all
          types of technical, consulting and advisory services, and enter into contracts
          or agreements in connection therewith; (v) to enter into all types of agreements
          with the Federal Government or any local governments or public or private
          entities, individuals or corporations, whether domestic or foreign; (vi)
          to
          issue, subscribe, accept, endorse and guarantee credit instruments, securities
          and other instruments permitted by law; (vii) to acquire, transfer, lease,
          sublease and permit the use, enjoyment, disposition of generally, and
          exploitation of all types of personal and real property, including their
          parts
          or appurtenances; (viii) to provide or receive all types of technical and
          professional assistance and services; (ix) to obtain and grant all types
          of
          loans, providing and receiving specific guarantees thereof; issue debentures
          and
          notes; accept, draw, endorse or guarantee all types of credit instruments
          and
          other documents evidencing credit rights; and grant all types of bonds
          or
          guarantees with regard to the obligations assumed or the instruments issued
          or
          accepted by third parties; and (x) generally, to carry out all types of
          commercial transactions and enter into all types of contracts, agreements
          and
          transactions of any nature whatsoever, in accordance with the law.
  ***Directors*** .
          Under
          the Mexican Securities Market Law, any shareholder or director that votes
          on a
          transaction in which his interests conflict with our interests may be liable
          for
          damages, but only if the transaction would not have been approved without
          his
          vote. In addition, any member of our Board of Directors that votes on a
          transaction in which his interest conflict with our interests may be liable
          for
          damages. Our existing bylaws do not contain any provisions that govern
          or limit
          the ability of our directors or shareholders to vote on transactions in
          which
          their interests conflict with our interests. In addition, our existing
          bylaws do
          not contain any provisions that govern or limit the ability of our directors,
          in
          the absence of an independent quorum, to borrow from us or to vote compensation
          to themselves or any other member of our Board of Directors or any committee
          of
          our Board of Directors. We have amended our bylaws in order to submit,
          among
          others, the following matters to the Board of Directors: (i) all transactions
          between the Company and any of its subsidiaries or any related party as
          such
          terms are defined under the Mexican Securities Market Law; (ii) the purchase
          or
          sale of assets by any subsidiary representing 10% (ten per cent) or more
          of the
          Company’s total assets; and (iii) the granting of loans by any subsidiary
          exceeding 30% (thirty per cent of the total value of the Company’s assets).
          Members of our Board of Directors, members of our Audit Committee and our
          Statutory Auditor will be liable to our shareholders for breaching their
          duty of
          loyalty to the corporation to the extent that these individuals approve
          transactions in which they have a conflict of interest. Members of our
          Board of
          Directors, members of our Audit Committee and our Statutory Auditor will
          be
          liable to our shareholders for breaching their duty of loyalty to the
          corporation to the extent that these individuals approve transactions in
          which
          they have a conflict of interest.
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  ***Voting
          Rights and Shareholders’ Meetings***
  Holders
          of Ordinary Shares have the right to vote on all matters subject to shareholder
          approval at any general shareholders meeting and have the right to appoint
          our
          Board of Directors.
 
 General
          shareholders meetings may be ordinary general meetings or extraordinary
          general
          meetings. Extraordinary general meetings are those called to consider specific
          matters listed in Article 182 of the Mexican Corporations Law and our bylaws,
          including the extension of the Company’s duration, changes to the corporate
          purpose, change of the Company’s jurisdiction of incorporation, amendments to
          the corporate bylaws, dissolution, liquidation or spin-offs, issuance of
          securities, mergers and transformations of our mercantile regime and increases
          and reductions in the fixed portion of our capital stock. In addition,
          our
          bylaws require an extraordinary general meeting to approve the cancellation
          of
          the Ordinary Shares’ listing with the securities and/or special sections of the
          National Registry of Foreign Investment (“NRFI”), as the case may be, and with
          any other Mexican or foreign stock exchange in which our Ordinary Shares
          or
          securities represented our Ordinary Shares, such as our ADSs, are registered.
          General meetings called to consider all other matters are ordinary meetings
          that
          are held at least once each year within four months following the end of
          each
          year.
  The
          procedure that must be followed in order to call a shareholders meeting
          is
          provided for in the General Corporations Law, the Securities Market Law
          and the
          Company’s bylaws, which incorporate the provisions set forth in the mentioned
          laws.
  In
          terms
          of the above-mentioned regulations and our bylaws, the shareholders meetings
          shall be called by our Board of Directors or the Statutory Examiner. Any
          shareholder or group of shareholders representing at least 10% of the capital
          stock may request that a shareholders meeting be called. If after 15 days
          following the request such call has not been made, the shareholder or
          shareholders may appear before a judge within the Company’s jurisdiction, who
          shall call upon such meeting as requested by the shareholder(s).
  Calls
          for
          the general ordinary shareholders meetings must be published in the *Official
          Fedéral
          Gazette* or in one major newspaper sold within our corporate domicile at
          least 15 days prior to the date in which the meeting is to be held.
          Extraordinary shareholders meetings may be called as described above, although
          calls for such meetings may be published with at least eight days prior
          to the
          meeting.
  In
          order
          for any shareholder to attend a shareholders meeting, a shareholder must
          demonstrate his title to the shares, and only such persons registered as
          shareholders in the stock registry book of the Company shall be deemed
          shareholders. Once the shareholder of record demonstrates his title to
          the
          shares, he shall obtain an admission pass for the meeting, which shall
          be
          required in order to be admitted at the corresponding meeting. The admission
          pass shall be delivered to such shareholders that request the pass in writing
          to
          the Secretary of the Board of Directors at least 24 hours prior to the
          meeting,
          and deliver to the Secretary their share certificates or the corresponding
          certificate from the depositary of the shares, as may be the case.
  Holders
          of ADRs have the same rights as holders of Ordinary Shares. They are entitled
          to
          direct the vote of the shares underlying their ADRs by means of instructing
          the
          ADRs Depositary who must ensure that the requirements set forth in the
          paragraph
          above for attendance at shareholder’s meetings are met. ADR holders also have
          all of the economic rights inherent to the Ordinary Shares that underlie
          their
          respective ADRs, such as the right to receive dividends.
  ***Dividend
          Rights***
  At
          our
          annual ordinary general shareholders’ meeting, our Board of Directors submits
          our financial statements from the previous year to the holders of our Ordinary
          Shares for their approval. Once our shareholders approve these financial
          statements, they must then allocate our net profits for the previous year.
          Under
          Mexican law, at least 5% of our net profits must be allocated to a legal
          reserve, until the amount of this reserve equals 20% of our paid-in capital
          stock. Thereafter, our shareholders may allocate our net profits to any
          special
          reserve. After this allocation, the remainder of our net profits will be
          available for distribution as dividends. Additionally and prior to the
          distribution of dividends, Mexican companies are required to contribute
          10% of
          their yearly taxable profits to our employees. However, please note that
          the
          Company has no direct employees as of this date, only its subsidiaries.
          See
“Item 10. Additional Information—Employee Profit Sharing.”
  Decisions
          regarding the payment and amount of dividends are subject to approval by
          the
          holders of our Ordinary Shares, generally, but not necessarily, on the
          recommendation of our Board of Directors. Our controlling shareholder owns
          85%
          of the authorized, issued and outstanding Ordinary Shares, and as long
          as he
          continues to do so, he will have, as a result of such ownership, the ability
          to
          determine whether dividends are to be paid and the amount of such dividends.
          See
“Item 3. Key Information—Dividends” and “Item 3. Key Information—Risk
          Factors—Risk Factors Relating to Our Securities—Our Controlling Shareholder Has
          the Ability to Restrict the Payment and Amount of Dividends.”
 
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   In
          accordance with the General Corporations Law, our shareholders have five
          years
          to collect their dividends, beginning on the date the dividends are declared
          payable. If the dividends are not collected during such period, a shareholder’s
          right to the dividend is extinguished.
  ***Limitation
          on Capital Increases***
  Our
          bylaws require that any capital increase is represented by new shares of
          each
          series of our capital stock in proportion to the number of each series
          outstanding shares **.** All
          increases in the capital stock of the Company must be approved at the general
          shareholder’s meeting. When the increase is to the fixed portion of the capital
          stock, then the general extraordinary shareholders meeting must approve
          it. If
          the increase is to the variable portion of the capital stock, then the
          general
          ordinary shareholder’s meeting must approve it.
  ***Preemptive
          Rights***
  In
          the
          event of a capital increase, a holder of Ordinary Shares has a preferential
          right to subscribe to a sufficient number of Ordinary Shares in order to
          maintain his existing proportionate holdings of Ordinary Shares. Shareholders
          must exercise their preemptive rights within the time period set by our
          shareholders at the meeting approving the issuance of additional Ordinary
          Shares. This period must continue for at least 15 days following the
          publication of notice of the issuance in the *Diario Oficial de la
          Federación*, Mexico’s official newspaper, and in a newspaper of general
          circulation in Mexico City. Under Mexican law, shareholders cannot waive
          their
          preemptive rights in advance or be represented by an instrument that is
          negotiable separately from the corresponding Ordinary Share. U.S. holders
          of
          ADSs may exercise preemptive rights only if we register any newly issued
          Ordinary Shares under the Securities Act of 1933 or qualify for an exemption
          from registration. We intend to evaluate at the time of any offering of
          preemptive rights the costs and potential liabilities associated with
          registering additional Ordinary Shares. See “Item 3. Key Information—Risk
          Factors—Risk Factors Relating to Our Securities—Preemptive Rights May Be
          Unavailable to Holders of Our ADSs. “
  ***Forfeiture
          of Shares*** .
          As
          required by Mexican law, our bylaws provide that for Ordinary Shares, our
          non-Mexican shareholders formally agree with the Foreign Affairs
          Ministry:
  ·
                to
                    be considered as Mexicans with respect to Ordinary Shares that
                    they
                    acquire or hold as well as to the property, rights, concessions,
                    participations or interests owned by us or to the rights and
                    obligations
                    derived from any agreements we have with the Mexican government;
                    and·
                not
                    to invoke the protection of their own governments. Failure to
                    comply is
                    subject to a penalty of forfeiture of such a shareholder’s capital
                    interests in favor of Mexico.
 In
          the
          opinion of Mijares, Angoitia, Cortés y Fuentes, S.C., our Mexican counsel, under
          this provision a non-Mexican shareholder is deemed to have agreed not to
          invoke
          the protection of his own government by asking such government to interpose
          a
          diplomatic claim against the Mexican government with respect to the
          shareholder’s rights as a shareholder, but is not deemed to have waived any
          other rights it may have, including any rights under the United States
          securities laws, with respect to its investment in our Company. If the
          shareholder should invoke governmental protection, in violation of this
          agreement, his shares could be forfeited to the Mexican government.
  ***Exclusive
          Jurisdiction*** .
          Our
          bylaws provide that legal action relating to the execution, interpretation
          or
          performance of the bylaws shall be brought only in courts located in Mexico
          City.
  ***Duration*** .
          Our
          corporate existence under our bylaws continues until 2099.
  ***Dissolution
          or Liquidation*** .
          Upon
          any dissolution, liquidation or split-up of our Company, our shareholders
          will
          appoint one or more liquidators at an extraordinary general shareholders’
meeting to wind up our affairs. In the event of a surplus upon dissolution,
          liquidation or split-up, a pro rata payment per Ordinary Share will be
          made to
          each of our shareholders.
 
 55
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   ***Redemption*** .
          Our
          bylaws provide that we may redeem our Ordinary Shares with distributable
          profits
          without reducing our capital stock by shareholder resolution at an extraordinary
          shareholders’ meeting. In accordance with Mexican law:
  ·
                any
                    redemption shall be made on a pro-rata basis among all of our
                    shareholders;·
                to
                    the extent that a redemption is effected through a public tender
                    offer on
                    the Mexican Stock Exchange, the shareholders’ resolution approving the
                    redemption may empower the Board of Directors to specify the
                    number of
                    shares to be redeemed and appoint the related intermediary or
                    purchase
                    agent; and·
                any
                    redeemed shares must be cancelled.
 ***Share
          Repurchases*** .
          As
          required by Mexican law, our bylaws provide that we may repurchase our
          shares on
          the Mexican Stock Exchange at the prevailing market prices. We are not
          required
          to create a special reserve for the repurchase of shares, nor do we need
          the
          approval of our Board to effect share repurchases however, we must appoint
          a
          person or individuals responsible for effecting share repurchases. The
          amount of
          capital stock allocated to share repurchases is determined by our shareholders
          at a general ordinary shareholders meeting. Share repurchases must be charged
          to
          our net worth if the repurchased shares remain in our possession and to
          our
          capital stock if the repurchased shares are converted into treasury shares.
          The
          aggregate amount of resources allocated to share repurchases in any given
          year
          cannot exceed the total amount of our net profits in any given year. Our
          capital
          stock is reduced automatically in an amount equal to the theoretical value
          of
          any repurchased shares. If the purchase price of the shares is less than
          the
          theoretical value of the repurchased shares, our capital stock account
          will be
          affected by an amount equal to the theoretical value of the repurchased
          shares.
  ***Delisting.*** In the
          event that the we decide to cancel the registration of our shares with
          the
          Mexican Securities Registry, or if the CNBV orders this deregistration,
          our
          shareholders who are deemed to have control will be required to make a
          tender
          offer to purchase the shares held by minority shareholders prior to such
          cancellation. Shareholders deemed to have control are those that own a
          majority
          of our common shares, have the ability to control our shareholders’ meetings, or
          have the ability to appoint a majority of the members of our Board of Directors.
          The price of the offer to purchase will generally be the higher of (x)
          the
          average trading price on the Mexican Stock Exchange during the last 30
          days on
          which the shares were quoted prior to the date on which the tender offer
          is made
          and (y) the book value of the shares as reflected in our latest quarterly
          financial information filed with the CNBV and the Mexican Stock
          Exchange.
  In
          accordance with the applicable regulations, in the event that our controlling
          shareholders are unable to purchase all of our outstanding shares pursuant
          to a
          tender offer, they must form a trust and contribute to it the amount required
          to
          secure payment of the purchase price offered pursuant to the tender offer
          to all
          of our shareholders that did not sell their shares pursuant to the tender
          offer.
          The trust may not exist for a period longer than six months.
  Controlling
          shareholders are not required to make a tender offer if the deregistration
          is
          approved by 95% of our shareholders and the aggregate consideration payable
          for
          publicly-traded shares does not exceed 300,000 UDIs, Mexico’s investment deposit
          units. Nonetheless, the trust mechanism described in the previous paragraph
          still must be implemented. Five business days prior to the commencement
          of the
          offering, our Board of Directors must make a determination with respect
          to the
          fairness of the offering, taking into 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 precluded from making
          this
          determination as a result of a conflict of interest, the Board’s resolution must
          be based on a fairness opinion issued by an expert selected by the audit
          committee.
  ***Modification
          of Shareholders’ Rights.*** The
          rights appurtenant to our Ordinary Shares may only be modified through
          a
          resolution adopted by at least 50% of our outstanding Ordinary Shareholders
          acting at a general extraordinary shareholders’ meeting.
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   ***Appraisal
          Rights and Other Minority Protections*** .
          Whenever our shareholders approve an amendment to our corporate purpose,
          jurisdiction of organization or the transformation of our corporate form,
          any
          dissenting shareholder is entitled, in terms of the General Corporations
          Law, to
          request the separation from the Company and receive the amount of his share
          participation in the Company through the reimbursement of his shares. The
          dissenting shareholder must exercise his appraisal rights 15 days following
          the
          conclusion of the shareholder’s meeting in which the matter was
          approved.
  The
          protections afforded to minority shareholders under Mexican law are generally
          different from those in the United States and many other jurisdictions.
          Substantive Mexican law concerning fiduciary duties of directors has not
          been
          the subject to extensive judicial interpretation in Mexico, unlike many
          states
          in the United States where duties of care and loyalty elaborated by judicial
          decisions helped to shape the rights of minority shareholders. Mexican
          civil
          procedure does not contemplate class actions or shareholder derivative
          actions,
          which permit shareholders in U.S. courts to file actions on behalf of other
          shareholders or to enforce rights of the corporation itself. Shareholders
          cannot
          challenge corporate actions taken at shareholders’ meetings unless they meet
          stringent procedural requirements.
  As
          a
          result of these factors, it is generally more difficult for our minority
          shareholders to enforce rights against us or our directors or principal
          shareholders than it is for shareholders of a U.S. issuer.
  In
          addition, under U.S. securities laws, as a foreign private issuer we are
          exempt
          from certain rules that apply to domestic U.S. issuers with equity securities
          registered under the U.S. Securities Exchange Act of 1934, including the
          proxy
          solicitation rules. We are also exempt from some of the corporate governance
          requirements of the New York Stock Exchange.
  Under
          our
          current bylaws, if we decide to cancel, or the CNBV requires us to cancel,
          the
          registration of our Ordinary Shares in the NRFI, our controlling shareholder
          will be required to initiate a tender offer for all Ordinary Shares held
          by
          minority stockholders at a price equal to the higher of the average trading
          price of the Ordinary Shares on the Mexican Stock Exchange during the 30-day
          period prior to the commencement of the tender offer or the book value
          of the
          Ordinary Shares. If any Ordinary Shares held by minority shareholders are
          not
          tendered pursuant to the tender offer, a trust will be established, into
          which
          our controlling shareholder would be required to contribute cash in an
          amount
          equal to the consideration for these remaining Ordinary Shares. Those minority
          shareholders who did not tender their Ordinary Shares in the tender offer
          have
          the right to tender their Ordinary Shares to the trust at the tender offer
          price
          for up to two years following the completion of the tender offer.
  In
          addition, as of June 1, 2001, the Mexican Securities Market Law was amended
          to
          heighten to the protections afforded to minority shareholders under Mexican
          law.
          In accordance with these amendments, we have amended our bylaws to include
          a
          number of minority protections. These minority protections include provisions
          that permit:
  ·
                holders
                    of at least 10% of our outstanding capital stock to call a shareholders’
                    meeting;·
                holders
                    of at least 15% of our outstanding capital stock to bring a derivative
                    suit against any member of our Board of Directors for breach
                    of fiduciary
                    duties;·
                holders
                    of at least 10% of our shares represented at a shareholders’ meeting to
                    request that resolutions with respect to any matter on which
                    they were not
                    sufficiently informed to be postponed; and·
                subject
                    to the satisfaction of certain requirements under Mexican law,
                    holders of
                    at least 20% of our outstanding capital stock to contest any
                    shareholder
                    resolution.
  We
          are
          organized under the laws of Mexico. Substantially all of our directors
          and
          executive officers reside outside of the United States, all or a significant
          portion of the assets of our directors and executive officers reside outside
          of
          the United States and substantially all of our assets are located outside
          of the
          United States. As a result, it may be difficult for investors to effect
          service
          of process within the United States upon these individuals. It may also
          be
          difficult for investors to enforce against these individuals, either inside
          or
          outside the United States, judgments obtained against them in U.S. courts,
          or to
          enforce in U.S. courts judgments obtained against them in courts in
          jurisdictions outside the United States, in any action based on civil
          liabilities under the U.S. federal securities laws. There is doubt as to
          the
          enforceability against these individuals in Mexico, whether in original
          actions
          or in actions to enforce judgments of U.S. courts, of liabilities predicated
          solely on U.S. federal securities laws. We have been advised by our Mexican
          counsel, Mijares, Angoitia, Cortés y Fuentes, S.C., that there is doubt as to
          the enforceability, in original actions in Mexican courts, of liabilities
          predicated solely on U.S. federal securities laws and as to the enforceability
          in Mexican courts of judgments of U.S. courts obtained in actions predicated
          upon the civil liability provisions of the U.S. federal securities
          laws.
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  ***Material
          Contracts***
  We
          are
          not a party to any material contract out of the ordinary course of
          business.
  ***Exchange
          Controls and Restrictions on Foreign Investment***
  In
          the
          past, the Mexican economy has experienced balance of payments deficits,
          shortages in foreign currency reserves and other problems that have affected
          the
          availability of foreign currencies in Mexico. The Mexican government does
          not
          currently restrict or regulate the ability of persons or entities to convert
          Pesos into U.S. Dollars or other currencies. However, it has done so in
          the past
          and could do so again in the future. We cannot assure you that the Mexican
          government will not institute a restrictive foreign currency exchange control
          policy in the future. For a description of exchange rate information, see
“Item
          3. Key Information—Exchange Rate Information.”
  Ownership
          by non-Mexicans of securities issued by Mexican Corporations is regulated
          by the *Ley
          de Inversión Extranjera* ,
          or the
          Foreign Investment Law, and the *Reglamento
          de la Ley de Inversión Extranjera y del Registro Nacional de Inversiones
          Extranjeras* ,
          or the
          Foreign Investment Regulations. The *Comisión
          Nacional de Inversiones Extranjeras* ,
          or the
          Foreign Investment Commission, is responsible for the administration of
          the
          Foreign Investment Law and the Foreign Investment Regulations. The Foreign
          Investment Law, as amended, provides that the Company may have up to 100%
          of
          foreign participation without requiring any government authorizations.
          The
          Foreign Investment Law also requires us to register any foreign owner of
          our
          Ordinary Shares, including the depositary for our ADSs, with the National
          Registry of Foreign Investment or the NRFI. We have registered The Bank
          of New
          York, the depositary for our ADSs, for this purpose.
  In
          addition, as required by Mexican law, our bylaws provide that non-Mexican
          holders of our Ordinary Shares, including those held in the form of ADSs,
          formally agree with the Foreign Affairs Ministry:
  ·
                to
                    be considered as Mexicans with respect to the Ordinary Shares
                    that they
                    acquire or hold, as well as to the property, rights, concessions,
                    participation or interests owned by us or to the rights and obligations
                    derived from any agreements we have with the Mexican government;
                    and·
                not
                    to invoke the protection of their own governments. If a holder
                    of our
                    Ordinary Shares invokes the protection of its own government,
                    the holder’s
                    Ordinary Shares will be forfeited to the Mexican government.
 **Mexican
          Tax Considerations**
  ***General*** .
          The
          following is a summary of the anticipated material Mexican tax consequences
          of
          the purchase, ownership and disposition of ADSs or Ordinary Shares by a
          person
          that is not a resident of Mexico, as defined below. The term “U.S. Holder” shall
          have the meaning ascribed below under the section “—U.S.
          Federal
          Income Tax Considerations”.
  U.S.
          Holders should consult with their own tax advisors to as to their entitlement
          to
          benefits afforded by the tax treaty between the United States and Mexico.
          Mexico
          has also entered into and is negotiating with various countries regarding
          other
          tax treaties that may have an effect on the tax treatment of ADSs or Ordinary
          Shares. Holders should consult with their tax advisors as to their entitlement
          to the benefits afforded by these treaties.
 
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   This
          discussion does not constitute, and shall not be considered as, legal or
          tax
          advice to holders. This discussion is for general information purposes
          only and
          is based upon the tax laws of Mexico as in effect on the date of this annual
          report, which are subject to change, including:
  ·
                The
                    Income Tax Law;·
                The
                    Federal Tax Code; and·
                The
                    Tax Treaty between Mexico and the U.S., which we refer to as
                    the Tax
                    Treaty.
 Holders
          should consult their own tax advisors as to U.S., Mexican or other tax
          consequences of the purchase, ownership and disposition of ADSs or Ordinary
          Shares.
  For
          Mexican income tax purposes, the following principles apply regarding
          residency:
  ·
                a
                    natural person may be treated as a resident of Mexico if he or
                    she has
                    established his or her home in Mexico, unless he or she resided
                    in another
                    country for more than 183 calendar days during a year and can
                    demonstrate
                    that he or she had become a resident of that country for tax
                    purposes;·
                a
                    legal entity is a resident of Mexico if it is established under
                    Mexican
                    law, or it has established in Mexico its main place of
                    management;·
                a
                    Mexican citizen is presumed to be a resident of Mexico unless
                    he or she
                    can demonstrate otherwise; and·
                a
                    legal entity that has a permanent establishment or fixed base
                    in Mexico
                    shall be required to pay taxes in accordance with relevant tax
                    provisions.
 On
          April
          3, 2001, a bill was introduced in the Mexican Congress involving a proposal
          to
          substantially reform the Mexican tax laws. Certain of such reforms have
          already
          been passed by the Mexican Congress and involve, among other things, the
          corporate income tax rate being gradually reduced to 28%. For 2005 the
          applicable corporate income tax rate was 30%, and will continue to be reduced
          by
          1% in each year until reaching 28% in 2007.
  ***Dividends*** .
          Dividends, either in cash or in any other form, paid with respect to the
          Ordinary Shares underlying the ADSs are no longer subject to a Mexican
          withholding tax, so long that certain requirements are met.
  ***Sales
          or Other Dispositions*** .
          The
          sale or other disposition of ADSs will not be subject to Mexican taxation.
          Deposits and withdrawals of Ordinary Shares for ADSs will not give rise
          to
          Mexican tax or transfer duties.
  The
          sale
          or other disposition of Ordinary Shares will not be subject to any Mexican
          tax
          if:
  ·
                the
                    sale is carried out through the Mexican Stock Exchange, or other
                    recognized securities market approved by the Mexican tax authorities
                    through general rules; and·
                the
                    Ministry of Finance and Public Credit considers such Ordinary
                    Shares to be
                    publicly held.
 Sales
          or
          other dispositions of Ordinary Shares made in other circumstances would
          be
          subject to Mexican income tax. However, under the Tax Treaty, any U.S.
          Holder
          that is eligible to claim the benefits of the Tax Treaty may be exempt
          from
          Mexican tax on gains realized on a sale or other disposition of Ordinary
          Shares
          in a transaction that is not carried out through the Mexican Stock Exchange
          or
          such other approved securities markets. The U.S. Holder will be exempt
          under the
          Tax Treaty if the U.S. Holder did not own directly or indirectly 25% or
          more of
          our outstanding shares within the 12-month period preceding such sale or
          disposition. Gains realized by other holders that are eligible to receive
          benefits pursuant to other income tax treaties to which Mexico is a party
          may be
          exempt from Mexican income tax in whole or in part. Non-U.S. Holders should
          consult their own tax advisors as to their possible eligibility under such
          other
          income tax treaties.
 
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   ***Other
          Mexican Taxes*** .
          There
          are no estate, gift, or succession taxes applicable to the ownership, transfer
          or disposition of ADSs or Ordinary Shares. However, a gratuitous transfer
          of
          ADSs or Ordinary Shares may, in some circumstances, result in the imposition
          of
          a Mexican federal tax upon the recipient. There are no Mexican stamp, issuer,
          registration or similar taxes or duties payable by holders of ADSs or Ordinary
          Shares.
  **U.S.
          Federal Income Tax Considerations**
  GENERAL.
          The following summary of U.S. Federal income taxes is based on U.S. Federal
          income tax laws in force on the date of this Form 20-F, which laws are
          subject
          to change, possibly with retroactive effect. It describes the principal
          U.S.
          Federal income tax consequences of the purchase, ownership and sale of
          ADSs or
          Ordinary Shares, as the case may be, by:
  ·
                a
                    citizen or resident of the United States;·
                a
                    corporation or other entity taxable as a corporation organized
                    or created
                    in the United States or any political subdivision thereof; as
                    the case may
                    be;·
                an
                    estate, the income of which is subject to U.S. federal income
                    tax,
                    regardless of its source; or·
                a
                    trust, if a court within the United States is able to exercise
                    primary
                    supervision over its administration and one or more United States
                    persons
                    have the authority to control all substantial decisions of such
                    trust
 (each
          a
“U.S. Holder”). This section applies only to holders who hold ADSs or Ordinary
          Shares as capital assets (generally, property held for investment) under
          the
          Internal Revenue Code of 1986, as amended (the “Code”). This section does not
          provide a complete analysis, listing or other description of all of the
          possible
          tax consequences of the purchase, ownership, sale or other disposition
          of ADSs
          or Ordinary Shares, as the case may be, and does not address tax consequences
          to
          persons with a special tax status such as dealers or traders in securities
          or
          currencies, U.S. Holders whose functional currency is not the U.S. Dollar,
          persons holding ADSs or Ordinary Shares as part of a hedge, straddle, conversion
          of other integrated transaction, certain U.S. expatriates, banks, insurance
          companies, real estate investment trust (REITs), regulated investment companies
          (RICs), tax-exempt entities, or persons owning at least 10% of the local
          combined voting power of our stock.
  If
          a
          partnership holds ADSs or Ordinary Shares, the tax treatment of a partner
          in
          such partnership will generally depend upon the status of the partner and
          the
          activities of the partnership. A partner of a partnership holding ADSs
          or
          Ordinary Shares should consult his, her or its own tax advisor.
  Investors
          should consult their tax advisors with respect to the tax consequences
          of the
          purchase, ownership, sale or other disposition of ADSs or Ordinary Shares,
          including consequences under foreign, state and local tax laws.
  For
          U.S.
          Federal income tax purposes, a U.S. Holder of an ADS generally will be
          treated
          as the beneficial owner of 10 Ordinary Shares.
  TAXATION
          OF CASH DISTRIBUTIONS AND DISTRIBUTIONS OF STOCK. The gross amount of any
          distribution (other than in liquidation), including the fair market value of all
          distributions of ADSs or Ordinary Shares whenever a holder may elect to
          receive
          cash distributions in lieu of distributions of ADSs or Ordinary Shares,
          that you
          receive with respect to our ADSs or Ordinary Shares (before reduction for
          any
          Mexican tax, if any, withheld from such distributions) generally will be
          includible in your gross income on the day on which the Depositary receives
          such
          distribution on behalf of the holder of the applicable ADSs or Ordinary
          Shares.
          Depending on the amount of the dividend and the amount of the U.S. Holder’s tax
          basis in the applicable ADSs or Ordinary Shares, distributions will be
          taxed in
          the following manner: to the extent that distributions paid by us with
          respect
          to the underlying Ordinary Shares do not exceed our earnings and profits
          (“E&P”), as calculated for U.S. Federal income tax purposes, such
          distributions will be taxed as dividends.
 
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   The
          Jobs
          and Growth Tax Relief Reconciliation Act of 2003 (the “Act”), enacted on May 28,
          2003, reduced the maximum rate of tax imposed on certain
          dividends paid prior to January 1, 2011 to U.S. Holders that are
          individuals to 15 percent (the “Reduced Rate”), so long as certain holding
          period requirements are met. In order for dividends paid by a foreign
          corporation to be eligible for the Reduced Rate, the foreign corporation
          must be
          a Qualified Foreign Corporation (“QFC”) within the meaning of the Act and must
          not be a passive foreign investment Company (a “PFIC”) in either the taxable
          year of the distribution or the preceding taxable year. We believe that
          we are,
          and will continue to be, a QFC. As a result, dividends paid prior to
          January 1, 2011 to individual U.S. Holders will generally constitute qualified
          dividend income (“QDI”) for U.S. Federal income tax purposes and taxable at the
          Reduced Rate, provided that certain holding period and other requirements
          are
          satisfied. There can be no assurance, however, that we will continue to
          be
          considered a QFC or that we will not be classified as a PFIC in the future.
          Thus, there can be no assurance that our dividends will continue to be
          eligible
          for the Reduced Rate. Special rules apply for purposes of determining the
          recipient’s investment income (which limits deductions for investment interest)
          and foreign income (which may affect the amount of foreign tax credit)
          and to
          certain extraordinary dividends. Each U.S. Holder that is an individual
          is urged
          to consult their tax advisor regarding the possible applicability of the
          Reduced
          Rate under the Act and the related restrictions and special rules.
  Because
          we are not a U.S. corporation, dividends paid by us will not be eligible
          for the
          dividends received deduction generally allowable to corporations under
          the
          Code.
  To
          the
          extent that distributions by us exceed our E&P, such distributions will be
          treated as a tax-free return of capital, by both individual and corporate
          U.S.
          Holders, to the extent of each such U.S. Holder’s basis in their ADSs or
          Ordinary Shares, and will reduce such U.S. Holder’s basis in the ADSs or
          Ordinary Shares (thereby increasing any gain or decreasing any loss on
          a
          disposition of the ADSs or Ordinary Shares).
  To
          the
          extent that the distributions exceed the U.S. Holders’ basis in the ADSs or
          Ordinary Shares, each such individual or corporate U.S. Holder will be
          taxed as
          having recognized gain on the sale of disposition of the ADSs or Ordinary
          Shares
          (see “Taxation of Sale or Other Disposition”, below).
  We
          anticipate that any distributions on the ADSs and Ordinary Shares will
          be made
          in Pesos, and any dividends so paid generally will be includible in a U.S.
          Holder’s gross income in a U.S. Dollar amount calculated by reference to the
          exchange rate in effect on the day the Depositary receives the dividend.
          It is
          expected that the ADS Depositary will, in the ordinary course, convert
          Pesos
          received by it as distributions on the Depository into U.S. Dollars. To
          the
          extent that the Depositary does not convert the Pesos into U.S. Dollars
          at the
          time that such U.S. Holder is required to take the distribution into gross
          income for U.S. Federal income tax purpose, such U.S. Holder may recognize
          foreign exchange gain or loss, taxable as ordinary income or loss, on the
          later
          conversion of the Pesos into U.S. Dollars. The gain or loss recognized
          will
          generally be based upon the difference between the exchange rate in effect
          when
          the Pesos are actually converted and the “spot” exchange rate in effect at the
          time the distribution is taken into account and any gain will generally
          be
          treated as U.S.-source income for U.S. foreign tax credit limitation
          purposes.
  Dividends
          paid by us will generally be treated as foreign source income for U.S.
          foreign
          tax credit limitation purposes. Subject to certain limitations, U.S. Holders
          may
          elect to claim a foreign tax credit against their U.S. Federal income tax
          liability for foreign tax withheld (if any) from dividends received in
          respect
          of the ADSs or Ordinary Shares, as applicable. The limitation on foreign
          taxes
          eligible for credit is calculated separately with respect to specific classes
          of
          income. For this purpose, dividends paid in respect of our ADSs or Ordinary
          Shares, as applicable, generally will be “passive income”, and therefore any
          U.S. Federal income tax imposed on these dividends cannot be offset by
          excess
          foreign tax credits that such U.S. Holders may have from foreign source
          income
          not qualifying as passive income. U.S. Holders that do not elect to claim
          a
          foreign tax credit may instead claim a deduction for foreign tax withheld
          (if
          any).
  Distributions
          of Ordinary Shares and ADSs to U.S. Holders with respect to their holdings
          of
          Ordinary Shares and ADSs, as the case may be (such previously held ADSs
          or
          Ordinary Shares being “Old Stock”), that are pro rata with respect to their
          holdings of Old Stock will generally not be subject to U.S. Federal income
          tax
          (except with respect to cash received in lieu of fractional Ordinary Shares
          and
          ADSs). The basis of the Ordinary Shares and ADSs so received will be determined
          by allocating the U.S. Holder’s adjusted basis in the Old Stock between the Old
          Stock and the Ordinary Shares and ADSs so received.
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 TAXATION
            OF SALE OR OTHER DISPOSITION. Unless a non-recognition provision applies,
            a U.S.
            Holder will recognize capital gain or loss upon a sale or other disposition
            of
            ADSs or Ordinary Shares in an amount equal to the difference between
            the amount
            realized on their disposition and such U.S. Holder’s basis in the ADSs or
            Ordinary Shares. Under current law, capital gains realized by corporate
            and
            individual taxpayers are generally subject to U.S. Federal income taxes
            at the
            same rate as ordinary income, except that long-term capital gains realized
            by
            individuals, trusts and estates are subject to Federal income taxes at
            a reduced rate (15% prior to January 1, 2011). Certain limitations exist
            on
            the deductibility of capital losses by both corporate and individual
            taxpayers.
            Capital gains and losses on the sale or other disposition by a U.S. Holder
            of
            ADSs or Ordinary Shares generally should constitute gains or losses from
            sources
            within the U.S.
  For
            cash
            basis U.S. Holders who receive foreign currency in connection with a
            sale or
            other taxable disposition of ADSs or Ordinary Shares, as applicable,
            the amount
            realized will be based on the U.S. Dollar value of the foreign currency
            received
            with respect to such ADSs or Ordinary Shares as determined on the settlement
            date of such sale or other taxable disposition.
  Accrual
          basis U.S. Holders may elect the same treatment required of cash basis
          taxpayers
          with respect to a sale or other taxable disposition of ADSs or Ordinary
          Shares,
          as applicable, provided that the election is applied consistently from
          year to
          year. Such election may not be changed without the consent of the U.S.
          Internal
          Revenue Service. Accrual basis U.S. Holders who or which do not elect to
          be
          treated as cash basis taxpayers (pursuant to the Treasury Regulations applicable
          to foreign currency transactions) for this purpose may have a foreign currency
          gain or loss for U.S. Federal income tax purposes because of differences
          between
          the U.S. Dollar value of the foreign currency received prevailing on the
          date of
          the sale or other taxable disposition of ADSs or Ordinary Shares, as applicable,
          and the date of payment. Any such currency gain or loss generally will
          constitute gain or loss from sources within the U.S. and generally will
          be
          treated as ordinary income or loss and would be in addition to gain or
          loss, if
          any, recognized on the sale or other taxable disposition of ADS or Ordinary
          Shares, as applicable.
  DEPOSITS,
          WITHDRAWALS AND PRE-RELEASES. Deposits and withdrawals by U.S. Holders
          of
          Ordinary Shares in exchange for ADSs and of ADSs in exchange for Ordinary
          Shares
          will not be subject to any U.S. Federal income tax. The U.S. Treasury
          Department, however, has expressed concerns that parties involved in
          transactions where depositary shares are pre-released may be taking actions
          that
          are not consistent with the claiming of foreign tax credits by the holders
          of
          the applicable ADSs. Accordingly, the analysis of the credibility of Mexican
          taxes described above could be affected by future actions that may be taken
          by
          the U.S. Treasury Department.
  UNITED
          STATES BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, information
          reporting requirements will apply to payments of dividends on ADSs or Ordinary
          Shares and the proceeds of certain sales of ADSs or Ordinary Shares in
          respect
          of U.S. Holders other than certain exempt persons (such as corporations).
          A 28%
          backup withholding tax (31% for 2011 and thereafter) will apply to such
          payments
          if the U.S. Holder fails to provide a correct taxpayer identification number
          or
          other certification of exempt status or, with respect to certain payments,
          the
          U.S. Holder fails to report in full all dividend and interest income and
          the
          U.S. Internal Revenue Service notifies the payer of such under-reporting.
          Amounts withheld under the backup withholding rules may be credited against
          a
          holder’s U.S. Federal tax liability, and a refund of any excess amounts withheld
          under the backup withholding rules may be obtained by filing the appropriate
          claim form with the U.S. Internal Revenue Service.
  PASSIVE
          FOREIGN INVESTMENT COMPANY CONSIDERATIONS. We believe that we are not currently,
          and we do not expect to become, a PFIC for U.S. Federal income tax purposes.
          Because this determination is made annually at the end of each of our taxable
          years and is dependent upon a number of factors, some of which are beyond
          our
          control, including the value of our assets and the amount and type of our
          income, there can be no assurance that we will not become a PFIC. In general,
          a
          corporation organized outside the United States will be treated as a PFIC
          for
          U.S. Federal income tax purposes in any taxable year in which either (a) at
          least 75% of its gross income is “passive income” or (b) on average at
          least 50% of the value of its assets is attributable to assets that produce
          passive income or are held for the production of passive income. If a U.S.
          Holder owns our ADSs or Ordinary Shares at a time when we become a PFIC
          and is
          not eligible to make or does not make certain elections with respect to
          our ADSs
          or Ordinary Shares, such U.S. Holder could be liable for additional taxes
          and
          interest charges upon certain distributions by us or upon a sale, exchange
          or
          other disposition of such shares at a gain, whether or not we continue
          to be a
          PFIC.
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   ***Documents
          on Display***
  For
          further information pertaining to us and our Ordinary Shares and ADSs,
          we refer
          you to the filings we have made with the SEC. Statements contained in this
          annual report concerning the contents of any contract or any other document
          are
          not necessarily complete. If a contract or document has been filed as an
          exhibit
          to any filing we have made with the SEC, we refer you to the copy of the
          contract or document that has been filed. Each statement in this annual
          report
          relating to a contract or document filed as an exhibit to any filing we
          have
          made with the SEC is qualified in its entirety by the filed
          exhibit.
  We
          are
          subject to the informational requirements of the Securities Exchange Act
          of 1934
          and, in accordance with these requirements, we file reports and other
          information with the SEC. These reports and other information, as well
          as any
          related exhibits and schedules, may be inspected, without charge, at the
          public
          reference facility maintained by the SEC at Room 1024, Judiciary Plaza,
          450
          Fifth Street, N.W., Washington, D.C. 20549. Copies of these reports and
          other
          information may also be obtained from the Public Reference Section of the
          SEC at
          450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. These
          reports and other information may also be inspected at the offices of the
          New
          York Stock Exchange, 20 Broad Street, New York, New York 10005.
  We
          furnish The Bank of New York, the depositary for our ADSs, with annual
          reports
          in English. These reports contain audited consolidated financial statements
          that
          have been prepared in accordance with Mexican GAAP, and include reconciliations
          of net income and stockholders’ equity to U.S. GAAP. These reports have been
          examined and reported on, with an opinion expressed by, an independent
          auditor.
          The depositary is required to mail our annual reports to all holders of
          record
          of our ADSs. The deposit agreement for the ADSs also requires us to furnish
          the
          depositary with English translations of all notices of shareholders’ meetings
          and other reports and communications that we send to holders of our Ordinary
          Shares. The depositary is required to mail these notices, reports and
          communications to holders of record of our ADSs.
  As
          a
          foreign private issuer, we are not required to furnish proxy statements
          to
          holders of our ADSs in the United States.
  **Significant
          Differences in Corporate Governance Standards**
  Pursuant
          to Rule 303A.11 of the Listed Company Manual of the New York Stock Exchange
          (NYSE), we are required to provide a brief summary of the significant ways
          in
          which our corporate governance practices differ from those required for
          U.S.
          companies under the NYSE listing standards.
  Since
          we
          are Mexican corporation with shares listed on the Mexican Stock Exchange
          ( *Bolsa
          Mexicana de Valores* ),
          our
          corporate governance standards are governed by our corporate bylaws, the
          Mexican
          Securities Market Law ( *Ley
          del Mercado de Valores* )
          and the
          regulations issued by the Mexican Banking and Securities Commission
          ( *Comisión
          Nacional Bancaria y de Valores* ).
          In
          order to comply with the above mentioned laws and regulations, as a public
          company listed in the Mexican Stock Exchange, since January 2001, we are
          required by the Mexican Banking and Securities Commission to disclose annually
          the extent to which our corporate governance practices comply with those
          issued
          by the Mexican Banking and Securities Commission as general guidelines
          and which
          are collected in the Mexican Code of Enhanced Corporate Practices ( *Código
          de Mejores Prácticas Corporativas* ).
          This
          Code was originally created by a group of Mexican business leaders and
          was
          acknowledged by the Mexican Banking and Securities Commission in January
          2001.
          Under Mexican legislation, we are not compelled to comply with the guidelines
          contained in the Code although compliance is highly recommended by the
          authorities and disclosure as to the degree of our compliance therewith
          is
          mandatory.
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   **NYSE
                    Standards**
                
                **Our
                    Corporate Governance Practice***Majority
                    of Board of Directors must be independent. Exception for “controlled
                    companies,” which would include our Company if we were a U.S.
                    issuer.*
                
                We
                    are required to have a Board of Directors of between 5 and 20
                    members, 25%
                    of whom must be independent under the Mexican Stock Exchange
                    Law. Our
                    Board of Directors is not required to make a determination as
                    to the
                    independence of our directors. The applicable definition of independence,
                    which differs in certain respects from the definition applicable
                    to U.S.
                    issuers under the NYSE standard, prohibits, among other relationships,
                    an
                    independent director from being an employee or officer of the
                    Company or
                    an independent director from being a shareholder that may have
                    influence
                    over the Company. It also prohibits certain relationships between
                    the
                    Company and the independent director, entities with which the
                    independent
                    director is associated and family members of the independent
                    director.*Non-management
                    directors must meet at executive sessions without
                    management.*
                
                Our
                    non-management directors are not required to meet in executive
                    sessions.
                    Executive sessions are not recommended by the Mexican Code of
                    Enhanced
                    Corporate Practices. Our Chief Executive Officer is a member
                    of our Board
                    of Directors.*Nominating/corporate
                    governance committee of independent directors required. Exception
                    for
                    “controlled companies,” which would include our Company if we were a U.S.
                    issuer.*
                
                We
                    are not required to have a nominating corporate governance committee,
                    and
                    such committee is not recommended by the Mexican Code of Enhanced
                    Corporate Practices.*Compensation
                    committee of independent directors required. Exception for “controlled
                    companies,” which would include our Company if we were a U.S.
                    issuer.*
                
                We
                    are not required to have a compensation committee, and currently
                    we do not
                    have one.*Audit
                    committee satisfying the independence and other requirements
                    of Rule 10A-3
                    under the Exchange Act and the NYSE independence
                    standards.*
                
                We
                    have a two member audit committee, both of which are independent
                    under
                    applicable Mexican standards and on Rule 10A-3. Members of our
                    audit
                    committee do not need to satisfy the NYSE independence standards
                    that are
                    not required by Rule 10A-3. Our audit committee does not have
                    a written
                    charter.*Equity
                    compensation plans require shareholder approval, subject to limited
                    exemptions.*
                
                Shareholder
                    approval is not required under Mexican law or our bylaws for
                    the adoption
                    and amendment of an equity-compensation plan. However, regulations
                    of the
                    Mexican Banking and Securities Commission require shareholder
                    approval
                    under certain circumstances.*Corporate
                    governance guidelines and code of conduct and ethics required,
                    with
                    disclosure of any waiver for directors or executive officers.*
                
                The
                    practices for our Board of Directors, including committees and
                    compensation of directors, are described in this annual report.
                    We have
                    adopted a code of ethics applicable to all of our directors and
                    executive
                    officers, which is available at http://www.casasaba.com.*CEO
                  Certifications must certify to the NYSE each year that the CEO
                  is not
                  aware of any violation by the Company of the NYSE corporate governance
                  listing standards. Additionally CEO’s must notify the NYSE in writing if
                  any executive officer becomes aware of any material non-compliance
                  with
                  the new listing standards.*
                
                We
                  are required to disclose each year our degree of compliance with
                  the Code
                  of Enhanced Corporate Governance Practices, and the truthfulness
                  of such
                  disclosure must be certified by the Chairman of the Board of Directors;
                  however there is no such concept as a violation of the Code of
                  Enhanced
                  Corporate Governance Practices since compliance with these is not
                  mandatory. Furthermore, other than the disclosure provided by our
                  CEO in
                  this annual report, the CEO is not required to provide notification
                  of any
                  non-compliance of which he may be aware
                  of.
   64
 Table
              of Contents
 
 **Item
          11.** **Quantitative
          and Qualitative Disclosures about Market Risk**
  We
          are
          exposed to a number of different market risks arising from our normal business
          activities and risk management activities. We do not enter into or hold
          any
          market risk sensitive instruments for trading purposes. Market risks arise
          from
          the possibility that changes in interest rates or currency exchange rates
          will
          adversely affect the value of our financial assets, liabilities or expected
          future cash flows.
  ***Interest
          Rate Risk***
  We
          are
          subject to market risks due to interest fluctuations in Mexico. In addition,
          in
          the past, we have occasionally entered into swap arrangements and other
          hedge
          transactions, and will continue to consider doing so in the future, to
          reduce our exposure to interest rate risks. Currently, we do not have any
          outstanding debt that is subject to interest rate risk, nor are we party
          to any
          arrangements to reduce our exposure to interest rate risk.
  ***Foreign
          Exchange Rate Risk***
  As
          of
          December 31, 2005 and June 15, 2006, we had no cost-bearing liabilities
          and,
          therefore, we are not currently subject to foreign exchange rate risk
          fluctuations. To the extent that we incur U.S. Dollar-denominated indebtedness
          in the future, we would be subject to foreign exchange rate risk.
  **Item
          12.** **Description
          of Securities Other than Equity Securities**
  Not
          applicable.
  **PART
          II**
  **Item
          13.** **Defaults,
          Dividend Arrearages and Delinquencies**
  Not
          applicable.
  **Item
          14.** **Material
          Modifications to the Rights of Security Holders and Use of
          Proceeds**
  Not
          applicable.
  **Item
          15.** **Controls
          and Procedures**
  As
          of the
          end of the period covered by this report, the Company’s management (with the
          participation of our Chief Executive Officer and Chief Financial Officer)
          conducted an evaluation pursuant to Rule 13a-15 promulgated under the
          Securities Exchange Act of 1934, as amended (the “Exchange Act”) of the
          effectiveness of the design and operation of the Company’s disclosure controls
          and procedures. Based on such evaluation, such officers have concluded
          that as
          of the end of the period covered by this report, the Company’s disclosure
          controls and procedures are effective to provide reasonable assurance that
          information required to be disclosed by the Company (including its consolidated
          subsidiaries) in reports it files or submits under the Exchange Act is
          recorded,
          processed, summarized and reported within the time periods specified in
          the
          rules and forms of the SEC. During 2005, there were no significant changes
          in
          the Company’s internal controls or in other factors that could significantly
          affect such controls.
   65
 Table
              of Contents
 
 **Item
          16.** **Reserved**
  **Item
          16A.  Audit Committee Financial
          Expert**
  At
          our
          annual ordinary shareholders’ meeting in April 27, 2006, our shareholders
          reelected the following individuals as members of the Audit Committee:
          Mr. Jose
          Ellstein Japchik and Mr. Javier Alarcón Velázquez. Our Board of Directors has
          determined that the “audit committee financial expert” within the meaning of
          this Item 16A, is Mr. Jose Ellstein Japchik.
  **Item
          16B.  Code of Ethics**
  We
          have
          adopted a code of ethics that applies to our Chief Executive Officer, Chief
          Financial Officer, Chief Accounting Officer, and persons performing similar
          functions, as well as to our directors and other officers and employees.
          Our
          code of ethics is available on our web site at *www.casasaba.com* .
          Since
          its adoption, our code of ethics has not been amended and no waivers have
          been
          granted thereunder; however, any amendment to the code of ethics or waiver
          thereto shall be disclosed on our web site at the same address.
  **Item
          16C.  Principal Accountant Fees and
          Services**
  **For
                      the year ended December 31,****2004**
                  
                  **2005****(Ps.
                      millions)**Audit
                      Fees
                  
                  Ps.
                  5.2
                  
                  Ps.
                  5.6Audit-Related
                      Fees
                  
                  
                  1.3
                  
                  
                  2.1Tax
                      Fees
                  
                  
                  3.1
                  
                  
                  4.9Other
                      Fees
                  
                  
                  0
                  
                  
                  0Total
                  
                  Ps.
                  9.6
                  
                  Ps.
                  12.6
 
 ***Audit
          Fees.*** The
          amount set forth as Audit Fees in the table above represents fees billed
          to us
          by Salles Sainz-Grant Thornton, S.C., our external auditor. The firm was
          appointed by the shareholders meeting and was hired to render tax and financial
          audit as well as to prepare Grupo Casa Saba’s audited consolidated financial
          statements.
  ***Audit-Related
          Fees.*** The
          amount set forth as Audit-Related Fees in the table above represents fees
          billed
          to us by Salles Sainz-Grant Thornton, S.C. in connection with their review
          of
          our consolidated financial statements.
  ***Tax
          Fees.*** The
          amount set forth as Tax Fees in the table above represents fees billed
          to us by
          Chevez, Ruiz Zamarripa, S.C., the firm hired by us to provide tax advisory
          services.
  ***Pre-Approval
          Policies and Procedures*** .
          Our
          Audit Committee has not adopted pre-approval policies and procedures under
          which
          all non-audit services provided by our external auditors must be pre-approved
          by
          the Audit Committee. However, any matter that is submitted to the Audit
          Committee for approval must be approved at a meeting and the members of
          the
          Board of Directors must be informed.
  **Item
          16D.**
  Not
          applicable.
  **Item
          16E.**
  Not
          applicable.
   66
 Table
              of Contents
 
 **PART
          III**
  **Item
          17.** **Financial
          Statements**
  We
          are
          furnishing financial statements pursuant to the instructions to Item 18
          of Form
          20-F.
  **Item
          18.** **Financial
          Statements**
  The
          following financial statements, together with the report of Salles Sáinz-Grant
          Thornton, S.C. thereon, are filed as part of this Annual Report.
 
 PageIndex
                    to Consolidated Financial Statements
                F-1Report
                    of Independent Registered Public Accounting Firm
                F-2Consolidated
                    Balance Sheets as of December 31, 2004 and 2005
                F-3Consolidated
                    Statements of Income for each of the years ended
                  December
                    31, 2003, 2004 and 2005
                F-4Consolidated
                    Statements of Stockholders’ Equity for the years ended
                  December
                    31, 2003, 2004 and 2005
                F-5Consolidated
                    Statements of Changes in Financial Position for the
                  years
                    ended December 31, 2003, 2004 and 2005
                F-6Notes
                    to Consolidated Financial Statements
                F-8
 
 All
          supplementary schedules relating to the Company are omitted because they
          are not
          required or because the required information, where material, is contained
          in
          our audited consolidated financial statements or the notes thereto.
  **Item
          19.** **Exhibits**
  Documents
          filed as an exhibit to this annual report are as follows:
 
 Exhibit
                  Number
                Description
                    of Exhibits1.1
                Amended
                    and Restated Bylaws (English translation).**8.1
                List
                    of Subsidiaries of the Registrant.*12.1
                Certification
                    of the Principal Executive Officer of Grupo Casa Saba, S.A. de
                    C.V.
                    pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.*12.2
                Certification
                    of the Principal Financial Officer of Grupo Casa Saba, S.A. de
                    C.V.
                    pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.*13.1
                Certification
                    of the Principal Executive and Financial Officer of Grupo Casa
                    Saba, S.A.
                    de C.V. pursuant to 18 U.S. C. Section 1350, as adopted pursuant
                    to
                    Section 906 of the Sarbanes-Oxley Act of
                    2002.*
 ____________________
 *
                  Filed
                    herewith.**
                  Filed
                    as an Exhibit to Grupo Casa Saba, S.A. de C.V.'s annual report
                    for the
                    year ended December 31, 2004 and incorporated by reference
                    hereto.
 
 
 67
 Table
              of Contents
  
 **SIGNATURE**
  GRUPO
          CASA SABA, S.A. DE C.V. hereby certifies that it meets all of the requirements
          for filing on Form 20-F and that it has duly caused and authorized the
          undersigned to sign this annual report on its behalf.
  Dated:
                    June 30, 2006
                **GRUPO
                    CASA SABA, S.A. DE C.V.**By:/s/
                    Manuel Saba Ades
                  Name:
                    Manuel Saba Ades
                  Title:
                    Chief Executive Officer
      68
 Table
                of Contents


***INDEX
                      TO CONSOLIDATED FINANCIAL
                      STATEMENTS*****Page****Consolidated
                      Financial Statements of Grupo Casa Saba, S.A. de
                      C.V.**Report
                      of Independent Registered Public Accounting Firm
                  F-2Consolidated
                      Balance Sheets as of December 31, 2004 and 2005
                  F-3Consolidated
                      Statement of Income for each of the years ended December 31,
                      2003, 2004
                      and 2005
                  F-4Consolidated
                      Statements of Stockholders’ Equity for the years ended December 31, 2003,
                      2004 and 2005
                  F-5Consolidated
                      Statement of Changes in Financial Position for the years ended
                      December
                      31, 2003, 2004 and 2005
                  F-6Notes
                      to Consolidated Financial Statements
                  F-8
   
 F-1






[Letterhead
      of]




**SALLES,
      SAINZ-GRANT
      THORNTON, S.C.**




**Certified
      Public Accountants and Business Advisors**


**Member
      of Grant Thornton International**







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and Stockholders of


Grupo
      Casa Saba, S.A. de C.V.:








We
      have
      audited the accompanying consolidated balance sheets of Grupo Casa Saba, S.
      A.
      de C. V. and Subsidiaries (all incorporated in Mexico and collectively the
      Group) as of December 31, 2004 and 2005, and the related consolidated statements
      of income, changes in stockholders’ equity and changes in financial position for
      each of the three years in the period ended December 31, 2005, all stated in
      thousands of 2005 year end constant Mexican pesos. These financial statements
      are the responsibility of the Group’s management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States of America) and with auditing
      standards generally accepted in Mexico. Those standards require that we plan
      and
      perform the audits to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Group is not required to
      have,
      nor were we engaged to perform, an audit of its internal control over financial
      reporting. Our audits included consideration of internal control over financial
      reporting as a basis for designing audit procedures that are appropriate in
      the
      circumstances but not for the purpose of expressing an opinion on the
      effectiveness of the Group’s internal control over financial reporting.
      Accordingly, we express no such an opinion. An audit includes examining, on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Grupo Casa Saba, S.A. de
      C.V. and Subsidiaries as of December 31, 2004 and 2005, and the results of
      their
      operations, changes in stockholders’ equity and changes in their financial
      position for each of the three years in the period ended December 31, 2005,
      in
      conformity with accounting principles generally accepted in Mexico.





The
      accounting principles used by the Group in preparing the accompanying
      consolidated financial statements conform to accounting principles generally
      accepted in Mexico (Mexican GAAP), which differ in certain material respects
      to
      accounting principles generally accepted in the United States of America (U.S.
      GAAP). A summary of these differences and a partial reconciliation of
      consolidated net income for each of the three years in the period ended December
      31, 2005 and consolidated stockholders’ equity as of December 31, 2004 and 2005
      from Mexican GAAP to U.S. GAAP, as permitted by Form 20-F of the Securities
      and
      Exchange Commission of the United States of America, are set forth in Notes
      16)
      and 17). That Form permits waiving the requirement to quantify the differences
      in the U.S. GAAP reconciliation attributable to the adjustments recorded locally
      to comprehensively recognize the effect of price level changes for each line
      item of the financial statements.








/s/  Salles,
      Sainz - Grant Thornton,
      S.C.





Mexico
      City, Mexico


February
      17, 2006














F-2






**Grupo
          Casa Saba, S.A. de C.V. and Subsidiaries**
 
 **Consolidated
          balance sheets**
 **as
          of december 31, 2004 and 2005**
 **(Amounts
          stated in thousands of 2005 year end constant Mexican pesos
          (Ps.)**
 **and
          thousands of U.S. dollars ($))**
  2004
                  
                  2005
                  
                  Convenience
                      translation 2005
                  
                  
                  
                  2004
                  
                  2005
                  
                  Convenience
                      translation 2005CURRENT
                      ASSETS:
                  
                  
                  
                  
                  
                  
                  
                  CURRENT
                      LIABILITIES:Cash
                      and cash equivalents (Note 3.d)
                  
                  Ps.
                  497,069
                  
                  Ps.
                  714,487
                  
                  $
                  66,706
                  
                  
                  Trade
                      accounts payable
                  
                  Ps.
                  4,217,198
                  
                  Ps.
                  4,030,376
                  
                  $
                  376,287Accounts
                      receivable, net (Notes 3.f and 4)
                  
                  
                  3,700,261
                  
                  
                  4,161,762
                  
                  
                  388,554
                  
                  
                  Other
                      payables and accrued liabilities
                  
                  
                  164,264
                  
                  
                  222,829
                  
                  
                  20,803Inventories,
                      net (Notes 3.c and 5)
                  
                  
                  3,817,600
                  
                  
                  3,590,104
                  
                  
                  335,182
                  
                  
                  Employee
                      profit sharing (Notes 3.l
                    and
                      12.d)
                  
                  
                  2,856
                  
                  
                  4,184
                  
                  
                  391Prepaid
                      expenses
                  
                  
                  8,891
                  
                  
                  10,680
                  
                  
                  997Total
                      current liabilities
                  
                  
                  4,384,318
                  
                  
                  4,257,389
                  
                  
                  397,481Total
                      current assets
                  
                  
                  8,023,821
                  
                  
                  8,477,033
                  
                  
                  791,439RESERVE
                      FOR RETIREMENT PENSIONS AND SENIORITY PREMIUM (Note
                      3.j)
                  
                  
                  55,615
                  
                  
                  87,707
                  
                  
                  8,188DEFERRED
                      INCOME TAX (Notes 3.k and 9)
                  
                  
                  815,415
                  
                  
                  870,713
                  
                  
                  81,292DEFERRED
                      EMPLOYEE PROFIT SHARING
                  
                  
                  8,181
                  
                  
                  2,888
                  
                  
                  270PROPERTY
                    AND EQUIPMENT, net (Notes 3.g and 6)
                  
                  
                  1,105,536
                  
                  
                  1,065,255
                  
                  
                  99,455Total
                      liabilities
                  
                  
                  5,263,529
                  
                  
                  5,218,697
                  
                  
                  487,231**STOCKHOLDERS’
                      EQUITY**Capital
                      stock (Note 11)
                  
                  
                  1,040,863
                  
                  
                  1,040,863
                  
                  
                  97,178Premium
                      on stock sold
                  
                  
                  805,706
                  
                  
                  805,706
                  
                  
                  75,223OTHER
                      ASSETS, net
                  
                  
                  86,439
                  
                  
                  119,951
                  
                  
                  11,199
                  
                  
                  Reserve
                      for
                      share repurchases (Note 11)
                  
                  
                  983,841
                  
                  
                  983,841
                  
                  
                  91,854Retained
                      earnings
                  
                  
                  3,275,675
                  
                  
                  3,873,936
                  
                  
                  361,682Deficit
                      on restatement (Note 3.c)
                  
                  
                  (1,900,915
                  )
                  
                  (2,024,062
                  )
                  
                  (188,972
                  )Accrued
                      deferred income tax effect
                  
                  
                  (37,693
                  )
                  
                  (37,693
                  )
                  
                  (3,519
                  )Additional
                      employee retirement liability
                  
                  
                  -
                  
                  
                  (28,309
                  )
                  
                  (2,643
                  )GOODWILL,
                      net (Note 3.h)
                  
                  
                  215,210
                  
                  
                  170,740
                  
                  
                  15,941
                  
                  
                  Total
                      stockholders’
                      equity
                  
                  
                  4,167,477
                  
                  
                  4,614,282
                  
                  
                  430,803Total
                      assets
                  
                  Ps.
                  9,431,006
                  
                  Ps.
                  9,832,979
                  
                  $
                  918,034
                  
                  
                  Total
                      liabilities and stockholders’
                      equity
                  
                  Ps.
                  9,431,006
                  
                  Ps.
                  9,832,979
                  
                  $
                  918,034The
                      accompanying notes are an integral part of these consolidated
                      financial
                      statements.
   F-3
  Grupo
                Casa Saba, S.A. de C.V. and Subsidiaries
 
 Consolidated
                statements of income
 for
                the
                years ended December 31, 2003, 2004 and 2005
 (Amounts
                stated in thousands of 2005 year end constant Mexican pesos (Ps.)
 and
                thousands of U.S. dollars ($))
  2003
                      
                      
                      2004
                      
                      
                      2005
                      
                      
                      Convenience
                        translation
                          2005Net
                          sales (Note 3.o and 13)
                      
                      Ps.
                      21,229,791
                      
                      Ps.
                      21,255,521
                      
                      Ps.
                      21,873,753
                      
                      $
                      2,042,196Cost
                          of sales
                      
                      
                      19,119,246
                      
                      
                      19,067,357
                      
                      
                      19,616,592
                      
                      
                      1,831,461Gross
                          Profit
                      
                      
                      2,110,545
                      
                      
                      2,188,164
                      
                      
                      2,257,161
                      
                      
                      210,735Operating
                          expensesSelling
                      
                      
                      528,857
                      
                      
                      582,904
                      
                      
                      542,977
                      
                      
                      50,694Administrative
                      
                      
                      779,578
                      
                      
                      780,878
                      
                      
                      818,945
                      
                      
                      76,4591,308,435
                      
                      
                      1,363,782
                      
                      
                      1,361,922
                      
                      
                      127,153Operating
                          income
                      
                      
                      802,110
                      
                      
                      824,382
                      
                      
                      895,239
                      
                      
                      83,582Comprehensive
                          cost of financing, netInterest
                          income
                      
                      
                      (3,297
                      )
                      
                      (6,236
                      )
                      
                      (27,216
                      )
                      
                      (2,541
                      )Interest
                          expense
                      
                      
                      68,901
                      
                      
                      30,805
                      
                      
                      13,029
                      
                      
                      1,216Exchange
                          loss, net (Note 3.I)
                      
                      
                      193
                      
                      
                      2
                      
                      
                      2,682
                      
                      
                      250(Gain)
                          loss on monetary position (Note 3.c)
                      
                      
                      (15,475
                      )
                      
                      (8,250
                      )
                      
                      9,937
                      
                      
                      92850,322
                      
                      
                      16,321
                      
                      
                      (1,568
                      )
                      
                      (147
                      )Other
                          income, net
                      
                      
                      (37,298
                      )
                      
                      (51,562
                      )
                      
                      (38,413
                      )
                      
                      (3,586
                      )Income
                          before provisions
                      
                      
                      789,086
                      
                      
                      859,623
                      
                      
                      935,220
                      
                      
                      87,315Provisions
                          for:Income
                          tax (Notes 3.k, 12.a and 12.e)
                      
                      
                      171,655
                      
                      
                      59,813
                      
                      
                      307,671
                      
                      
                      28,724Income
                          tax offset by prior year tax loss
                        carryforwards
                      
                      
                      (140,504
                      )
                      
                      (38,294
                      )
                      
                      (188,344
                      )
                      
                      (17,584
                      )Asset
                          tax (Note 12.b)
                      
                      
                      -
                      
                      
                      10,687
                      
                      
                      -
                      
                      
                      -Deferred
                          income tax (Notes 3.k and 9)
                      
                      
                      130,342
                      
                      
                      147,164
                      
                      
                      88,437
                      
                      
                      8,257161,493
                      
                      
                      179,370
                      
                      
                      207,764
                      
                      
                      19,397Employee
                          profit sharing (Notes 3.k and 12.d)
                      
                      
                      1,558
                      
                      
                      1,645
                      
                      
                      4,259
                      
                      
                      398Deferred
                          employee profit sharing (Notes 3.k and 12.d)
                      
                      
                      -
                      
                      
                      8,181
                      
                      
                      (5,028
                      )
                      
                      (469
                      )163,051
                      
                      
                      189,196
                      
                      
                      206,995
                      
                      
                      19,326Net
                          income
                      
                      Ps.
                      626,035
                      
                      Ps.
                      670,427
                      
                      Ps.
                      728,225
                      
                      $
                      67,989Net
                          income per share (Note 3.n)
                      
                      Ps.
                      2,359
                      
                      Ps.
                      2,526
                      
                      Ps.
                      2.744
                      
                      $
                      0.256Weighted
                          average shares
                        outstanding
                          (in thousands)
                      
                      
                      265,419
                      
                      
                      265,419
                      
                      
                      265,419
 
 The
                accompanying notes are an integral part of these consolidated financial
                statements.
  F-4
  **Grupo
          Casa Saba, S.A. de C.V. and Subsidiaries**
 
 **Consolidated
          statements of stockholders’
          equity**
 **for
          the years ended December 31, 2003, 2004 and 2005**
 **(Amounts
          stated in thousands of 2005 year end constant Mexican pesos (Ps.)
          )**
 Capital
                      stockHistorical
                  
                  
                  Restatement
                  
                  
                  Premium
                      on stock sold
                  
                  
                  Reserve
                      for share repurchases
                  
                  
                  Retained
                      earnings
                  
                  
                  Deficit
                      on restatement
                  
                  
                  Accrued
                      deferred income tax effect
                  
                  
                  Additional
                      employee retirement liability
                  
                  
                  TotalBalances
                      as of January 1, 2003
                  
                  Ps.
                  167,903
                  
                  Ps.
                  872,960
                  
                  Ps.
                  805,706
                  
                  Ps.
                  983,841
                  
                  Ps.
                  2,207,889
                  
                  Ps.
                  (1,631,542
                  )
                  Ps.
                  (37,693
                  )
                  Ps.
                  -
                  
                  Ps.
                  3,369,064Dividends
                      paid
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (111,131
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (111,131
                  )Comprehensive
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  626,035
                  
                  
                  (252,470
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  373,565Balance
                      as of December 31, 2003
                  
                  
                  167,903
                  
                  
                  872,960
                  
                  
                  805,706
                  
                  
                  983,841
                  
                  
                  2,722,793
                  
                  
                  (1,884,012
                  )
                  
                  (37,693
                  )
                  
                  -
                  
                  
                  3,631,498Dividends
                      paid
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (117,545
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (117,545
                  )Comprehensive
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  670,427
                  
                  
                  (16,903
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  653,524Balance
                      as of December 31, 2004
                  
                  
                  167,903
                  
                  
                  872,960
                  
                  
                  805,706
                  
                  
                  983,841
                  
                  
                  3,275,675
                  
                  
                  (1,900,915
                  )
                  
                  (37,693
                  )
                  
                  -
                  
                  
                  4,167,477Dividends
                      paid
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (129,964
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (129,964
                  )Comprehensive
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  728,225
                  
                  
                  (123,147
                  )
                  
                  -
                  
                  
                  (28,309
                  )
                  
                  576,769Balance
                      as of December 31, 2005
                  
                  Ps.
                  167,903
                  
                  Ps.
                  872,960
                  
                  Ps.
                  805,706
                  
                  Ps.
                  983,841
                  
                  Ps.
                  3,873,936
                  
                  Ps.
                  (2,024,062
                  )
                  Ps.
                  (37,693
                  )
                  Ps.
                  (28,309
                  )
                  Ps.
                  4,614.282
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
 F-5
  **Grupo
          Casa Saba, S.A. de C.V. and Subsidiaries**
  **Consolidated
          statements of changes in financial position**
 **for
          the years ended December 31, 2003, 2004 and 2005**
 **(Amounts
          stated in thousands of 2005 year end constant Mexican pesos (Ps.)**
 **and
          thousands of U.S. dollars ($))**
  2003
                
                
                2004
                
                
                2005
                
                
                Convenience
                    translation 2005Operating
                    activities:Net
                    income
                
                Ps.
                626,035
                
                Ps.
                670,427
                
                Ps.
                728,225
                
                $
                67,989Add
                    - Non cash items:Depreciation
                    and amortization
                
                
                99,865
                
                
                107,530
                
                
                130,012
                
                
                12,138Allowance
                    for
                    doubtful accounts
                
                
                87,639
                
                
                90,828
                
                
                70,452
                
                
                6,578Loss
                    on
                    sale of property and equipment
                
                
                8,703
                
                
                1,464
                
                
                4,444
                
                
                415Provision
                    for
                    retirement pensions and seniority premium
                
                
                13,917
                
                
                14,071
                
                
                19,261
                
                
                1,798Deferred income
                    tax
                
                
                130,342
                
                
                147,164
                
                
                88,437
                
                
                8,257Deferred
                    employee profit sharing
                
                
                -
                
                
                8,181
                
                
                (5,028
                )
                
                (469
                )966,501
                
                
                1,039,665
                
                
                1,035,803
                
                
                96,706Changes
                    in assets and liabilities:(Increase)
                    decrease in:Accounts
                    receivable
                
                
                (505,945
                )
                
                283,768
                
                
                (531,953
                )
                
                (49,665
                )Inventories
                
                
                (248,812
                )
                
                (521,910
                )
                
                104,349
                
                
                9,742Prepaid
                    expenses
                
                
                (1,598
                )
                
                8,213
                
                
                (1,789
                )
                
                (167
                )Trade
                    accounts payable
                
                
                (134,301
                )
                
                334,109
                
                
                (186,822
                )
                
                (17,442
                )Other
                    payables and accrued liabilities
                
                
                143,906
                
                
                (65,018
                )
                
                58,565
                
                
                5,468Employee
                    profit
                    sharing
                
                
                (2,332
                )
                
                1,298
                
                
                1,328
                
                
                124(749,082
                )
                
                40,460
                
                
                (556,322
                )
                
                (51,940
                )Net
                    cash provided by operating activities
                
                
                217,419
                
                
                1,080,125
                
                
                479,481
                
                
                44,766Investing
                    activities:Additions
                    of
                    property and equipment, net of retirements
                
                
                47,800
                
                
                116,583
                
                
                45,261
                
                
                4,226Increase
                    in
                    other assets
                
                
                2,145
                
                
                2,499
                
                
                41,137
                
                
                3,841Reserve
                      for retirement pensions andseniority
                      premium
                
                
                12,806
                
                
                12,106
                
                
                12,297
                
                
                1,148Net
                    cash used in investing activities
                
                
                62,751
                
                
                131,188
                
                
                98,695
                
                
                9,215Financing
                    activities:Dividends
                    paid
                
                
                (111,131
                )
                
                (117,545
                )
                
                (129,964
                )
                
                (12,134
                )Bank
                    loans, net of payments made
                
                
                (8,695
                )
                
                (402,998
                )
                
                -
                
                
                -Effect
                    in change of bank loans due to therestatement
                
                
                (17,204
                )
                
                (20,919
                )
                
                -
                
                
                -Deferred
                    income
                    tax
                
                
                98,652
                
                
                (96,369
                )
                
                (33,139
                )
                
                (3,094
                )Deferred
                    employee profit sharing
                
                
                -
                
                
                -
                
                
                (265
                )
                
                (25
                )Net
                    cash (used in) financing activities
                
                
                (38,378
                )
                
                (637,831
                )
                
                (163,368
                )
                
                (15,253
                )
  F-6
   2003
                
                
                2004
                
                
                2005
                
                
                Convenience
                    translation 2005Net
                    increase in cash andcash
                    equivalents
                
                
                116,290
                
                
                311,106
                
                
                217,418
                
                
                20,298Cash
                    and cash equivalentsat
                    beginning of year
                
                
                69,673
                
                
                185,963
                
                
                497,069
                
                
                46,408Cash
                    and cash equivalentsat
                    end of year
                
                Ps.
                185,963
                
                Ps.
                497,069
                
                Ps.
                714,487
                
                $
                66,706Supplementary
                    information:Income
                    tax and asset tax paid
                
                Ps.
                175,790
                
                Ps.
                100,172
                
                Ps.
                266,846
                
                $
                24,913Employee
                    profit
                    sharing paid
                
                Ps.
                1,417
                
                Ps.
                1,579
                
                Ps.
                2,583
                
                $
                241Interest
                    paid
                
                Ps.
                55,369
                
                Ps.
                21,219
                
                Ps.
                4,107
                
                $
                383
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
   F-7
    GRUPO
          CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 
 AS
          OF
          DECEMBER 31, 2003, 2004 AND 2005
 
 (Amounts
          stated in thousands of 2005 year end constant Mexican
 pesos
          (Ps.) and thousands
 of
          U.S.
          dollars ($), except as indicated otherwise)
 
 
 
 **1.**  
          **Description of business:**
 
 Grupo
          Casa Saba, S.A. de C.V. (the
          Company), through its consolidated subsidiaries (the Company and its
          subsidiaries collectively the Group), distributes pharmaceutical products,
          as
          well as health-and-beauty/other products, entertainment products (including
          magazines and books), food/non-perishable products, and office/electronic
          products. The Group distributes these five product lines through its
          distribution network to supermarket chains, pharmacies (private and
          governmental) and retail customers throughout Mexico. The Group does not
          maintain separate operating results for each of its five product lines,
          and as a
          result, it considers all of its operations and reporting the results of
          all of
          its operations to management as a single business segment. Revenue attributable
          to each of the five product lines is shown in Note 13).
  The
          Company holds substantially all of
          the issued and outstanding capital stock of the following subsidiaries
          that are
          members of the Group:
  Economic
                      Interest(Direct
                      or indirect)2004
                  
                  2005Casa
                      Saba, S.A de C.V.
                  (Casa
                      Saba)
                  99.9%
                  
                  99.9%Drogueros,
                      S.A. de C.V.
                  (Drogueros)
                  99.9%
                  
                  99.9%Grupo
                      Mexatar, S.A. de C.V.
                  (Mexatar)
                  99.9%
                  
                  99.9%Centennial,
                      S.A. de C.V.
                  (Centennial)
                  99.9%
                  
                  99.9%Inmuebles
                      Visosil, S.A. de C.V.
                  (Visosil)
                  99.9%
                  
                  99.9%Publicaciones
                      Citem, S.A. de C.V.
                  (Citem)
                  99.9%
                  
                  99.9%Transportes
                      Marproa, S.A. de C.V.
                  (Marproa)
                  99.9%
                  
                  99.9%Servicios
                      Corporativos Saba, S.A. de C.V.
                  (Servicios
                      Corporativos Saba)
                  99.9%
                  
                  99.9%Distribuidora
                      Casa Saba, S.A. de C.V.
                  (Distribuidora
                      Saba)
                  99.9%
                  
                  99.9%Other
                      companies (real estate and service companies)
                  
                  99.9%
                  
                  99.9%
  During
              2004 and 2005, the Group’s
              management approved the following agreements to strengthen its corporate
              structure, as well as to facilitate its consolidated operations. The
              Group’s
              management constantly reviews its strategies to adapt to any economic
              changes
              that may arise.
 
 a) Through
              an
              assignment of rights and obligations agreement dated November 30, 2004,
              Casa
              Saba sold certain collection rights applicable to individuals and legal
              entities
              to the Company at a discount in the amount of Ps. 263,337 (Ps. 254,319
              historical Mexican pesos). The selling price of the assignment agreed
              upon
              amounted to Ps. 149,796 (Ps. 144, 666 historical Mexican pesos).
   F-8
 
 b) Through
              an
              assignment of documents for collection agreements dated August 31,
              October 31
              and October 31, 2005, the Group’s
              subsidiaries
              Casa Saba, Drogueros and Citem sold certain collection rights applicable
              to
              individuals and legal entities to the Company at a discount in the
              amount of Ps.
              127,421, Ps.37,275 and Ps. 206,629, respectively (Ps. 124,930, Ps.
              36,782, Ps.
              203,900 historical Mexican pesos). The selling price of the assignment
              agreed
              upon amounted to Ps. 87,872, Ps. 16,483, and Ps. 87,668, respectively
              (Ps.
              86,153, Ps. 16,265 and Ps. 86,510 historical Mexican pesos).
 
 The
              Company accrues a gain on the
              collection rights acquired as discussed in paragraphs a) and b) above,
              which is
              recognized in income when realized. At 2004 and 2005 fiscal year end,
              that gain
              amounted to Ps. 28,609 (Ps. 27,686 historical Mexican pesos) and Ps.
              63,003,
              respectively.
 
 c) Pursuant
              to a
              specific contract dated September 28, 2005, the Group decided to renew
              its
              technological platform to increase its competitive advantage, simplify
              and make
              execution processes more efficient, as well as to redocument its application
              functions with IBM tools. This investment will allow the Group to improve
              product distribution to its customers and suppliers throughout the
              country. The
              investment would approximate to Ps. 74,000, which would be applied
              over a 28
              month period. At 2005 fiscal year end, the amount was Ps. 28,700 and
              was
              included in the line item “Other assets”.
   **2. Basis
              of
              presentation:**
  These
              financial statements have been prepared based on the Mexican GAAP issued
              by the
              Mexican Institute of Public Accountants (MIPA), which is described
              in Note 3.
              Certain accounting principles applied by the Group in accordance with
              Mexican
              GAAP differ in certain material respects to U.S. GAAP, as discussed
              in Note 16.
              A partial reconciliation of the consolidated net income and stockholders’
              equity from
              Mexican GAAP to U.S. GAAP is included in Note 17.
 
 **Convenience
              translation**
 
 The
              accompanying consolidated financial
              statements have been translated from Spanish into English for the convenience
              of
              readers outside of Mexico. The consolidated financial statements are
              stated in
              Mexican pesos. U.S. dollar amounts shown in the accompanying financial
              statements were calculated based on the amounts in constant Mexican
              pesos as of
              December 31, 2005. They have been included solely for the convenience
              of the
              reader and are translated from constant Mexican pesos as a matter of
              arithmetic
              computation only by using the rate of Ps. 10.7109 (pesos) per U.S.
              dollar as
              quoted by Banco de Mexico in the Official Daily Gazette as of December
              31, 2005.
              The convenience translation should not be construed as a representation
              that the
              Mexican peso amounts have been, could have been, or in the future could
              be
              translated into U.S. dollars at this or any other exchange rate.
   **3. Significant
              accounting policies:**
 
 a) Use
              of
              estimates
 
 Preparing
              the accompanying financial
              statements requires the Group’s management to make certain estimates and use
              certain assumptions to determine the valuation of some assets and liabilities
              and disclose contingent assets and liabilities at the date of the financial
              statements and the reported amount of revenues and expenses incurred
              during the
              periods. Those estimates and assumptions are made on a going concern
              basis.
 
 The
              most significant line items subject
              to the estimates and assumptions foregoing discussed, apply mainly
              to property
              and equipment and goodwill, allowance for doubtful accounts and slow-moving
              inventories, labor obligations derived from defined benefits, income
              tax and
              valuation of contingencies. Actual results may differ from these estimates
              and
              assumptions.
 
 
 F-9
 
 
 b) Basis
              of
              consolidation
 
 The
              accompanying financial statements
              are presented on a consolidated basis under Mexican GAAP. Those financial
              statements include the results of operations of the Company and all
              of its
              subsidiaries (controlled directly or indirectly, acquired, newly incorporated
              or
              disposed of) from the date on which they are acquired and/or incorporated
              up to
              the date when they are sold and/or at the fiscal year end of the last
              year
              reported. The accounting consolidation was made based on the subsidiaries’s
              audited financial statements, prepared in accordance with Mexican GAAP.
              The
              consolidated financial statements are prepared at the same date and
              for the same
              period. All significant intercompany balances and transactions are
              eliminated
              from the Group’s consolidated financial statements. The accounting consolidation
              under Mexican GAAP is virtually identical to the method under U.S.
              GAAP.
 
 c) Recognition
              of the impact of inflation on the financial information
  The
              Group restates its consolidated
              financial statements in terms of the purchasing power of the currency
              as of the
              fiscal year end of the last period reported to recognizing the impact
              of
              inflation. Consequently, the amounts of the financial statements for
              the current
              year are comparable to one another and with those of prior years. Accordingly,
              all prior years financial statement amounts presented herein differ
              from those
              originally reported.
 
 The
              impact of inflation on the
              financial information is recognized under Bulletin B-10, “Recognition of the
              Impact of Inflation on the Financial Information”, as amended (Bulletin B-10)
              and issued by MIPA by applying the following procedures:
 
 i)  The
              amounts of the accompanying financial statements and their notes are
              presented
              for comparative purposes in Mexican pesos of purchasing power of the
              currency as
              of December 31, 2005, by applying the inflation factor derived from
              the National
              Consumer Price Index or NCPI factor.
 
 ii) Revenues
              and
              expenses related to monetary items are restated from the month in which
              they
              occur up to fiscal year end, by applying the NCPI factor. Expenses
              related to
              nonmonetary items such as cost of sales and depreciation are restated
              as of the
              date on which inventories are sold, and/or at the time when property
              and
              equipment are depreciated based on the restated value thereof, and
              from that
              date up to fiscal year end, based on the applicable NCPI factor.
 
 iii)Monetary
              position
              represents the impact of inflation, as measured by the NCPI, on the
              purchasing
              power of the currency applicable to monetary items. The resulting gain
              or loss
              on monetary position is included in the comprehensive cost of
              financing.
 
 iv)Inventories
              are
              initially recorded at acquisition cost. Subsequently, they are restated
              to their
              replacement cost, which do not exceed their net realizable values.
              Cost of sales
              is restated by applying the same method.
 
 v) Property
              and
              equipment are initially recorded at acquisition cost. Those fixed assets
              along
              with their depreciation are restated based on "adjustments due to changes
              in the
              general price level method" by applying the relevant NCPI factor to
              the value of
              those assets determined by an appraisal performed by independent experts
              as of
              December 31, 1996 (except for Drogueros, as discussed in Note 6), as
              well as to
              the historical cost of acquisitions made subsequent to that date. The
              carrying
              value of property and equipment is subject to periodic impairment
              valuation.
 
 Depreciation
              is calculated on the
              restated value of fixed assets by using the straight-line method based
              on the
              remaining economic useful lives thereof.
 
 vi)      
              Goodwill is restated by applying the relevant NCPI factor to the historical
              cost
              thereof. The carrying value of goodwill is subject to periodic impairment
              valuation.
 
 vii)     
              Stockholders’ equity is restated based on the NCPI factor by considering the age
              of contributions and that of earnings or losses generated. The stockholders’
equity restatement represents the amount necessary to maintain shareholders’
investment in terms of the purchasing power of the currency at fiscal
              year end
              of the last year reported.
   F-10
  viii)    
              The deficit on restatement represents the accumulated monetary effect
              at the
              date on which the financial statements were restated for the first
              time, plus
              (less) the deficit (surplus) generated by the valuation of nonmonetary
              assets
              (inventories), based on the replacement cost above or below inflation
              by
              considering the NCPI factor. The resulting deficit is included in
              stockholders’
              equity as a component of comprehensive income of the year.
  d) Cash
              and cash
              equivalents
 
 Cash
              consists of non-interest bearing
              bank deposits. Cash equivalents are comprised mainly of highly liquid
              investments which when acquired have maturity dates of ninety days
              or less,
              payable on demand at market variable interest rates. Investments are
              made in
              banking institution and valued at market value (cost plus accrued interest).
              Interests and market fluctuation are included in comprehensive cost
              of
              financing.
 
 e) Financial
              instruments
 
 All
              financial assets and financial
              liabilities derived from any type of financial instrument are recognized
              in the
              balance sheet at fair value. The valuation effect is recognized in
              income.
              Revenues and expenses generated by financial instruments are recognized
              in
              income when earned or incurred, respectively.
 
 The
              Group’s financial instruments are
              comprised mainly of cash and cash equivalents, and bank loans. As of
              December
              31, 2004, and 2005, the carrying value of financial instruments approximates
              their fair value due to their short-term nature.
 
 f) Allowance
              for
              doubtful accounts
 
 The
              allowance for doubtful accounts
              represents the Group’s estimate of the probable loss inherent in all receivables
              by considering the general historical trend of payment performance
              of customers
              and factors surrounding the specific customer’s credit risk.
 
 g) Property
              and
              equipment
 
 In
              accordance with Bulletin C-15,
“Impairment of the value of long-lived assets and their related disposal”
(Bulletin C-15) issued by the MIPA, the Group periodically assesses
              the restated
              value of long-lived tangible and intangible assets, including goodwill,
              to
              establish whether factors such as the occurrence of significant adverse
              events,
              changes in the business environment and/or changes in expectations
              regarding
              operating income for each business unit or subsidiary, indicate that
              the
              carrying value of those assets may not be recovered. An impairment
              loss is
              determined by the excess of carrying value of long-lived assets over
              recovery
              value thereof by considering net present value of cash flows estimated
              to be
              generated by those assets. The impairment loss, if any, is recorded
              in income in
              the period when such an assessment is carried out, unless indications
              mentioned
              are of a temporary nature. Bulletin C-15 contemplates the reversal
              of the
              recognition of impairment. Property and equipment to be disposed of
              are recorded
              at the lower of carrying value and the fair market value thereof, less
              sale
              related costs.
 
 At
              2004 and 2005 fiscal year end, the
              Group completed the fair value based impairment test on its property
              and
              equipment. As a result, the fair value of those long-lived assets was
              equivalent
              to or greater than the carrying value thereof recorded at that date.
              Accordingly, no impairment charges resulted from the assessment performed
              on the
              carrying value of property and equipment.
 
 h) Intangible
              assets and Goodwill
 
 Intangible
              assets refer to costs
              incurred and/or rights or privileges acquired that generate specific
              future
              economic benefits over which the Group has control. Consequently: (i)
              development costs are capitalized as intangible assets under certain
              circumstances; (ii) preoperating costs are expensed when incurred;
              and (iii)
              intangible assets acquired through a business combination are accounted
              for
              individually at the fair value as of the acquisition date and reported
              separately, unless their cost cannot be reasonably determined. In that
              event,
              they are accounted for collectively as goodwill. The Group’s goodwill arises
              from acquiring shares of capital stock of subsidiary companies at a
              price
              exceeding the fair value of the net assets acquired at the acquisition
              date.
   F-11
  Intangible
              assets with a defined
              economic useful life are amortized over their useful life by using
              the
              straight-line method, unless there is no market for those assets. In
              that event,
              they are reduced to the amount of goodwill or to zero. In addition,
              intangible
              assets with an undefined economic useful life including goodwill are
              subject to
              a periodic impairment valuation, by following the provisions referred
              to in
              paragraph g) above.
 
 At
              2004 and 2005 fiscal year end, the
              Group completed the fair value based impairment test on its goodwill.
              As a
              result, the Group recorded an operating expense for goodwill impairment
              in the
              amount of Ps. 24,683 (Ps. 23,888 historical Mexican pesos) and Ps.
              44,921,
              respectively.
 
 i) 
Provisions,
              contingent assets and liabilities and commitments
 
 The
              Group recognizes the liabilities of
              present obligations on which the transfer of assets or the rendering
              of future
              services are virtually unavoidable, and arise as a consequence of past
              transactions or events. Provisions are recognized when present, legal
              or
              assumed, obligations are unavoidable and will require the disbursement
              of
              economic resources or can be reasonably estimated.
 
 Significant
              obligations or losses
              related to contingencies are periodically evaluated. They are only
              accounted for
              when it is likely that present obligations will require the disbursement
              of
              economic resources, and there are reasonable elements for their quantification.
              If there are no such reasonable elements, they are disclosed qualitatively
              in
              the notes to the financial statements. Contingent revenues, income
              or assets are
              only recognized when their realization is practically certain.
 
 Commitments
              are not recognized unless
              they result in a loss. Commitments are disclosed when they represent
              significant
              additions of fixed assets, goods or services contracted substantially
              exceed the
              immediate needs of the Group, or represent contractual obligations
              regarding
              restrictive covenants or significant events related to liabilities.
 
 j) 
Labor
              obligations
 
 i)  Members
              of the Group that have personnel recognize the labor obligations for
              retirement
              pensions and seniority premiums derived from defined benefit plans
              for all their
              employees. Seniority premiums are granted for a voluntary separation
              of
              personnel after completing fifteen years of service and then calculated
              based on
              the number of years worked. Retirement pensions are granted to all
              personnel
              that have completed at least ten years of service and have reached
              sixty-five
              years of age. In addition, those subsidiaries are required to pay certain
              severance benefits to employees upon termination of the employer/employee
              relationship when they complete that employment relationship prior
              to retirement
              age.
 
 Projected
              benefit obligations,
              unamortized items, and the net periodic cost applicable to labor obligations
              referred to above are determined by using the "projected unit credit
              method", in
              conformity with Bulletin D-3, "Labor obligations" issued by the MIPA.
 
 Effective
              January 1, 2005, the revised
              Bulletin D-3 requires that severance benefits to employees upon termination
              of
              the employer/employee relationship referred to above were assessed.
              Accordingly,
              severance benefits granted to employees due to causes other than restructuring,
              are valued by using the projected unit credit method, whereas severance
              benefits
              due to restructuring causes, should continue to follow the guidelines
              of
              Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and
              commitments” of MIPA. At 2005 fiscal year end, the unrecognized net transition
              obligation amounted to Ps. 4,102, and will be amortized over the average
              remaining labor life of employees. Up to December 31, 2004, these severance
              benefits were expensed when paid.
 
 Members
              of the Group with employees
              have created a fund placed in an irrevocable trust in a financial institution
              to
              meet the labor obligations derived from defined benefits. During 2004
              and 2005,
              contributions to the fund based on actuTimes New Roman computations
              amounted to
              Ps. 10,718 (Ps. 10,372 historical Mexican pesos) and Ps. 14,455, respectively.
              Fund assets consisted of investments in equity securities, as well
              as
              investments in fixed income securities that are traded on the Mexican
              Stock
              Market.
   F-12
 
 ii) The
              relevant
              information of the study performed by independent actuaries, regarding
              labor
              obligations is summarized below. The rates referred to below with regard
              to
              actuTimes New Roman assumptions are stated in real terms (nominal rates
              discounted by inflation).
 **December
                          31,****2004**
                      
                      **2005****Labor
                          liability**Vested
                          benefit obligation
                      
                      Ps.
                      
                      114,913
                      
                      Ps.
                      
                      125,736Non-vested
                          benefit obligation
                      
                      
                      
                      24,274
                      
                      
                      
                      12,702Accumulated
                          benefit obligation
                      
                      
                      
                      
                      
                      139,187
                      
                      
                      
                      
                      
                      138,438Additional
                          benefit related to futurecompensation
                          increases
                      
                      
                      
                      
                      
                      9,515
                      
                      
                      
                      
                      
                      25,001Projected
                          benefit obligation
                      
                      
                      
                      
                      
                      148,702
                      
                      
                      
                      
                      
                      163,439Fair
                          value of plan assets
                      
                      
                      
                      
                      
                      59,637
                      
                      
                      
                      
                      
                      67,094Unfunded
                          projected benefit obligation
                      
                      
                      
                      
                      
                      89,064
                      
                      
                      
                      
                      
                      96,345Unrecognized
                          net transition obligation
                      
                      
                      
                      
                      
                      (41,815
                      )
                      
                      
                      
                      
                      (44,607
                      )Negative
                          amendments
                      
                      
                      
                      
                      
                      16,452
                      
                      
                      
                      
                      
                      15,411Unrecognized
                          net loss
                      
                      
                      
                      
                      
                      (39,669
                      )
                      
                      
                      
                      
                      (42,516
                      )**Unfunded
                          accrued pension cost****and
                          seniority premium to be recognized****under
                          U.S. GAAP and Mexican GAAP**
                      
                      
                      **Ps.**
                      
                      
                      **24,032**
                      ****
                      ****
                      **Ps.**
                      ****
                      ****
                      **24,63**3Additional
                          employee retirement liability
                      
                      
                      
                      
                      
                      31,584
                      
                      
                      
                      
                      
                      63,074Net
                          actual obligation
                      
                      
                      **Ps.**
                      
                      
                      **55,615**
                      ****
                      ****
                      **Ps.**
                      ****
                      ****
                      **87,707****Net
                          periodic cost**Service
                          cost
                      
                      
                      Ps.
                      
                      
                      5,028
                      
                      
                      Ps.
                      
                      
                      8,196Interest
                          on projected benefit obligation
                      
                      
                      
                      
                      
                      7,839
                      
                      
                      
                      
                      
                      8,458Expected
                          return on plan assets
                      
                      
                      
                      
                      
                      (3,248
                      )
                      
                      
                      
                      
                      (3,483
                      )Amortization
                          of net transition obligation
                      
                      
                      
                      
                      
                      3,567
                      
                      
                      
                      
                      
                      5,132Amortization
                          of amendments
                      
                      
                      
                      
                      
                      (989
                      )
                      
                      
                      
                      
                      (1,007
                      )Amortization
                          of losses
                      
                      
                      
                      
                      
                      1,873
                      
                      
                      
                      
                      
                      1,965**Net
                          periodic cost under U.S. GAAP****and
                          Mexican GAAP**
                      
                      
                      Ps.
                      
                      
                      **14,071**
                      
                      
                      Ps.
                      
                      
                      **19,26**1**Assumptions
                          (real rates)**Discount
                          rate
                      
                      
                      
                      
                      
                      5.5
                      %
                      
                      
                      
                      
                      5.5
                      %Salary
                          increase rate
                      
                      
                      
                      
                      
                      1
                      %
                      
                      
                      
                      
                      1
                      %Return
                          on plan assets
                      
                      
                      
                      
                      
                      7.5
                      %
                      
                      
                      
                      
                      6
                      %
    F-13
 
 **December
                        31,****2004**
                    
                    **2005****Change
                        in projected benefit obligation**Actual
                        projected benefit obligation atBeginning
                        of year
                    
                    
                    Ps.
                    
                    
                    152,083
                    
                    
                    Ps.
                    
                    
                    158,904Service
                        cost
                    
                    
                    
                    
                    
                    5,028
                    
                    
                    
                    
                    
                    13,470Interest
                        on projected benefit obligation
                    
                    
                    
                    
                    
                    7,839
                    
                    
                    
                    
                    
                    8,375ActuTimes
                        New Roman loss
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    (4,463
                    )Benefits
                        paid
                    
                    
                    
                    
                    
                    (16,248
                    )
                    
                    
                    
                    
                    (12,848
                    )Projected
                        benefit obligation at end of year
                    
                    
                    Ps.
                    
                    
                    148,702
                    
                    
                    Ps.
                    
                    
                    163,438**Change
                        in plan assets**Fair
                        value of plan assets at beginning of year
                    
                    
                    Ps.
                    
                    
                    52,242
                    
                    
                    Ps.
                    
                    
                    59,637Actual
                        return on plan assets
                    
                    
                    
                    
                    
                    (16,622
                    )
                    
                    
                    
                    
                    4,468Employer
                        contributions
                    
                    
                    
                    
                    
                    10,717
                    
                    
                    
                    
                    
                    14,455Benefits
                        paid
                    
                    
                    
                    
                    
                    13,300
                    
                    
                    
                    
                    
                    (11,466
                    )Fair
                        value of plan assets at end of year
                    
                    
                    Ps.
                    
                    
                    59,637
                    
                    
                    Ps.
                    
                    
                    67,094Funded
                        status
                    
                    
                    Ps.
                    
                    
                    89,064
                    
                    
                    Ps.
                    
                    
                    96,344Unrecognized
                        net transition obligation
                    
                    
                    
                    
                    
                    (41,815
                    )
                    
                    
                    
                    
                    (44,606
                    )Negative
                        amendments
                    
                    
                    
                    
                    
                    16,452
                    
                    
                    
                    
                    
                    15,411Unrecognized
                        net loss
                    
                    
                    
                    
                    
                    (39,669
                    )
                    
                    
                    
                    
                    (42,516
                    )Unfunded
                        accrued pension cost and senioritypremium
                        to be recognized under U.S. GAAPand
                        Mexican GAAP
                    
                    
                    Ps.
                    
                    
                    24,032
                    
                    
                    Ps.
                    
                    
                    24,633**Amounts
                        recognized in the statement of****financial
                        position consist of:**Unfunded
                        accrued pension cost and senioritypremium
                        to be recognized
                    
                    
                    Ps.
                    
                    
                    24,032
                    
                    
                    Ps.
                    
                    
                    24,633Accrued
                        benefit liability
                    
                    
                    
                    
                    
                    (63,014
                    )
                    
                    
                    
                    
                    (63,074
                    )Intangible
                        asset
                    
                    
                    
                    
                    
                    31,584
                    
                    
                    
                    
                    
                    34,765Accumulated
                        other comprehensive income
                    
                    
                    
                    
                    
                    31,430
                    
                    
                    
                    
                    
                    28,309-
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Net
                        amount recognized
                    
                    
                    Ps.
                    
                    
                    24,032
                    
                    
                    Ps.
                    
                    
                    24,633
 
 
 At
              2005 fiscal year end, the additional
              employee retirement liability (net actual obligation over net projected
              obligation) exceeded the limit amount for recording an intangible asset
              as an
              offsetting entry. The intangible asset is recorded up to the algebraic
              sum of
              the unrecognized net transition obligation plus prior services and
              amendments of
              plan. Therefore, the excess of additional employee retirement liability
              over the
              intangible asset was recognized in stockholders’s equity as a debit item in the
              amount of Ps. 28,309.
 
 
 F-14
 
  k) Income
              tax and
              employee profit sharing
 
 i)  The
              Group records the provision for both income tax and employee profit
              sharing
              based on the amount payable determined based on taxable income that
              is obtained
              as provided for in the applicable provisions in effect.
 
 ii) The
              deferred income
              tax effect is determined by applying the “comprehensive asset and liability
              method” in accordance with Mexican GAAP. Therefore, the deferred income tax
              liability is recorded for all temporary differences, whereas the deferred
              income
              tax asset is only recorded under certain circumstances. The income
              tax rate in
              effect is applied to the temporary differences between the accounting
              and tax
              values of assets and liabilities as of the date of the relevant financial
              statements, as well as the amount of the tax loss carryforwards. In
              the event of
              any change in the income tax rate effective subsequent to the fiscal
              year end,
              the income tax rate that will be affected at the time it is estimated
              that the
              temporary differences that are realized will be applied. Asset tax
              paid in the
              current year and in prior years that may be recoverable is recognized
              as
              deferred income tax asset under certain circumstances. The deferred
              income tax
              liability and/or asset are classified as a noncurrent item. The deferred
              employee profit sharing effect is determined under the same method.
 
 In
              the
              event that it is likely that a portion or the entire deferred income/employee
              profit sharing asset may not be realized, the Group periodically performs
              the
              valuation allowance to determine the amount of the deferred income
              tax/employee
              profit sharing asset that will be recorded. Any reduction in the deferred
              income
              tax/employee profit sharig asset amount is recorded in the income statement
              and/or the stockholders’ equity, by considering the nature of the temporary
              item. As of December 31, 2003, 2004 and 2005, the Group determined
              that there
              was no valuation allowance to be recognized.
 
 iii)The
              Group prepares
              its income tax return and asset tax return on a consolidated basis.
              The Group’s
              consolidated subsidiaries meet the characteristics set forth in the
              Income Tax
              Law for controlled companies. The Group recognizes the impact of the
              eliminations that should be recorded for accounting and tax consolidation
              purposes. Consequently, the Group’s consolidated financial statements reflect
              the amount of the provision for income tax of the Company and that
              of its
              consolidated subsidiaries, adjusted for the impact of
              consolidation.
 
 l) 
Foreign
              currency transactions
 
 Foreign
              currency denominated
              transactions are recorded at the current exchange rate at the date
              on which they
              are entered into or paid. Foreign currency denominated monetary items
              on the
              balance sheet are translated to Mexican pesos by using the exchange
              rate
              published by the Central Bank of Mexico at month-end. Resulting exchange
              fluctuation is recorded in income in the comprehensive cost of
              financing.
 
 m)     
               Comprehensive
              income
 
 Comprehensive
              income consists of the
              consolidated net income for the period, plus (less) other results (i.e.
              deficit
              on restatement) for the same period reflected in the stockholders’ equity
              pursuant to specific accounting principles. Accordingly, stockholders’ equity
              discloses the components of comprehensive income, which does not include
              capital
              contributions or reductions.
 
 n) Earnings
              per
              share
  Earnings
              per
              share are determined based on the weighted average common shares outstanding
              during the years and earnings for common shareholders, in conformity
              with
              Bulletin B-14, "Earnings per share" issued by the MIPA.
 
 o) Revenue
              recognition
 
 Revenues
              are recognized in the period
              on which risks and benefits are transferred to customers, which generally
              coincides with: (i) persuasive evidence that an arrangement exists,
              (ii)
              delivery has occurred to the satisfaction of customer’s orders, (iii) the
              seller’s price to the customer is fixed or determined, and (iv) collection
              is
              reasonable assured.
   F-15
  **4. Receivables:**
  **2004**
                    
                    
                    **2005**Trade
                        receivables
                    Ps.
                    3,728,205
                    
                    
                    
                    Ps.
                    4,101,327Allowance
                        for doubtful accounts
                    
                    (325,819
                    )
                    
                    
                    
                    348,8723,402,386
                    
                    
                    
                    
                    3,752,455Other
                        receivables
                    
                    70,976
                    
                    
                    
                    
                    66,513Related
                        parties
                    
                    3,786
                    
                    
                    
                    
                    3,870Value
                        added tax recoverable
                    
                    59,024
                    
                    
                    
                    
                    61,052Income
                        tax recoverable
                    
                    150,682
                    
                    
                    
                    
                    259,243Asset
                        tax recoverable
                    
                    13,407
                    
                    
                    
                    
                    18,629Ps.
                    3,700,261
                    
                    
                    
                    Ps.
                    4,161,762
  **5. Inventories:**
  **2004**
                      
                      
                      **2005**Pharmaceutical
                        products
                      Ps.
                      2,523,571
                      
                      
                      Ps.
                      2,417,078Beauty
                          care products
                      
                      318,980
                      
                      
                      
                      305,519Books
                          and magazines
                      
                      284,618
                      
                      
                      
                      219,646Electric
                          appliances
                      
                      3,579
                      
                      
                      
                      3,248Groceries
                      
                      90,756
                      
                      
                      
                      95,928Other
                      
                      12,278
                      
                      
                      
                      12,1783,233,782
                      
                      
                      
                      3,053,597Estimate
                          for slow-moving inventory
                      
                      (7,251
                      )
                      
                      
                      7,0223,226,531
                      
                      
                      
                      3,046,575Merchandise-in-transit
                      
                      591,069
                      
                      
                      
                      543,529Ps.
                      3,817,600
                      
                      
                      
                      Ps.3,590,104
  Merchandise-in-transit
              represents
              pharmaceutical products for which title and risk of loss has been transferred
              to
              the Group.
 
 
 **6. Property
              and
              equipment:**
  **2004**
                      
                      
                      **2005****Total**
                      ****
                      ****
                      **Original cost**
                      ****
                      ****
                      ****
                      **Restatement**
                      ****
                      ****
                      **Total**Buildings
                      
                      Ps.
                      838,114
                      
                      
                      Ps.247,039
                      
                      
                      Ps.
                      595,502
                      
                      Ps.
                      842,541Machinery
                          and equipment
                      
                      
                      93,973
                      
                      
                      39,690
                      
                      
                      
                      55,103
                      
                      
                      94,793Transportation
                          equipment
                      
                      
                      238,581
                      
                      
                      174,126
                      
                      
                      
                      86,994
                      
                      
                      261,120Office
                          equipment
                      
                      
                      143,780
                      
                      
                      44,158
                      
                      
                      
                      100,573
                      
                      
                      144,731Computer
                          equipment
                      
                      
                      303,874
                      
                      
                      151,425
                      
                      
                      
                      156,181
                      
                      
                      307,6061,618,322
                      
                      
                      656,438
                      
                      
                      
                      994,353
                      
                      
                      1,650,791Less-accumulated
                          depreciation
                      
                      
                      (833,010
                      )
                      
                      (313,349
                      )
                      
                      
                      (591,678
                      )
                      
                      (905,027
                      )785,312
                      
                      
                      343,089
                      
                      
                      
                      402,675
                      
                      
                      745,764Land
                      
                      
                      320,224
                      
                      
                      57,834
                      
                      
                      
                      261,657
                      
                      
                      319,491Ps.
                      1,105,536
                      
                      Ps.
                      400,923
                      
                      
                      Ps.
                      664,332
                      
                      Ps.
                      1,065,255
  F-16
   As of December 31, 2004 and 2005, the net restated value of the property
        and
        equipment of the subsidiary Drogueros, that is included in the foregoing
        summary
        amounted to Ps. 117,082 and Ps. 113,204, respectively. The restatement for
        that
        property and equipment is determined by applying the applicable NCPI factor
        to
        the original cost thereof from their respective dates of
        acquisition.
  The
        average annual depreciation rates for 2004 and 2005 were as
        follows:
 
 Buildings
                  and improvements
              2.10%Machinery
                  and equipment
              6.09%Transportation
                  equipment
              10.15%Furniture
                  and fixtures
              6.50%Computer
                  equipment
              11.15%
 
 
 **7. Related
        party
        balances and transactions:**
 
 As
        of December 31, 2004 and 2005, the
        receivable balances from related parties were as follows:
 
 **2004**
              ****
              ****
              **2005**Aeroxtra,
                  S.A. de C.V.
              
              Ps.
              2,067
              
              Ps.
              2,000Xtra
                  Inmuebles, S.A. de C.V.
              
              
              1,719
              
              
              1,870Ps.
              3,786
              
              
              3,870
 
 At
        2004 year end, the receivable
        balance from Aeroxtra, S.A. de C.V. and Xtra Inmuebles, S.A. de C.V. represented
        prepaid flight services, as well as the leasing of real property, respectively.
        During 2004, amounts paid to these related parties were expensed in the amounts
        of Ps. 10,727 and Ps. 4,952, respectively.
 
 At
        2005 year end, the receivable
        balances from those related parties represented prepaid flight services and
        leasing of real property. During 2005, amounts paid to those related parties
        were expensed in the amounts of Ps. 11,365 and Ps. 4,792, respectively. Those
        amounts were included in the line item “Accounts receivable”.
 
 During
        2004 and 2005, the Group had no
        other material related party agreements, except for the balances and
        transactions referred to above. The Group’s management
        estimates that all related party transactions were agreed upon on an arm’s length
        basis.
 
 
 **8. Bank
        loans:**
 
 a) On
        December
        31, 2003, Casa Saba obtained an unsecured loan from Scotiabank Inverlat,
        S.A.
        (Scotiabank) in the amount of Ps. 423,916 (Ps. 390,000 historical Mexican
        pesos), which bore interest at a 7.29% annual market rate. The proceeds from
        this loan were used for the working capital. The loan was paid in full on
        its
        due date, January 7, 2004.
 
 b) During
        the
        years ended December 31, 2004 and 2005, Casa Saba obtained various unsecured
        loans from Scotiabank and Banco Santander Serfin in various amounts. These
        loans
        bore variable interest at market rates. The proceeds from these loans were
        used
        for the working capital. Each loan was paid in full on its due date. At years
        ended 2004 and 2005, the Group had no bank debts payable.
  c) Applicable
        interest rates are adjusted monthly, in accordance with market rates in effect.
 
 
 
 F-17
 
 
 
 **9. Deferred
        income tax and employee profit sharing:**
 
 As
        of December 31, 2004 and 2005, the
        deferred income tax effect was as follows:
  **2004**
                
                
                **2005**Inventories
                
                Ps.
                3,873,180
                
                Ps.
                -Cumulative
                    inventory
                
                
                -
                
                
                3,058,383Allowance
                    for doubfoul accounts and estimate for low-moving
                    inventory
                
                
                (303,713
                )
                
                (337,176
                )Property
                    and equipment
                
                
                385,775
                
                
                457,603Other
                
                
                217
                
                
                362,707Excess
                    of accounting over tax values of assets and liabilities
                
                
                3,955,459
                
                
                3,541,517Tax
                    loss carryforwards
                
                
                (757,373
                )
                
                (11,400
                )3,198,086
                
                
                3,530,117Income
                    tax rate
                
                
                28%
                
                
                28%Deferred
                    income tax
                
                
                895,464
                
                
                988,433Less-Asset
                    tax recoverable
                
                
                (80,049
                )
                
                (117,720
                )Deferred
                    income tax liability
                
                Ps.
                815,415
                
                Ps.
                870,713
  Effective
        January 1, 2005, the Company
        and its subsidiaries with stock on hand in inventories as of December 31,
        2004
        (base inventory) chose to deduct the cost of sales of the base inventory
        for
        income tax purposes in 2005. Due to the foregoing, those Companies will treat
        the value of “cumulative inventory” (see next paragraph) as taxable income for
        income tax purposes, determined at 2004 year end as provided for in the Income
        Tax Law. Effective 2005 to 2012 accumulation is annual. Accumulation term
        was
        determined pursuant to the provisions of the Income Tax Law.
  As
        of January 1, 2005, the cumulative
        inventory amount discussed above (which allows setting off tax loss
        carryforwards) amounted to Ps. 3,187,513 (see section ii) Note 12a). Tax
        loss
        carryforwards applied amounted to Ps. 554,351. Up to 2004 year end, purchases
        of
        inventories were deductible for tax income purposes when made regardless
        of the
        date sold, which mainly generated the deferred income tax liability at that
        date.
 
 The
        Group recognizes the deferred
        income tax asset derived from tax loss carryforwards. Their realization depends
        on generating sufficient taxable income prior to the expiration of those
        tax
        loss carryforwards. Management estimates a high likelihood that the deferred
        income tax asset will be realized by taking into account the Group’s business
        plan. The deferred income tax asset realization attributable to other temporary
        items depends on generating sufficient taxable income in the periods on which
        such items are deductible for income tax purposes.
 
 As
        of December 31, 2003, 2004 and 2005,
        the provision for deferred income tax applied to income amounted to Ps. 130,342,
        Ps. 147,164 and Ps. 88,347, respectively; whereas the provision for deferred
        employee profit sharing amounted to Ps. 8,181 and Ps. (5,028) in 2004 and
        2005,
        respectively. At 2003 fiscal year end, there was no deferred employee profit
        sharing effect.
 
 Effective
        January 1, 2005, the
        amendments to the Income Tax Law set forth the income tax rate will be reduced
        gradually. Therefore, a tax income rate of 30%, 29% and 28% should be applied
        to
        the taxable income obtained in 2005, 2006 and 2007, respectively (33% in
        2004).
        At 2005 year end, the decrease in the income tax rate had no significant
        impact
        on the deferred income tax determined, whereas the decrease in the income
        tax
        rate for 2004 year end represented a reduction in the deferred income tax
        liability in the amount of Ps. 63,960.
 
   F-18
  **10.  Foreign
          currency
          position:**
 
 As
          of December 31, 2004 and 2005,
          assets and liabilities denominated in U.S. dollars were as follows:
 
 **2004**
                ****
                **2005**Current
                    assets
                
                $
                5,554
                
                $
                9,728Current
                    liabilities
                
                
                1,048
                
                
                4,736Net
                    position in U.S. dollars
                
                $
                4,506
                
                $
                4,992Net
                    position (at fiscal year end constant Mexican pesos)
                
                
                Ps.
                    50,556
                
                $
                53,473
 
 As
          of December 31, 2004 and 2005, the
          Group valued its U.S. dollars denominated assets and liabilities at the
          fiscal
          year end exchange rate of Ps. 11.22 (pesos), and Ps. 10.7109 (pesos) per
          dollar,
          respectively, published by the Central Bank of Mexico in the Official Daily
          Gazette.
 
 As
          of February 17, 2006, issue date of
          the accompanying financial statements, the consolidated net U.S. dollar
          position
          was similar to that of December 31, 2005 and the exchange rate was Ps.
          10.52
          (pesos) per dollar.
  **11.     
          Stockholders’ equity:**
 
 Capital
          structure
 
 As
          of December
          31, 2004 and 2005, paid-in capitalstock was as follows:
 
 Number
                
                Par
                    value**2004**
                ****
                **2005**Fixed
                    capital shares without retirement rights
                
                
                265,149,080
                
                Ps.
                167,730
                
                Ps.
                167,730Variable
                    capital shares
                
                
                270,280
                
                
                173
                
                
                173Ps.265,419,360
                
                Ps.
                167,903
                
                
                167,903At
                    fiscal year end constant Mexican pesos
                
                
                
                
                Ps.
                1,040,863
                
                Ps.
                1,040,863
  As
                of
                December 31, 2004 and 2005, capital stock was comprised of 265,419,360
                fully
                paid and non-assessed Ordinary Shares, with no par value. Variable
                capital
                shares may not exceed ten times the amount of fixed capital stock.
  Repurchase
                and resale of own shares (restricted earnings)
  At
                the
                General Ordinary and Extraordinary Stockholders’ Meeting held on April 22, 2003,
                the stockholders resolved that the maximum amount geared toward the
                Company’s
                own share
                repurchases should be equivalent to 15% of the Company’s stockholders’ equity as
                of December 31, 2002, without exceeding retained earnings at that
                date. The
                amount of the reserve for own share repurchases was appropriated
                from retained
                earnings. At 2004 and 2005 year end, the Stockholders’ Meeting resolved to
                maintain the same level of the reserve approved by its similar on
                April 22,
                2003. During 2004 and 2005, the stockholders did not approve a specific
                number
                of shares and peso amount for repurchase or resale of its own shares.
  As
                of
                December 31, 2004 and 2005, the number of own shares available for
                resale was
                14,729,720 in the amount of Ps. 100,446 historical Mexican pesos.
                Those shares
                cannot be represented at the stockholders’ meeting, as long as the shares belong
                to the Company.
   F-19
  Legal
                reserve
  Net
                income generated by the Company is subject to the legal provision
                that requires
                appropriating 5% of the Company’s income to a legal reserve until that reserve
                equals 20% of the Company’s capital stock. Equity in earnings of subsidiaries is
                not considered for this purpose. Amounts from this reserve may not
                be
                distributed to the Company’s stockholders, except as stock dividends. As of
                December 31, 2004 and 2005, the Company’s legal reserve amounted to Ps. 59,586
                at fiscal year end constant Mexican pesos, which is included in the
                balance
                sheet under the line item "Retained earnings".
  Distribution
                of earnings and capital reductions
  Any
                dividends distributed to stockholders must be paid out of the consolidated
“Net
                taxable income account” (NTIA). Any dividends paid out in excess of NTIA are
                subject to a 40.9% in fiscal 2006 (42.9% in fiscal 2005) tax rate
                payable by the
                Company, except as discussed in the following paragraph “Dividends among
                companies of the Group”. The resulting income tax may be offset against income
                tax due in the same year and the subsequent two years. The consolidated
                balance
                of NTIA is determined as provided for in currently enacted tax legislation.
                As
                of December 2004, and 2005, the consolidated balance of NTIA amounted
                to Ps.
                111,978 and Ps. 329,180, respectively.
  In
                April
                2004 and 2005, dividends were declared at the Company’s Stockholders’ Meetings
                in the amounts of Ps. 117,545 and Ps. 122,592 (Ps. 110,000 and Ps.
                120,000
                historical Mexican pesos), of retained earnings, respectively. Dividends
                paid in
                2005 were paid out of the consolidated NTIA up to the amount of Ps.
                102,798
                historical Mexican pesos. The remaining balance amounting to Ps.
                17,202 was
                subject to income tax amounting Ps. 7,372 that was applied to retained
                earnings.
                Dividends paid in 2004 did not exceed the consolidated NTIA balance
                at that
                date. Therefore, no income tax was due.
  The
                excess of capital reimbursement per share paid to stockholders over
                the balance
                of the consolidated "Restated contributed capital per share account"
                should be
                treated as a distributed dividend. The excess will be assessable
                as provided for
                in the Income Tax Law. The resulting income tax may be offset as
                referred to
                above. Restated contributed capital per share account is determined
                in
                accordance with currently enacted tax legislation.
  Dividends
                among companies of the Group
  Dividends
                distributed among consolidating companies that are not paid out of
                the NTIA will
                be subject to income tax at the time when the shares of the controlled
                subsidiary distributing them are sold, either in whole or in part,
                when the
                equity stake is reduced in the controlled subsidiary or when the
                Group is
                dissolved or no longer consolidates. During 2004 and 2005, no corporate
                changes
                of that nature occurred.
  At
                stockholders’ meetings held on April 2, 2004 and on April 1, 2005, the
                stockholders of Casa Saba declared the payment of dividends in the
                amounts of
                Ps. 96,174 and Ps. 115,441 (Ps. 90,000 and Ps. 113,000 historical
                Mexican
                pesos), of the retained earnigs, respectively. These payments were
                made out of
                the NTIA of Casa Saba.
  **12.** **Tax
                system:**
  a) Consolidated
                income tax due
  i) In
                accordance with the recently enacted tax provisions, effective January
                1, 2005,
                the income tax rate will be reduced gradually. Therefore, a 30% tax
                income rate
                will be applied in fiscal 2005, 29% in fiscal 2006, and finally 28%
                in fiscal
                2007 (33% in fiscal 2004).
  As
                the
                Holding Company, the Group determines the amount of income and asset
                taxes on a
                consolidated basis. For this purpose, effective fiscal 2005, the
                Holding Company
                includes in the consolidated taxable income and/or consolidated tax
                loss the
                taxable income and/or tax loss generated in the year by its consolidated
                subsidiaries at 100% of the average equity stake that the Holding
                Company holds
                in the capital stock of all of its consolidated subsidiaries. In
                addition, the
                Holding Company includes its individual taxable income and/or tax
                loss generated
                in the year at 100%, as well. Accordingly, effective January 1, 2005,
                “consolidating tax equity” of controlled subsidiaries referred below is
                equivalent to the equity stake that the Holding Company holds, directly
                or
                indirectly, in the capital stock of each one of the consolidated
                subsidiaries.
   F-20
  During
                the 1999-2004 period, tax authorities allowed partial tax consolidation
                due to
                the equity stake of the Holding Company in the capital stock of its
                consolidated
                subsidiaries should have been multiplied by the 0.60 factor to determine
                the
                consolidating tax equity of taxable income and/or tax loss of each
                one of its
                subsidiaries which was included in consolidated taxable income and/or
                consolidated tax loss. On the other hand, consolidating tax equity
                of the
                Holding Company was 0.60 from 2002 to 2004. The remaining 0.40 of
                the individual
                taxable income and/or tax loss was reported individually by the Holding
                Company
                and for each one of its consolidated subsidiaries.
  Taxes
                are
                computed in Mexican pesos as of the date on which the transactions
                occurred.
                Under Mexican GAAP, they are restated to fiscal year end Mexican
                pesos by
                applying the NCPI factor.
  ii) Effective
                2005, the Income Tax Law set forth the change in the tax deduction
                of
                merchandise when acquired for the tax deduction of the cost of sales
                of those
                goods up to the time when they are sold. Accordingly, the value of
                stock on hand
                as of December 31, 2004 is not deductible from the taxable income
                determined
                subsequent to that year. Nevertheless, the Law established a transition
                regime
                for its tax deduction.
  As
                a
                result of applying that transition regime, the Company and its subsidiaries
                with
                inventories deducted the cost of sales of stock on hand as of December
                31, 2004
                for tax purposes in 2005. However, those inventories should be accumulated
                pursuant to certain rules, that is, the value thereof (cumulative
                inventory
                amounting to Ps. 3,187,513) should be accumulated at the taxable
                income that
                should be determined effective 2005, without exceeding 2012, as explained
                in
                Note 9). The Companies determined cumulative inventories in the amount
                of Ps.
                129,130 that is added to the taxable income of income tax in 2005.
  iii) One
                of
                the Group’s consolidated subsidiaries (Transportes Marproa, S.A. de C.V., of
                which assets and revenues are not material to the Group’s consolidated
                operations), is authorized to pay its annual income and asset taxes
                separately
                from the Group under a special tax regime known as the “administrative
                facilities,” which basically considers cash-in and cash-out with regard to all
                of its transactions carried out during the year.
  iv) Income
                tax due is determined by taking into account the depreciation on
                the restated
                fixed assets value, annual inflationary adjustment on monetary items,
                benefit of
                tax loss carryforwards of prior year and until fiscal 2004, the deduction
                of
                inventory purchases instead of the book cost of sales.
  At
                2004 and
                2005 year end, the Group generated consolidated taxable income for
                income tax in
                the amount of Ps. 116,040 (Ps. 112,300 historical Mexican pesos)
                and Ps.
                1,025,570, respectively. At 2004 year end, income tax due was entirely
                offset by
                the tax benefit effect of the partial amortization of the prior year
                consolidated tax loss carryforwards. The income tax effect offset
                amounted to
                Ps. 38,294 (Ps. 37,059 historical Mexican pesos). At 2005 year end,
                income tax
                due was partially offset by the remaining tax loss carryforwards
                in the amount
                of Ps. 627,813. The income tax effect offset amounted to Ps. 188,344.
                The effect
                of the offsets discussed is shown in the accompanying income
                statement.
  b) Consolidated
                asset tax due
  i) Consolidated
                asset tax due is determined by applying a 1.8% annual tax rate to
                the average
                restated value of the assets, less the average face value of certain
                debts
                (“Group’s net asset position”). Pursuant to the amendments to the Asset Tax Law,
                effective 2005: a) the consolidated lending position is determined
                by
                considering both the value of assets and value of debts of its controlled
                companies and the value of its own assets and debts in the 100% consolidating
                tax equity, and b) the amount of debts with the financial system
                and
                nonresidents are deductible from the taxable income of asset tax.
   F-21
  At
                2004
                year end, the consolidated lending position was determined by considering
                both
                the value of assets and value of debts of its controlled companies
                and the value
                of its own assets and debts in the 60% consolidating tax equity,
                whereas the
                fiscal deduction of the amount of debts with the financial system
                and
                nonresidents was not permitted.
  Asset
                tax is
                only paid on the amount on which it exceeds income tax for the year.
                Income tax
                paid during the year may be credited against asset tax due in the
                same year.
                Likewise, asset tax paid in excess of income tax due in the same
                period may be
                recovered over a ten year term, under certain circumstances. On the
                other hand,
                income tax paid in excess of asset tax due may be credited for the
                immediately
                foregoing three years, under certain circumstances. As of December
                31, 2004, the
                consolidated asset tax due amounted to Ps. 20,902 (Ps. 20,228 historical
                Mexican
                pesos). In 2005, there was no asset tax payable.
  c) Tax
                loss
                carryforwards and recoverable asset tax
  i) Tax
                loss
                carryforwards can be offset against taxable income that may be generated
                in the
                future over a ten year term. Tax loss carryforwards can be restated
                based on the
                NCPI factor from the date incurred up to the sixth month of the year
                when they
                can be offset against taxable income. As discussed in paragraph a)
                above, prior
                year consolidated tax loss carryforwards were fully offset in the
                amount of Ps.
                627,813 in fiscal 2005. On the other hand, recoverable asset tax
                recoverable can
                be restated from the date on which the recoverable balance is generated
                up to
                the date when that balance is recovered.
  As
                of
                December 31, 2005, the consolidated recoverable asset tax was as
                follows:
  Year
                        incurred
                      
                      Asset
                          tax
                        recoverable1995
                      
                      Ps.  4,1781996
                      
                      15,6581999
                      
                      8,0512001
                      
                      3,2122002
                      
                      32,9342003
                      
                      32,0382004
                      
                      21,649Ps. 117,720
   ii) The
                Holding Company has incurred individual tax loss carryforwards derived
                from the
                sale of stock (whose return is not considered interest as provided
                for in the
                Income Tax Law) in the amount of Ps. 421,687 (Ps. 352,997 historical
                Mexican
                pesos). That amount may be applied only in the Holding Company, if
                certain
                requirements are met. This tax loss carryforwards expires in fiscal
                2006,
                pursuant to currently enacted tax legislation.
  iii)  Tax
                loss
                carryforwards of the subsidiaries expire individually over a ten
                year term,
                effective the date on which the tax losses are incurred. The effect
                of these
                restated tax loss carryforwards should be reversed in the tax consolidation
                on
                the year that the subsidiary loses its carryforward right.
  d) Employee
                profit sharing
  The
                Federal Labor Law provides that the Group’s consolidated subsidiaries that have
                personnel are required to pay profit sharing to their employees.
                This profit
                sharing is calculated by applying a 10% annual rate to taxable income
                for each
                subsidiary, determined as provided for in the Income Tax Law. As
                of December 31,
                2003, no deferred effect was recorded. At 2004 and 2005 year end,
                the deferred
                employee profit sharing in the amount of Ps 8.181 and Ps. (5,028)
                was applied to
                the income statement, respectively.
   F-22
  e) Provisions
                for income tax
  In
                accordance with Mexican GAAP, the following items represent the principal
                differences between Mexican income tax computed at the statutory
                tax rate and
                the Group’s
                provisions for income tax in each year:
  **Year
                              ended December 31,****2003******
                          ****
                          **2004******
                          ****
                          **2005****Statutory
                              income tax rate**
                          
                          
                          **34**
                          **%**
                          
                          **33**
                          **%**
                          
                          **30**
                          **%****Permanent
                              differences:**Comprehensive
                              cost of financing vs. annual inflationary adjustment
                          
                          
                          3
                          
                          
                          15
                          
                          
                          1Non-deductible items
                          
                          
                          (10
                          )
                          
                          (35
                          )
                          
                          (3
                          )Other (cumulative inventory)
                          
                          
                          -
                          
                          
                          -
                          
                          
                          (4
                          )**Temporary
                              differences:**Depreciation
                          
                          
                          4
                          
                          
                          9
                          
                          
                          1Book cost of sales vs. purchases, labor and overhead
                          
                          
                          16
                          
                          
                          225
                          
                          
                          -Application
                              of prior year tax loss carryforwards
                          
                          
                          26.5
                          
                          
                          (226.1
                          )
                          
                          (2.8
                          )20.5
                          %
                          
                          20.9
                          %
                          
                          22.2
                          %
  In
                fiscal
                2003, 2004 and 2005, the Group generated consolidated taxable income
                for income
                tax purposes in the amounts of Ps. 413,234, Ps. 116,040 and Ps. 1,025,570,
                respectively (Ps.380,182, Ps.112,300 and Ps. 1,025,570 historical
                Mexican pesos,
                respectively). At those fiscal year end, income tax due was fully
                offset by the
                tax benefit effect of the amortization of the prior year consolidated
                tax loss
                carryforwards. The income tax effect offset amounted to Ps. 140,504,
                Ps. 38,294
                and Ps. 188,344, respectively. That effect is shown in the accompanying
                statement of income.
  **13.** **Segment
                information:**
  Although
                the Group distributes five product lines, it considers all of its
                operations,
                and reports the results of all of its operations to management as
                a single
                business segment as discussed in Note 1).
  As
                of
                December 31, 2003, 2004 and 2005, revenue attributable to each of
                the five
                product lines, were as follows:
  **2003**
                        
                        
                        **2004**
                        
                        
                        **2005**Pharmaceutical
                            products
                        
                        Ps.
                        17,736
                        
                        Ps.
                        18,396
                        
                        Ps.
                        18,937Health
                            and beauty aids/other products
                        
                        
                        2,618
                        
                        
                        1,945
                        
                        
                        1,925Entertainment
                            products
                        
                        
                        693
                        
                        
                        737
                        
                        
                        795Food/non-perishable
                            products
                        
                        
                        161
                        
                        
                        176
                        
                        
                        212Office/electronic
                            products
                        
                        
                        22
                        
                        
                        2
                        
                        
                        5Total
                        
                        Ps.
                        21,230
                        
                        Ps.
                        21,256
                        
                        Ps.
                        21,874
  **14.** **Contingencies
                and Commitments:**
  a) In
                March
                2002, a favorable ruling was handed down for the Group by the Federal
                Tax Court
                relating to the writ of amparo (appeal for constitutional relief)
                against the
                tax amendment that bound taxpayers to determine 60% consolidating
                tax equity,
                effective 1999, as discussed in section i) of Note 12a), instead
                of 100%.
                Notwithstanding the foregoing, during the period from 1999 to 2004,
                the Group
                determined its consolidated taxable income or consolidated tax loss,
                as the case
                may be, based on the 60% discussed.
   F-23
  b) On
                June
                24, 2004, the SAT (Tax Authority) determined an income tax liability
                payable by
                Casa Saba for fiscal 1995. At the date of the auditors’ report, the expert
                appointed by the Tax Authority has not issued the relevant opinion.
                The advisors
                of Casa Saba deem that there are sufficient and reasonable elements
                for a ruling
                to be handed down in favor of the interests thereof. Accordingly,
                Management
                deems that there are no elements to quantify and recognize the probable
                disbursement of economic resources regarding this contingency, in
                conformity
                with Mexican GAAP.
  c) The
                Group
                is involved in various lawsuits and claims derived from the normal
                course of its
                operations. Management deems that they will have no significant impact
                on its
                financial position and future operating income.
  d) In
                accordance with currently enacted tax legislation, the Tax Authority
                has the
                power to review up to the five fiscal years prior to the last income
                tax return
                filed by the Company and its subsidiaries.
  e) As
                discussed in Note 1), the Group decided to renew its technological
                platform to
                increase its competitive advantage, simplify and make its execution
                processes
                more efficient, and redocument their application functions. Consequently,
                there
                are payment commitments to be covered in 2006, 2007, and 2008 in
                the amount of
                Ps. 56,979, Ps. 15,854, and Ps. 1,167, respectively.
  **15.** **New
                accounting pronouncements:**
  Effective
                June 2004, the Research and Development Board of Financial Information
                Standards
                (CINIF -Spanish acronym) replaced the Accounting Principles Board
                (APB) of the
                MIPA in the duty of developing financial information standards (NIF-Spanish
                acronym) related to economic and governmental entities, conducting
                research
                processes, issuing and disseminating those standards, and reaching
                their
                convergence with internationally accepted NIF.
  To
                that
                end, CINIF started by reviewing the theoretical concepts contained
                in Mexican
                GAAP and establishing a Conceptual Framework to support the development
                of
                financial reporting standards and to serve as a reference in solving
                issues
                arising in the accounting practice. The Conceptual Framework is formed
                by eight
                financial reporting standards, which comprise the NIF-A series. The
                NIF-A
                series, together with NIF B-1, were issued on October 31, 2005. Their
                provisions
                are effective for years beginning January 1, 2006, superseding all
                existing
                Mexican GAAP series A bulletins. To date NIFs are summarized as
                follows:
  ·
                        
                        NIF
                            and its interpretations.·
                        
                        APB
                            Bulletins transferred to the CINIF on May 31, 2004 that
                            have not been
                            amended,
                          substituted,
                            or anulled by the new NIFs; and·
                        
                        IFRSthat
                            are supplementary guidance to be used when Mexican GAAP
                            does not provide
                            primary guidance.
  Management
                deems that this substitution does not change the financial information
                previously presented by the Group.
  The
                most
                significant established by these standards are as follows:
  ·
                        
                        In
                            addition to the statement of changes in financial position,
                            NIF A-3
                            includes the statement of cash flows, which should be
                            issued when required
                            by a particular standard.·
                        
                        NIF
                            A-5 includes a new classification for revenues and expenses:
                            ordinary and
                            extraordinary. Ordinary revenues and expenses are derived
                            from
                            transactions or events thar are within the normal course
                            of business or
                            that are inherent in the entity’s activities, whether frequent or not;
                            extraordinary revenues and expenses refer to unusual
                            transactions and
                            events, whether frequent or not.·
                        
                        NIF
                            A-7 requires the presentation of comparative financial
                            statements for at
                            least with the preceding period. Throuhg December 31,
                            2004, the
                            presentation of prior years’ financial statements was optional. The
                            financial statements must disclose the authorized date
                            for their issuance,
                            and the name of the officers or administrative body authorizing
                            the
                            related issuance·
                        
                        In
                            October 2005, the CINIF issued NIF B-1, “Accounting changes and
                            corrections of errors”, intended to establish specific presentation and
                            disclosure rules of accounting changes and corrections
                            of errors. NIF B-1
                            sets forth the retrospective application of the effects
                            of changes and
                            correction of accounting errors to evaluate the financial
                            information as
                            if the change had not existed or the error had not been
                            committed.
                            Application of the NIF is mandatory for accounting changes
                            and corrections
                            of errors recognized, effective January 1,
                            2006.
  F-24
   The
                  Group is
                  presently evaluating the fully effect this adoption will have on
                  its
                  consolidated financial statements.
  **16.** **Differences
                between Mexican and U.S. GAAP:**
  The
                Group’s consolidated financial statements are prepared based on Mexican
                GAAP,
                which differ in certain material respects from U.S. GAAP. A partial
                reconciliation of the reported net income and stockholders’ equity from Mexican
                GAAP to U.S. GAAP is presented in Note 17). This partial reconciliation
                to U.S.
                GAAP does not include the reversal of the restatement of the financial
                statements to recognize the impact of inflation, as required under
                Mexican GAAP,
                Bulletin B-10, as amended. The application of Bulletin B-10 represents
                a
                comprehensive measure of the impact of price-level changes in the
                inflationary
                Mexican economy and, as such, is considered a more meaningful presentation
                than
                historical cost-based financial reporting for both Mexican and U.S.
                accounting
                purposes.
  Other
                than inflation accounting, the principal differences between Mexican
                GAAP and
                U.S. GAAP that affect the Group’s consolidated financial statements are
                described below along with an explanation, where appropriate, of
                the method used
                to determine the adjustment between Mexican and U.S. GAAP.
  a) Statements
                of Cash Flows
  Under
                Mexican GAAP, the Group prepares the consolidated statements of changes
                in
                financial position in accordance with Bulletin B-12, “Statement
                of
                Changes in Financial Position”.
                Bulletin B-12
                specifies the appropriate presentation of this statement when the
                financial
                statements have been restated to constant Mexican pesos in accordance
                with the
                Third Amendment to Bulletin B-10. Bulletin B-12 identifies the generation
                and
                application of resources representing differences between beginning
                and ending
                balance sheets in constant Mexican pesos, excluding the effect of
                the line item
“Deficit
                on
                restatement”.
                The Bulletin also requires treating monetary gains and losses and
                unrealized
                gains and losses on foreign currency transactions as cash items in
                the
                determination of net cash provided by operating activities. Consequently,
                the
                changes included in this financial statement constitute cash flow
                activity
                stated in constant Mexican pesos. Under Mexican GAAP, the changes
                in current and
                long-term debt related to restatement to constant Mexican pesos are
                presented in
                the consolidated statements of changes in financial position as a
                resource used
                in financing activities, and the gain or loss on monetary position
                is presented
                as a component of operating activities.
  Under
                Statement of Financial Accounting Standard No. 95, “Statement
                of Cash
                Flows”
                (SFAS
                95), a statement of cash flows that presents only cash movement and
                excludes
                non-cash items is required. SFAS 95 does not provide guidance on
                inflation-adjusted statements of changes in financial position. If
                the gain on
                monetary position were treated as a component of financing activities,
                resources
                provided by operating activities would be Ps.
                201,944, Ps. 1,071,875 and Ps. 489,418 and net cash used in financing
                activities
                would be Ps. (22,903), Ps. (629,581) and Ps. (173,305) in 2003, 2004
                and 2005,
                respectively.
  b) Deferred
                income tax and employee profit sharing
  i) The
                Group
                adopted SFAS No. 109, “Accounting
                for
                income taxes”
                (SFAS 109) for U.S. GAAP reconciliation purposes. SFAS 109 determines
                the
                deferred income tax effect by applying the “comprehensive
                asset and liability method.”
                As described in
                Note 12b), Mexican Income Tax Law requires paying a 1.8% annual tax
                rate on the
                Group’s net assets which may be used to offset future income tax obligations.
                Under SFAS 109, such an amount should be treated as a deferred income
                tax
                benefit and reduced by a valuation allowance, if required.
   F-25
 Moreover,
          for
          U.S. GAAP purposes, all of the changes in the required deferred income
          tax
          effect during the year are allocated in the income statement, except for
          the
          deferred income tax effect derived from temporary differences attributable
          to
          changes in other stockholders’ equity accounts. In that event, such an effect is
          applied directly to the specific stockholders’ equity accounts that generate
          such changes.
 
 The
          foregoing provisions are virtually identical to Mexican GAAP, except that
          the
          recognition of the accumulated initial effect of the comprehensive asset
          and
          liability method as of January 1, 2000, was recorded directly to stockholders’
equity.
  Under
          U.S. GAAP, the deferred income tax effect should be classified as current
          and
          non-current, based on the classification of the asset and liability items
          that
          give rise to it. As of December 31, 2004 and 2005, the deferred income
          tax
          effect under Mexican and U.S. GAAP was classified as follows:
   **CONSTANT
                        MEXICAN PESOS****MEXICAN
                        GAAP**
                    
                    **U.S.
                        GAAP****2004**
                    
                    **2005**
                    
                    **2004**
                    
                    **2005**Current
                    
                    Ps.
                    -
                    
                    Ps.
                    -
                    
                    Ps.
                    999,512
                    
                    Ps.
                    863,495Noncurrent
                    
                    
                    815,415
                    
                    
                    870,713
                    
                    
                    (184,097
                    )
                    
                    7,218Ps.
                    815,415
                    
                    Ps.
                    870,713
                    
                    Ps.
                    815,415
                    
                    Ps.
                    870,713
  ii) The
              Group’s consolidated subsidiaries that have personnel are obligated to pay
              profit sharing to their employees. Profit sharing is calculated by
              applying a
              10% annual rate to taxable income determined for each subsidiary as
              provided for
              in the Income Tax Law, as explained in Note 12d). Therefore, employee
              profit
              sharing is subject to the future consequences of temporary differences
              in the
              same manner as income tax.
  Under
              Mexican GAAP, no deferred employee profit sharing was recorded in 2003
              insofar
              as the Group’s consolidated subsidiaries did not have significant temporary
              differences that had generated future liabilities or benefits. At 2004
              and 2005
              year end, deferred employee profit sharing amounted to Ps. 8,181 and
              Ps.(5,028).
              See Note 12d).
  For
              U.S.
              GAAP purposes, a deferred profit sharing expense and liability have
              been
              calculated. Therefore, in fiscal years 2003, 2004 and 2005, the deferred
              employee profit sharing amounted to Ps. 0, Ps. 8,181 and Ps. (5,028),
              respectively. Employee profit sharing is classified as an operating
              expense for
              U.S. GAAP purposes. The components of the U.S. GAAP employee profit
              sharing
              liability as of December 31, 2003, 2004 and 2005, were as follows:
  **DEFERRED
                          EMPLOYEE PROFIT SHARING**
                        **CONSTANT
                          MEXICAN PESOS****2003**
                      
                      **2004**
                      
                      **2005**CurrentInventories
                      
                      Ps.
                      307,932
                      
                      Ps.
                      28,453
                      
                      Ps.
                      -Cumulative
                          inventory
                      
                      
                      -
                      
                      
                      -
                      
                      
                      8,592Non-deductible
                          reserves
                      
                      
                      (104,126
                      )
                      
                      -
                      
                      
                      (5,780
                      )203,806
                      
                      
                      28,453
                      
                      
                      2,812Non-currentProperty
                          and
                          equipment
                      
                      
                      405
                      
                      
                      -
                      
                      
                      76Prepaid
                          expenses and prepaid pension cost
                      
                      
                      (48
                      )
                      
                      -
                      
                      
                      -Other
                      
                      
                      (204,163
                      )
                      
                      (20,272
                      )
                      
                      -(203,806
                      )
                      
                      (20,272
                      )
                      
                      76Ps.
                      -
                      
                      Ps.
                      8,181
                      
                      Ps.
                      2,888
   F-26
  iii) Goodwill
  Under
              Mexican GAAP, goodwill is restated based on the NCPI factor as discussed
              in Note
              3c). Under Mexican GAAP and U.S. GAAP, prior to January 1, 2003, and
              January 1,
              2002, respectively, goodwill was amortized on a straight-line basis
              over 20
              years.
  The
              Financial Accounting Standards Board approved SFAS 142, “Goodwill
              and Other
              Intangible Assets”,
              which requires
              that all intangible assets that are obtained through contractual or
              legal right,
              or are capable of being separately sold, transferred, licensed, rented
              or
              exchanged must be recognized as an asset apart from goodwill. As a
              result of the
              statement, under U.S. GAAP, goodwill and intangibles with indefinite
              lives are
              no longer amortized, but are subject to an annual assessment for impairment
              by
              applying a fair value based test. Effective 2003, this provision is
              virtually
              identical to Mexican GAAP.
  iv) Additional
              employee retirement liability and unrecognized net transition obligation
  At
              2005
              fiscal year end, the additional employee retirement liability exceeded
              the limit
              amount for recording an intangible asset as an offsetting entry. Under
              Mexican
              GAAP, the intangible asset is recorded up to the algebraic sum of the
              unrecognized net transition obligation plus prior services and amendments
              of
              plan. Therefore, the excess of additional employee retirement liability
              over the
              intangible asset was recognized in stockholders’s equity as a debit item in the
              amount of Ps. 28,309. Under U.S. GAAP, this effect is included in income.
              Therefore a reconciliation line item is shown in Note 17)
  Effective
              January 1, 2005, the revised Bulletin D-3 requires that the severance
              benefits
              referred to above be assessed upon termination of the employer/employee
              relationship. Accordingly, severance benefits granted to employees
              due to causes
              other than restructuring are valued by using the projected unit credit
              method.
              Under Mexican GAAP, the unrecognized net transition obligation amounting
              to Ps.
              4,102, will be amortized over the average remaining labor life of employees.
              Up
              to December 31, 2004, these severance benefits were expensed when paid.
              Under
              U.S. GAAP this effect is included in income. Therefore a reconciliation
              line
              item is shown in Note 17).
  **17.** **Reconciliation
              from Mexican to U.S. GAAP:**
  Net
              income and stockholder’s equity, adjusted to take into account the significant
              differences between Mexican GAAP and U.S. GAAP, except for the comprehensive
              effect of price-level changes as required by Mexican GAAP, were as
              follows:
  **Thousands
                          of Mexican pesos (Ps.) and thousands of U.S. dollars
                          ($),**
                        **except
                          per share****NET
                        INCOME**
                      
                      **Year**
                      
                      **Convenience**
                        **translation****2003**
                      
                      **2004**
                      
                      **2005**
                      
                      **2005**Net
                          income under Mexican GAAP
                      
                      Ps.
                      626,035
                      
                      Ps.
                      670,427
                      
                      Ps.
                      728,225
                      
                      $
                      67,989U.S.
                          GAAP adjustments-Deferred
                          employee profit Sharing
                      
                      
                      61,277
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Additional
                          employee retirement liability (Note 3.j)
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (28,309
                      )
                      
                      (2,643
                      )Unrecognized
                          net transition obligation (Note 3.j)
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (4,102
                      )
                      
                      (383
                      )Impact
                          of inflation accounting on U.S. GAAP adjustments
                      
                      
                      2,437
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -63,714
                      
                      
                      -
                      
                      
                      (32,411
                      )
                      
                      (3,026
                      )Net
                          income under U.S. GAAP
                      
                      
                      689,749
                      
                      
                      670,427
                      
                      
                      695,814
                      
                      
                      64,963Weighted
                          average common shares outstanding
                        (thousands)
                      
                      
                      265,419
                      
                      
                      265,419
                      
                      
                      265,419Basic
                          and diluted earnings per share under U.S. GAAP
                      
                      Ps.
                      2.60
                      
                      Ps.
                      2.53
                      
                      Ps.
                      2.62
  F-27
  Because Mexican GAAP requires use of a comprehensive method for recognizing
              the
              impact of inflation and because the financial statements are prepared
              on this
              basis, the applicable impact of inflation on U.S. adjustments was calculated
              and
              included in the heading “impact of inflation accounting on U.S. GAAP
              adjustments.”
  **STOCKHOLDERS’
                          EQUITY****2003**
                      
                      **2004**
                      
                      **2005**
                      
                      **Convenience**
                        **translation**
                        **2005**Stockholders’
                          equity under Mexican GAAP
                      
                      Ps.
                      3,631,498
                      
                      Ps.
                      4,167,477
                      
                      Ps.
                      4,614,282
                      
                      $
                      430,803Unrecognized
                          net transition labor obligation (Note 3.J)
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (4,102
                      )
                      
                      (383
                      )Amortization
                          of goodwill
                      
                      
                      24,941
                      
                      
                      24,941
                      
                      
                      24,941
                      
                      
                      2,32924,941
                      
                      
                      24,941
                      
                      
                      20,839
                      
                      
                      1,946Stockholders’
                          equity under U.S. GAAP
                      
                      Ps.
                      3,656,439
                      
                      Ps.
                      4,192,418
                      
                      Ps.
                      4,635,121
                      
                      $
                      432,749
 
 
 **Changes
                          in stockholders’ equity under U.S. GAAP****2003**
                      
                      **2004**
                      
                      **2005**
                      
                      **Convenience**
                        **translation**
                        **2005**Stockholders’
                          equity under U.S. GAAP as of beginning of the year
                      
                      Ps.
                      3,330,291
                      
                      Ps.
                      3,656,439
                      
                      Ps.
                      4,192,418
                      
                      $
                      391,417Comprehensive
                          income under U.S. GAAP
                      
                      
                      437,279
                      
                      
                      653,524
                      
                      
                      572,667
                      
                      
                      53,466Dividends
                          paid
                      
                      
                      (111,131
                      )
                      
                      (117,545
                      )
                      
                      (129,964
                      )
                      
                      (12,134
                      )Stockholders’
                          equity under U.S. GAAP at year end
                      
                      Ps.
                      3,656,439
                      
                      Ps.
                      4,192,418
                      
                      Ps.
                      4,635,121
                      
                      $
                      432,749
 
 
 **Comprehensive
                          income under U.S. GAAP****2003**
                      
                      **2004**
                      
                      **2005**
                      
                      **Convenience**
                        **translation**
                        **2005**Net
                          income under U.S. GAAP
                      
                      Ps.
                      689,749
                      
                      Ps.
                      670,427
                      
                      Ps.
                      695,814
                      
                      $
                      64,963Deficit
                          on restatement
                      
                      
                      (252,470
                      )
                      
                      (16,903
                      )
                      
                      (123,147
                      )
                      
                      (11,497
                      )Comprehensive
                          income under U.S. GAAP
                      
                      Ps.
                      437,279
                      
                      Ps.
                      653,524
                      
                      Ps.
                      572,667
                      
                      $
                      53,466
  F-28
  **18.** **Supplementary
              U.S. GAAP disclosures:**
  a) Financial
              instruments with off-balance-sheet risk
 Under
              the
              provisions of SFAS No. 105, “Disclosure
              of
              information about financial instruments with off-balance-sheet risk
              and
              financial instruments with concentrations of credit risk,” the Group sells its
              products mainly to distributors including supermarket chains, pharmacies
              and
              retail customers throughout Mexico. No single customer accounted for
              a
              significant amount of the Group’s sales in fiscal 2004, 2005 and 2006, and there
              were no significant accounts receivable from a single customer for
              the same
              years. Moreover, there is no significant concentration of a specific
              supplier
              relating to the purchase of inventories.
  The
              Group
              currently does not have any off-balance sheet arrangement that has
              or is
              reasonably likely to have a current or future effect on the financial
              statements, changes in financial condition, results of operations,
              liquidity,
              capital expenditures or capital resources that is material to investors,
              except
              commitments referred in Note 14e).
  b) Accounts
              receivable
  The
              majority of the Group’s accounts receivable are due from companies in the
              pharmaceutical products, and health-and-beauty/products activities.
              Credit is
              extended based on evaluation of a customer’s financial condition, and generally,
              collateral is not required. Accounts receivable are due within a 30-60
              day term
              and are stated at amounts due from customers net of an allowance for
              doubtful
              accounts. Accounts outstanding longer than the agreed upon payment
              terms are
              considered past due. The Group determines its allowance by considering
              a number
              of factors, including the length of time trade accounts receivable
              are past due,
              the Group’s previous loss history, the customer’s current ability to pay its
              obligation to the Group, and the condition of the general economy and
              the
              industry as a whole. The Group writes off accounts receivable when
              they become
              uncollectible, and payments subsequently received on such receivables
              are
              credited to the allowance for doubtful accounts.
  c) Impairment
              of long-lived assets
  Under
              U.S. GAAP, an impairment occurs when the total amount of the estimated
              future
              cash flows that may be reasonably expected to be obtained through the
              use of the
              asset during its remaining economic useful live, reduced by the operating
              costs
              and expenses associated with such cash flows, is less than the net
              book value of
              the asset. The impairment of a long-lived asset that must be charged
              to the
              income statement is that amount by which the net book value exceeds
              its recovery
              value. If the adjustment is in order, it is determined by the difference
              between
              fair value and net book value. At fiscal 2003, 2004 and 2005 year end,
              there
              were no changes in circumstances indicate that the net book value of
              a
              long-lived asset may not be fully recoverable.
  In
              August
              2001, SFAS 144, “Accounting
              for the
              impairment or disposal of long-lived assets”
              was issued,
              superseding SFAS No. 121, “Accounting
              for the
              impairment of long-lived assets and for long-lived assets to be disposed
              of.”
              SFAS 144
              provides a single accounting model for long-lived assets to be disposed
              of and
              retains many of the fundamental recognition and measurement provisions
              of SFAS
              121 including: (i) the write-down for impairment is not allowed to
              be reversed
              and, (ii) the valuation of fixed assets and some intangibles held for
              sale at
              the lower between net book value or their realization value.
  SFAS
              144
              changes the criteria that would have to be met to classify an asset
              as
              held-for-sale. The new rules also supersede the provisions of APB Opinion
              No.
              30, “Reporting
              the
              results of operations-reporting, the effects of disposal of a segment
              of a
              business, and extraordinary, unusual and infrequently occurring events
              and
              transactions.”
              with regard to
              reporting the effects of a disposal of a segment of business. Those
              rules
              further require showing expected future operating losses from discontinued
              operations in the period in which the losses are incurred (rather than
              as of the
              measurement date presently required by APB No. 30).
  At
              fiscal
              2003, 2004 and 2005 year end, the Group did not have any intangible
              and/or fixed
              assets held for sale.
  Also,
              Bulletin C-15, “Impairment
              of the
              value of long-lived assets and their related disposal” (Bulletin C-15) issued by
              the MIPA, which is similar to U.S. GAAP, became effective in January
              2004 (see
              Note 3 g), except that the reversal of the recognition of impairment
              is pemitted
              under Mexican GAAP.
  As
              a
              result of the application of the provisions of Bulletin C-15, the Group
              completed a transitional fair value based impairment test on its property
              and
              equipment as of January 1, 2004. As a result, no impairment charges
              resulted
              from the transitional evaluation performed on the carrying value of
              property and
              equipment as of January 1, 2004.
   F-29
  d) Goodwill
              and other intangible assets
  Under
              SFAS 142, “Goodwill
              and other
              intangible assets,”
              goodwill and
              intangible assets deemed to have indefinite lives are no longer continued
              to be
              amortized over their remaining economic useful lives. Instead they
              should be
              subject to annual impairment tests. Other intangible assets should
              be amortized
              over their remaining useful economic lives. The Group applied the provisions
              of
              SFAS 142 beginning on January 1, 2002.
  Also,
              Bulletin C-8, “Intangible
              assets,” (Bulletin C-8) issued by the MIPA, which is similar to U.S. GAAP,
              became effective in January 2003. As a result of the application of
              the
              provisions of Bulletin C-8, no impairment charges resulted on the carrying
              value
              of goodwill as of January 1, 2003 (see Note 3 h).
  e) Business
              combinations
  SFAS
              141,
“Business combination,” prohibits use of the “pooling
              of
              interest method”
              and requires use of the purchase method of accounting for business
              combinations.
  Also,
              Bulletin B-7, “Intangible
              assets”
(Bulletin B-7) issued by the MIPA, which is similar to U.S. GAAP, became
              effective on January 1, 2005. Although the Group does not carry out
              business
              combinations, there can be no assurance that the Group will not do
              so in the
              future.
  f) Asset
              retirement obligations
  SFAS
              143,
“Accounting
              for Asset Retirement Obligations”
              addresses
              financial accounting and reporting for obligations associated with
              the
              retirement of tangible long-lived assets and the associated asset retirement
              costs. SFAS 143 requires recording the fair value of an asset retirement
              obligation as a liability in the period on which it incurs a legal
              obligation
              associated with the retirement of a tangible long-lived asset. SFAS
              143 also
              requires recording the contra to the initial obligation as an increase
              to the
              carrying amount of the related long-lived asset (i.e., the associated
              asset
              retirement costs) and to depreciate that cost over the remaining useful
              life of
              the asset. The liability is adjusted at the end of each period to reflect
              the
              passage of time (i.e., accretion expense) and the changes in the estimated
              future cash flows underlying the initial fair value measurement. At
              2003, 2004
              and 2005 fiscal year end, the Group did not have any impact on its
              financial
              position or its results of operations, or cash flows.
  Also,
              Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and
              commitments” issued by the MIPA, which is similar to U.S.GAAP, became effective
              on January 1, 2003.
  g) Quantitative
              and qualitative disclosures on market risk
  The
              Group
              is subject to market risks due to interest rate fluctuations that prevail
              in the
              domestic economy. Those fluctuations further impact the short-term
              debt
              generated by loans obtained from Mexican banks for financing its operations.
              The
              Group has managed its interest rate risks.
  h) Fair
              value of financial instruments
  The
              carrying amount for cash and cash equivalents, accounts receivable,
              other
              accounts receivable, accounts payable, receivables due from and payable
              to
              related parties, and accrued liabilities and short term debt approximates
              their
              fair value due to their short-term nature.
  i) Comprehensive
              income
  SFAS
              No.
              130, “Reporting
              comprehensive income,”
              requires
              reporting all items required to be recognized under accounting standards
              as
              components of comprehensive income in a financial statement displayed
              with the
              same prominence as other financial statements. The adoption of SFAS
              No. 130 does
              not impact net income or shareholders’
              equity. The Group
              presents comprehensive income under U.S.GAAP for 2003, 2004, and 2005
              in Note
              17). Bulletin B-4, “Comprehensive income” issued by the MIPA is similar to U.S.
              GAAP.
   F-30
  j) Segment
              Information
  The
              Group
              adopted SFAS No. 131, “Disclosures
              about
              Segments of an Enterprise and Related Information.”
              SFAS 131
              establishes standards for the way that public enterprises must determine
              and
              report information or operating segments in its annual and interim
              reports.
              Although the Group distributes five product lines, it considers all
              of its
              operations, and reports the results to management as a single business
              segment.
              Accordingly, the Group does not maintain separate operating results
              for each of
              its five product lines. Revenue attributable to each of the five product
              lines
              for the years ended December 31, 2003, 2004 and 2005, is mentioned
              in Note 13).
              Also, Bulletin B-5, “Financial Information by Segment,” issued by the MIPA,
              which is similar to SFAS No. 131, became effective in April 2003.
  k) Variable
              interest entities
  FASB
              Interpretation No. 46, “Consolidation
              of
              Variable Interest Entities”
              (FIN 46)
              clarifies existing accounting for whether variable interest entities
              should be
              consolidated in the financial statements based upon the investee’s ability to
              finance its activities without additional financial support and whether
              investors possess characteristics of a controlling financial interest.
              Management assessed the applicability of FIN 46 to its leases with
              related
              parties discussed in Note 7), and does not believe this standard had
              a material
              impact on its financial position or its results of operations at 2003,
              2004, and
              2005 fiscal year end.
  The
              FASB
              published a revision to Interpretation 46 (46R) to clarify some of
              the
              provisions of FASB No. 46, and to exempt certain entities from its
              requirements.
  Under
              46R, special effective date provisions apply to enterprises that have
              fully or
              partially applied Interpretation 46 prior to issuance of this revised
              Interpretation. Otherwise, application of 46R is required in financial
              statements of public entities that have interests in structures that
              are
              commonly referred to as special-purpose entities for periods endings
              after
              December 15, 2003. Application by public entities, other than small
              business
              issuers, for all other types of variable interest entities is required
              in
              financial statements for periods ending after March 15, 2004. Application
              by
              small business issuers to variable interest entities other than special-purposes
              entities and by nonpublic entities to all types of variable entities
              is required
              at various dates in 2004 and 2005. In some instances, enterprises have
              the
              option of applying or continuing to apply Interpretation 46 for a short
              period
              of time before applying this revised Interpretation. The Group believes
              that
              adoption of Interpretation 46 had no effect on its financial
              statements.
  l) Financial
              instruments with characteristics of both liabilities and equity
  The
              FASB
              150, “Accounting
              for
              Certain Financial Instruments with Characteristics of Both Liabilities
              and
              Equity”
              improves the accounting for certain financial instruments that, under
              previous
              guidance, issuers could account for as equity. The Statement requires
              that those
              instruments be classified as liabilities in financial statements when
              they meet
              certain specific criteria. In addition to its requirements for the
              classification and measurement of financial instruments in its scope,
              Statement
              150 also requires disclosures about alternative ways of settling the
              instruments
              and the capital structure of entities, all of whose shares are mandatorily
              redeemable. The Group did not have any impact for this provision.
  Bulletin
              C-12, “Financial
              instruments with liability and equity characteristics or characteristics
              of
              both” issued by MIPA, which is similar to SFAS No. 150, became effective
              in
              January 2004. Although, the Group currently has no financial instruments
              with
              these characteristics, they could issue such instruments in the
              future.
 m) Share-Based
                payment
 In
              December 2004, the FASB issued Statement 123 (revised 2004), “Share-Based
              Payment” (Statement 123(R)). Statement 123(R) requires that the compensation
              cost relating to share-based payment transactions be recognized in
              financial
              statements. The cost is measured based on the fair value of the instruments
              issued. Statement 123 (R) covers a wide range of share-based compensation
              arrangements including share options, restricted share plans, performance-based
              awards, share appreciation rights and employee share purchase plan.
              Statement
              123 (R) replaces Statement 123, “Accounting for Stock-Based Compensation” and
              supersedes Opinion 25, “Accounting for Stock Issued to Employees”. As originally
              issued in 1995, Statement 123 established as preferable the fair-value-based
              method of accounting for share-based payment transactions with employees.
              However, that Statement permitted entities the option of continuing
              to apply the
              guidance in Opinion 25, as long as the footnotes to the financial statements
              disclosed what net income would have been had the preferable fair-value-based
              method been used. The Group is required to apply Statement 123 (R)
              as of the
              first interim reporing period that begins after June 15, 2005. Adoption
              of this
              Statement had no had an impact on the Group’s consolidated financial
              statement.
   F-31
 n) Contingently
                Convertible Instruments on Diluted Earnings per Share
  In
                September
                2004, the EITF released EITF Issue No. 04-8, “The Effect of Contingently
                Convertible Instruments on Diluted Earnings per Share.” Under current
                interpretations of Statement 128, Earnings per Share, issuers of
                contingently
                convertible debt instruments generally exclude the potential underlying
                common
                shares of the contingently convertible debt instruments from the
                calculation of
                diluted earnings per share until the underlying common stock achieves
                a
                specified price target, or other contingency is met. EITF 04-8 requires
                that
                contingently convertible debt instruments should be included in diluted
                earnings
                per share computations if dilutive, regardless of whether the market
                price
                trigger has been met. The Group will adopt the requirements of EITF
                04-8
                beginning with the quarter ending February 28, 2005. The application
                of EITF
                04-8 requires the Group to include the contingent convertible subordinated
                notes
                (the Notes) in the calculation of diluted earnings per share if dilutive.
                The
                Group does not believe that the adoption of EITF 04-8 had a material
                impact on
                its consolidated financial statements.
  o) Recently
              Issued Accounting Pronouncements
  In
              November 2004, FASB issued Statement
              151, “Inventory Cost”, an amendment of ARB No. 43, Chapter 4, which is effective
              for inventory costs incurred during fiscal years beginning after June
              15, 2005.
              The amendments made by Statement 151 will improve financial reporting
              by
              clarifying that abnormal amounts of idle facility expense, freight,
              handling
              costs and wasted material (spoilage) should be recognized as current-period
              charges and by requiring the allocation of fixed production overheads
              to
              inventory base on the normal capacity of the production facilities.
              Adoption of
              this Statement had not an impact on the Group’s consolidated financial
              statement.
  In
              December 2004, FASB issued Statement
              153, “Exchanges of Nonmonetary Assets”, an amendment of APB Opinion No. 29. This
              Statement is effective for nonmonetary asset exchanges occurring in
              fiscal
              periods beginning after June 15, 2005. This Statement eliminates the
              exception
              to fair value for exchanges of similar productive assets and replaces
              it with a
              general exception for exchange transactions that do not have commercial
              substance-that is, transactions that are not expected to result in
              significant
              changes in the cash flow of the reporting entity. Adoption of this
              Statement had
              not an impact on the Group’s consolidated financial statement.
  In
              December 2004, the Financial Accounting Standard Board (FASB) issued
              Statement
              123 (revised 2004), “Share-Based Payment” (Statement 123(R)). Statement 123(R)
              requires that the compensation cost relating to share-based payment
              transactions
              be recognized in financial statements. The cost will be measured based
              on the
              fair value of the instruments issued. Statement 123 (R) covers a wide
              range of
              share-based compensation arrangements including share options, restricted
              share
              plans, performance-based awards, share appreciation rights and employee
              share
              purchase plan. Statement 123 (R) replaces Statement 123, “Accounting for
              Stock-Based Compensation” and supersedes Opinion 25, “Accounting for Stock
              Issued to Employees”. As originally issued in 1995, Statement 123 established as
              preferable the fair-value-based method of accounting for share-based
              payment
              transactions with employees. However, that Statement permitted entities
              the
              option of continuing to apply the guidance in Opinion 25, as long as
              the
              footnotes to the financial statements disclosed what net income would
              have been
              had the preferable fair-value-based method been used. We will be required
              to
              apply Statement 123 (R) as of the first interim reporting period that
              begins
              after June 15, 2005, and we plan on using the modified-prospective
              method,
              effective July 1, 2005. The Group deems that adoption had not impact
              on its
              consolidated results and financial position.
   In
              June 2005, the FASB published SFAS
              No. 154, “Accounting changes and Error Corrections a replacement of APB Opinion
              No. 20 and FASB Statement No. 3” (SFAS No. 154), which changes the requirements
              for the accounting for and reporting of a change in accounting principle
              and
              redefines restatement as the revising of previously issued financial
              statement
              to reflect the correction of an error. SFAS No. 154 requires retrospective
              application to prior periods financial statements of changes in accounting
              principles, unless it is impracticable to determine the period-specific
              effects
              of the cumulative effect of the change. This Statement also carries
              forward
              without change the guidance contained in Opinion 20 for reporting the
              correction
              of an error in previously issued financial statement and a change in
              accounting
              estimate. This statement does not change the transition provisions
              of any
              existing accounting pronouncement. SFAS No. 154 will be effective for
              accounting
              changes and corrections of errors made in fiscal years beginning after
              December
              15, 2005. The Group is currently considering the impact that adoption
              will have
              on its consolidated results and financial position.
   F-32
   NIF
              B-1 “Accounting
              Changes
              and Error Corrections” issued by MIPA which is similar to SFAS No. 154, will be
              effective for accounting changes and corrections of errors made in
              fiscal years
              beginning after January 1, 2006.
  In
              June 2005, the FASB issued Emerging
              Issues Task Force (EITF) Issue No. 05-06, “Determining the Amortization Period
              for Leasehold Improvements”. EITF Issue No. 05-06 indicates that for operating
              leases, leasehold improvements that are placed in services significantly
              after
              and not contemplated at or near the beginning of the lease term should
              be
              amortized over the shorter of the useful life of the assets or a term
              that
              includes required lease periods and renewals that are deemed to be
              reasonably
              assured at the date the leasehold improvements are purchased. Leasehold
              improvements acquired in a business combination should be amortized
              over the
              shorter of the useful life of the assets or a term that includes required
              lease
              periods and renewal that are deemed to be reasonably assured at the
              date of
              acquisition. EITF Issue No. 05-06 is effective for leasehold improvements
              that
              are purchased or acquired in reporting periods beginning after June
              28, 2005.
              The Group deems that adoption had no impact on its consolidated results
              and
              financial position.
  In
              September
              2005, the Board ratified the consensus reached by the Task Force regarding
              EITF
              Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same
              Counterparty”. This guidance addresses the circumstances under which two or more
              inventory transactions with the same counterparty should be considered
              as a
              single non-monetary transaction with the scope of APB Opinion 29, “Accounting
              for Non-monetary Transactions”. The Task Force reached a consensus that
              non-monetary exchange whereby an entity transfers finished goods inventory
              in
              exchange for the receipt of raw materials or work-in-progress inventory
              within
              the same line of business is not considered as an exchange transaction
              to
              facilitate sales customers as described in APB Opinion 29 paragraph
              20(b) and
              therefore should be recognized by the entity at fair value if it is
              determinable
              within reasonable limits and the transaction has commercial substance.
              All other
              non-monetary exchanges of inventory within the same line of business
              should be
              recognized at the carrying amount of the inventory transferred. The
              Task Force
              agreed that this consensus should be applied to transactions completed
              in
              reporting periods beginning after March 2006. The Group does not expect
              the
              application of EITF 04-13 to have a material impact on its consolidated
              financial statements.
  In
              October 2005, the FASB issued FASB
              Staff Position (FSP) No. FAS 13-1, “Accounting for Rental Costs Incurred during
              a Constuction Period”. This Statement requires rental costs associated with
              operating leases that are incurred during a construction period to
              be recognized
              as a rental expense. FSP FAS 13-1 is effective for reporting periods
              beginning
              after December 15, 2005. The transition provisions FSP No. FAS 13-1
              permit early
              adoption and retrospective application of the guidance. The Group deems
              that
              adoption had no impact on its consolidated results and financial
              position.
  On
              November
              3, 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of
              Other-Than-Temporary Impairment and Its Application to Certain Investments”.
              This FASB Staff Position (FSP) addresses the determination as to when
              an
              investment is considered impaired, whether the impairment is other
              than
              temporary, and the measurement of an impairment loss. This FSP also
              includes
              accounting consideration subsequent to the recognition of an
              other-than-temporary impairment and requires certain disclosures about
              unrealized losses that have not been recognized as other-than-temporary
              impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for
              Certain Investments in Debt and Equity Securities”, and SFAS No. 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations”, and
              APB Opinion No.18, “The Equity method of accounting for Investments in Common
              Stock”. Certain disclosure requirements of EITF 03-1 were adopted in 2003
              and
              the Group complied with that new disclosure requirements in its consolidated
              financial statements The Group does not expect the comprehensive application
              of
              EITF 03-01 to have a material impact on its consolidated financial
              statements.
   F-33
  In
              February 2006, the FASB issued
              Statement of Financial Accounting Standards No. 155, “Accounting for certain
              Hybrid Financial Instruments” (SFAS 155). SFAS 155 permits fair value
              measurement for any hybrid financial instrument that contains an embedded
              derivative that would otherwise require bifurcation and separate accounting.
              An
              irrevocable election may be made at inception to measure such a hybrid
              financial
              instrument at fair value, with changes in fair value recognized through
              income.
              Such an election needs to be supported by concurrent documentation.
              SFAS 155 is
              effective for fiscal years beginning after September 15, 2006, with
              early
              adoption permitted. The Group deems that adoption will not have impact
              on its
              consolidated results and financial position.
       F-34