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, 2007




Commission
file number 1-12632




Grupo
Casa Saba, S.A.B. 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
      RegisteredAmerican
      Depositary Shares, each representingten
              Ordinary
      Shares, without par value
            New
      York Stock ExchangeOrdinary
      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, 2007 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
      __
              No
      X
  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  X
              Non-accelerated
      filer __


Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:






U.S. GAAP
      __
            International
      Financial Reporting Standards as issuedby
      the International Accounting Standards Board __
            Other X




If
“Other” has been checked in response to the previous question, 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 IItem 1.
              Identity of Directors, Senior Management and
      Advisers
              3Item 2.
              Offer Statistics and Expected Timetable
              3Item 3.
              Key Information
              3Item 4.
              Information on the Company
              11Item 5.
              Operating and Financial Review and
      Prospects
              30Item 6.
              Directors, Senior Management and
    Employees
              48Item 7.
              Major Shareholders and Related Party
      Transactions
              52Item 8.
              Financial Information
              54Item 9.
              Offer and Listing Details
              54Item 10.
              Additional Information
              57Item 11.
              Quantitative and Qualitative Disclosures about Market
      Risk
              71Item 12.
              Description of Securities Other than Equity
      Securities
              72PART IIItem 13.
              Defaults, Dividend Arrearages and
      Delinquencies
              73Item 14.
              Material Modifications to the Rights of Security Holders
      and Use of Proceeds
              73Item 15.
              Controls and Procedures
              73Item 16.
              [Reserved]
              73Item 16A.
              Audit Committee Financial Expert
              73Item 16B.
              Code of Ethics
              73Item 16C.
              Principal Accountant Fees and
    Services-
              74Item 16D.
              Exemptions from the Listing Standards for Audit
      Committees
              74Item 16E.
              Purchases of Equity Securities by the Issuer and
      Affiliated Purchasers
              74PART IIIItem 17.
              Financial Statements
              75Item 18.
              Financial Statements
              75Item 19.
              Exhibits
              75




i
 Table of Contents


INTRODUCTION




Grupo Casa Saba, S.A.B. de C.V. is a
limited liability stock corporation with variable capital, or sociedad anónimabursátilde 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 Group”, “the
company”, “we”, “us”, “our” and “ours” refer to Grupo Casa Saba, S.A.B. 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, 2007, the Mexican Pesos per U.S. Dollar exchange rate, as
reported by the Mexican Central Bank in the Official Gazette of the Federation,
was Ps. 10.9157 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,
2007.  References to “Ps.” or “Pesos” in this annual report are
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 own company
estimates.




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;




1
 Table of Contents


●
            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.




2
 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 Financial Reporting Standards,
or Mexican FRS, which differs in some significant respects from U.S.
GAAP.  Note 18 to our audited consolidated financial statements
provides a description of the principal differences between Mexican FRS and U.S.
GAAP as they relate to us, and describes differences in presentation between the
statement of changes in financial position under Mexican FRS and the
requirements under U.S. GAAP for a statement of cash flows.  Note 19
to our audited consolidated financial statements provides a partial
reconciliation to U.S. GAAP of net income and stockholders’ equity.




Pursuant to Mexican FRS, 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
FRS 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, 2007.  See Note 3 to our audited
consolidated financial statements for significant accounting
policies.  The impact of inflation accounting under Mexican FRS has
not been reversed in our reconciliation to U.S. GAAP.  See Notes 18
and 19 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,
            2003
            2004
            2005
            2006
            2007
            2007(1)(in
      thousands of constant Pesos as of December 31, 2007 and U.S. Dollars,
      except share and per share data)Income
      StatementMexican
      FRS:Net
      sales
            22,919,162
            22,949,403
            23,615,926
            24,486,493
            25,259,662
            2,314,067Gross
      profit
            2,278,492
            2,362,542
            2,436,935
            2,420,076
            2,484,257
            227,586Operating
      expenses
            1,412,555
            1,472,464
            1,470,392
            1,365,941
            1,424,852
            130,532Operating
      income, net
            865,939
            890,078
            966,543
            1,054,135
            1,059,405
            97,054Comprehensive
      cost of financing, net
            54,326
            17,621
            -1,693
            -4,351
            17,848
            1,635Other
      income (2)
            40,268
            55,671
            42,303
            46,331
            51,756
            4,741




3
 Table of Contents




Year ended
      December 31,
            2003
            2004
            2005
            2006
            2007
            2007 (1)(in
      thousands of constant Pesos as of December 31, 2007 and U.S. Dollars,
      except share and per share data)Income before
      taxes and employee profit sharing
            851,973
            928,128
            1,010,539
            1,155,095
            1,093,313
            100,160Net
      income
            675,852
            723,854
            786,226
            916,563
            905,087
            82,916Net
      income per Ordinary Share (3)
            2.45
            2.63
            2.96
            3.45
            3.41
            0.31Weighted
      average Ordinary Shares outstanding (in thousands) (3)
            265,419
            265,419
            265,419
            265,419
            265,419
            265,419U.S.GAAP (4):Net
      sales
            22,919,162
            22,949,403
            23,615,926
            24,486,493
            25,259,662
            2,314,067Gross
      profit
            2,278,492
            2,362,542
            2,436,935
            2,420,076
            2,484,257
            227,586Operating
      income
            865,939
            890,078
            966,543
            1,054,135
            1,059,405
            97,053Income before
      taxes and employee profit sharing
            851,973
            928,128
            1,009,708
            1,155,095
            1,093,313
            100,160Net
      income (4)
            675,852
            723,854
            751,235
            951,554
            890,164
            81,549Net
      income per Ordinary share (3)
            2.54
            2.72
            2.83
            3.59
            3.35
            0.31Weighted
      average Ordinary Shares outstanding (in thousands) (3)
            265,419
            265,419
            265,419
            265,419
            265,419
            265,419Balance
      Sheet DataMexican
      FRS:Property
      and equipment, net
            1,154,554
            1,193,551
            1,150,099
            1,198,242
            1,269,821
            116,330Total
      assets
            9,705,516
            10,181,835
            10,616,144
            10,778,971
            12,039,715
            1,102,972Short-term
      debt
            457,650
            -
            -
            17,044
            -
            -Long-term
      debt
            -
            -
            -
            -
            -
            -Capital
      stock
            1,123,690
            1,123,729
            1,123,764
            1,123,764
            1,123,764
            102,949Total
      stockholders’ equity (4)
            3,920,475
            4,499,262
            4,981,795
            5,544,017
            6,092,720
            558,161U.S.GAAP(4):Property
      and equipment, net
            1,154,554
            1,193,551
            1,150,099
            1,198,242
            1,269,821
            116,330Total
      assets
            9,705,516
            10,181,835
            10,616,144
            10,778,970
            12,006,578
            1,099,937Short-term
      debt
            457,650
            -
            -
            17,044
            -
            -Long-term
      debt
            -
            -
            -
            -
            -
            -Capital
      stock
            1,123,690
            1,123,729
            1,123,764
            1,123,764
            1,123,764
            102,949Total
      stockholders’ equity (4)
            3,920,475
            4,526,330
            4,973,731
            5,570,945
            6,091,437
            558,044


________________________


(1)  Peso
amounts have been translated into U.S. Dollars solely for the reader’s
convenience, at the rate of Ps. 10.9157 per U.S. $1.00, which was the Peso /U.S.
Dollar exchange rate as of December 31, 2007, 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 FRS
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 18 and 19 to our audited consolidated financial statements.  4
 Table of Contents





(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,
2007, we had a legal reserve of approximately Ps. 149.5 million, which
represented approximately 13.3% 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, 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. 126.9 million at fiscal year
end constant Pesos), equivalent to Ps. 0.41 per Ordinary Share.  Five
percent of our net income for the year ended December 31, 2004 was applied
to the legal reserve, and thus our annual shareholder’s meeting held on April
29, 2005 approved the payment of a dividend in the amount of Ps. 120.0
million (Ps. 140.3 million at fiscal year end constant Pesos), equivalent
to Ps. 0.4521 per Ordinary Share.  Five percent of our net income
for the year ended December 31, 2005 was applied to the legal reserve, and thus
our annual shareholder’s meeting held on April 27, 2006 approved the
payment of a dividend in the amount of Ps. 150.0 million (Ps. 160.3 at
fiscal year end constant Pesos), equivalent to Ps. 0.5651 per Ordinary
Share.  Five percent of our net income for the year ended December 31,
2006 was applied to the legal reserve, and thus our annual shareholder’s meeting
held on April 26, 2007 approved the payment of a dividend in the amount of
Ps. 170.0 million (Ps. 175.3 million at fiscal year end constant Pesos),
equivalent to Ps. 0.6405 per Ordinary Share.  Five percent of our
net income for the year ended December 31, 2007 was applied to the legal
reserve, and thus our annual shareholder’s meeting held on April 29, 2008
approved the payment of a dividend in the amount of Ps. 170.0 million, the
equivalent of Ps. 0.6405 per Ordinary Share, which is payable on June 26,
2008.




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.




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—Mexican Tax
Considerations—Dividends.”




5
 Table of Contents


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
16, 2008, was Ps. 10.33 per U.S. Dollar.




Exchange
      Rate(1)Year ended December
      31,
            
            High
            
            
            Low
            
            
            Average(2)
            
            
            Period
      End2003
            
            
            11.41
            
            
            
            10.11
            
            
            
            10.79
            
            
            
            11.242004
            
            
            11.64
            
            
            
            10.81
            
            
            
            11.30
            
            
            
            11.152005
            
            
            11.41
            
            
            
            10.41
            
            
            
            10.89
            
            
            
            10.632006
            
            
            11.49
            
            
            
            10.44
            
            
            
            10.91
            
            
            
            10.812007
            
            
            11.27
            
            
            
            10.67
            
            
            
            10.93
            
            
            
            10.92Month
      endedDecember
      31, 2007
            
            Ps.10.92
            
            
            Ps.10.80
            
            
            Ps.10.91
            
            
            Ps.10.92January
      30, 2008
            
            
            10.97
            
            
            
            10.82
            
            
            
            10.91
            
            
            
            10.82February
      28, 2008
            
            
            10.82
            
            
            
            10.67
            
            
            
            10.77
            
            
            
            10.73March
      31, 2008
            
            
            10.85
            
            
            
            10.63
            
            
            
            10.73
            
            
            
            10.63April
      30, 2008
            
            
            10.60
            
            
            
            10.44
            
            
            
            10.51
            
            
            
            10.51May
      31, 2008
            
            
            10.57
            
            
            
            10.31
            
            
            
            10.44
            
            
            
            10.33June
      16, 2008
            
            
            10.44
            
            
            
            10.29
            
            
            
            10.36
            
            
            
            10.33





_____________________


(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 month-end rates.  Monthly average
rates reflect the average of daily rates.




(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 where 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, under the
sections entitled “Item 4.  Information on the Company” and “Item
5.  Operating and Financial Review and Prospects” or elsewhere in this
annual report.  Please see “Forward-Looking
Statements.”


6
 Table of Contents




Risk
Factors Related 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 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 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 than us with respect to any key competitive
factors, 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.  One of the
primary objectives of the United States, Mexico and other countries’ securities
laws is to promote full and fair disclosure of all material corporate
information.  However, there may be less publicly available
information about foreign private 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 FRS, which differs from U.S. GAAP and accounting
procedures in certain significant respects.  Thus, Mexican financial
statements and reported earnings may differ from those of companies in other
countries. Notes 18 and 19 to our Audited Annual Financial Statements
describe the principal differences between Mexican FRS 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.




We rely on
certain key managers and other personnel, and our business could be adversely
affected if we are not able to retain these key personnel or find suitable
replacements.  Our growth and success depend on our ability to
retain skilled, qualified and experienced managerial and technical
personnel.  Any loss or interruption ofthe services of key
senior personnel, or the inability to timely recruit sufficient qualified
personnel, could adversely affect our business, results of operations and
financial condition.




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, based on the Board of Directors’ recommendation.  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 or not we will declare and pay dividends, in cash
or otherwise.  See “Item 3.  Key
Information—Dividends.”




Preemptive Rights
May Be Unavailable to Holders of Our ADSs.  Under Mexican law, our
shareholders have preemptive rights.  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 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.


7
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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.  In
accordance with the Ley
del Mercado de Valores, or the Mexican Securities Market Law, as amended,
we amended our bylaws to increase the protections afforded to our minority
shareholders in an effort to try to ensure that our corporate governance
procedures are substantially similar to international standards.  See
“Item 10.  Additional Information—Amendments to the Mexican Securities
Market Law—Bylaws”.




You
may be unable to enforce judgments against us.We are a
corporation with variable capital (sociedad anónima bursátil 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 of 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 company 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 as well 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.




Risk
Factors Relating to Economic and Political Developments in Mexico




Economic and Political
Developments in Mexico May Adversely Affect Our Business. Our
business, financial condition and results of operations are affected by
economic, political or social developments in Mexico, including, among others,
any political or social instability in Mexico, changes in the rate of economic
growth or contraction, changes in the exchange rate between the peso and the
U.S. dollar, an increase in Mexican inflation or interest rates, changes in
Mexican taxation and any amendments to existing Mexican laws and
regulations.  Accordingly, Mexican governmental actions and policies
concerning the economy in general and healthcare policy in particular could have
a significant impact on us, as well as more generally on market conditions,
prices and returns on Mexican equity securities.  We cannot assure you
that changes in Mexican governmental policies will not adversely affect our
business, results of operations, financial condition and prospects.




Social and political instability in
Mexico or other adverse social or political developments in or affecting Mexico
could adversely affect us, our ability to obtain financing and Mexican financial
markets generally.  We cannot provide any assurance that the current
political situation or any future developments in Mexico will not have a
material adverse effect on our financial condition or results of
operations.




Our business may be especially
affected by economic conditions in Mexico. Mexico has experienced a prolonged
period of slow growth since 2001, primarily as a result of the downturn in the
U.S. economy and the lack of structural reforms. According to preliminary data,
during 2007, Mexico’s gross domestic product, or “GDP,” grew by 3.3% in real
terms. Mexico has also experienced high levels of inflation and high domestic
interest rates. The annual rate of inflation, as measured by changes in the
NCPI, as published by the Banco de México, was 3.8% for
2007 and the average interest rate on 28-day Mexican government treasury
securities, or “CETES”, averaged 7.2% for 2007.




The current U.S. economic slowdown
could have a negative impact on the Mexican economy, particularly with respect
to remittances, the second-largest source of foreign currency inflows after oil
exports.  Remittances fell by nearly 6% in January 2008, and may
continue to decline if conditions in the U.S. continue to exert pressure on the
amount of disposable income that Mexican immigrants have to send home. From a
macroeconomic standpoint, Mexican officials are projecting a higher estimated
annual inflation rate of 4.1% due to the increases in raw materials and
commodities (grains) price.  In addition, the Banco de México recently
adjusted the annual GDP forecast downward, to 2.7% from
3.1%.  Therefore, there is no guarantee that the Mexican and U.S.
economies will continue to grow at their past levels.  As a result,
there is a potential for an economic slowdown.  Should this happen, it
would negatively impact both our business and our results of
operations.




8
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We are a Mexican company and all of
our business operations take place in Mexico.  Therefore, our business
may be affected by the general condition of the Mexican economy.  For
each of the years ended on December 31, 2005, 2006 and 2007, 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
Peso devaluations.  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 ours.  Inflation in
Mexico decreases the real purchasing power of the Mexican
population.  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 in the future have an adverse effect on us. 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 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 affected 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 in that the peso appreciated
4.7% against the U.S. Dollar.  In 2006, however, the peso depreciated
1.6% with respect to the US Dollar due to higher inflation levels in
Mexico.  The combination of more moderate GDP growth and a slightly
lower level of inflation, led to a 1.0% depreciation of the peso against the US
Dollar in 2007.




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. A severe devaluation or depreciation of the Peso may
also disrupt international foreign exchange markets and, as such, may limit our
ability to transfer or to convert Pesos into U.S. Dollars and other currencies
for the purpose of obtaining imported goods.  A devaluation or
depreciation of the Peso against the U.S. Dollar may also adversely affect the
U.S. Dollar prices of 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 5.2% for 2004, 3.3%
for 2005, 4.1% for 2006, and 3.8% for 2007.  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 that inflation exceeds price increases, our prices and revenues
      will be adversely affected in “real”
terms.




Mexico also has, and could continue
to have, high nominal interest rates.  The interest rates on 28-day
CETES averaged approximately 6.8%, 9.1%, 7.2% and 7.2% for 2004, 2005, 2006 and
2007, respectively, and 7.9% by May 2008.  Accordingly, if we need to
incur Peso-denominated debt in the future, it could be at high interest
rates.




9
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If Foreign Currency Exchange
Controls and Restrictions are Imposed, Investors Would be Exposed to Foreign
Currency Exchange Rate 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.  Likewise, 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 Mexican Stock Exchange Index 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.  In 2006, the index of the Mexican Stock Exchange increased by
48.6%, following the positive performance of both emerging and developed markets
worldwide.  High levels of liquidity as well as positive outlooks for
emerging markets, including Mexico, contributed to the increase of the index of
the Mexican Stock Exchange.  During 2007, the index of the Mexican
Stock Exchange increased by 11.7%, somewhat lower than the last four years, but
still positive as a result of strong economic growth of emerging economies such
as China and Brazil, as well as solid internal economic activity. During
the first quarter of 2008, the index of the Mexican Stock Exchange increased by
4.7%, mainly due to the solid financial results demonstrated by several
companies listed on the Mexican Stock Exchange. There can
be no assurance that the market price of our securities will not be adversely
affected by future events elsewhere in the world, particularly in other emerging
market countries.




Risk
Factors Relating to Regulations in Mexico to which our Business is
Subject




Mexican Antitrust
Law 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.  The implementation of
such amendments or changes in interpretation or enforcement of existing laws and
regulations or any other future laws or regulations could materially and
adversely affect our operations and revenue.


10
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In September 2007, the Mexican
Congress approved a new federal tax applicable to all Mexican corporations
(which will be applicable to us), known as the single rate business tax (Impuesto Empresarial a Tasa
Única), or IETU, which is a form of an alternative minimum tax and
replaces the asset tax that previously applied to corporations and other
taxpayers in Mexico.




The IETU is a tax that will be
imposed at the rate of 16.5% for calendar year 2008, 17.0% for calendar year
2009 and 17.5% for calendar year 2010 and thereafter.  A Mexican
corporation is required to pay the IETU if, as a result of the calculation of
the IETU, the amount payable under the IETU exceeds the income tax payable by
the corporation under the Mexican Income Tax Law (Ley del Impuesto Sobre la
Renta).  In general terms, the IETU is determined by applying
the rates specified above to the amount resulting from deducting from a
company’s taxable income, among other items, goods acquired (consisting of raw
materials and capital investments), services provided by independent contractors
and lease payments required for the performance of the activities taxable under
the IETU.  Salaries, royalty payments made to related parties and
interest payments arising from financing transactions are not deductible for
purposes of determining the IETU.  However, salaries subject to income
tax and social security contributions paid to employees are creditable for
purposes of determining the IETU.  The legislation became effective in
January 2008.  We have currently initiated an injunction through a
constitutional appeal, or “amparo” proceeding, against the IETU.  We
cannot assure you that such proceeding will be in our favor, thus potentially
increasing our tax liabilities. Although we cannot currently predict the impact
of this legislation or quantify its effect on our tax liability for future
years, this change in the tax regime could materially increase our tax
liabilities and cash tax payments, including by limiting our ability to make use
of tax loss carry forwards, which could adversely affect our results of
operations and financial condition.




Our Ability to
Increase the Prices of Some Products is Regulated by the Mexican
Government.  Our historical operating performance has been
significantly affected by price controls imposed by the Mexican government in
the pharmaceutical sector.  Prices of pharmaceuticals continue to be
subject to approval by the Mexican government.  As a result, neither
our suppliers nor we may 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 they do,
that our ability to increase prices will continue, or that these increases will
result in an improvement in 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 that we
distribute, the prescription drugs and over-the-counter drugs that 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 on prescription drugs and
over-the-counter drugs from 0% to 15%.  Although that bill was not
passed by the Mexican Congress, the current Government may file similar
proposals.  If prescription drugs and over-the-counter drugs become
subject to a value-added tax in excess of the currently applicable 0% rate, the
prices paid by consumers for prescription drugs and over-the-counter 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 have an adverse effect on consumer demand for these products and
result in a decrease in related revenues.  To the extent that any of
these price increases adversely impact revenues related to prescription drugs
and over-the-counter 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.B. de C.V. is a
sociedad anónimabursátilde 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 be
indefinite.  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.  Their telephone number is (302)
738-6680.




11
 Table of Contents




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, and other products.  The majority
of these products are distributed by us on a non-exclusive
basis.  With 115 years of experience, we serve the majority of
Mexico’s pharmacies, mass merchandisers, retail and convenience stores,
supermarkets and other specialized channels.




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 these Ordinary Shares were
acquired from Xtra Inmuebles by our controlling shareholder.




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.B. de C.V.  For a description of our financial
restructuring and the subsequent refinancing of our restructured debt, 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 debt 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 our short-term loan facilities in their entirety to end
the year with a net debt of Ps. -536 million.  During 2005, we did not
incur in any additional debt, so that our net debt figure by year-end amounted
to Ps. -771 million.  In 2006, our cost-bearing liabilities were Ps.
17 million and our net debt figure by year-end amounted to Ps. -622
million.  By the end of 2007, we had no cost-bearing liabilities and
our net debt by year-end was Ps. -684 million. See “Item 5.  Operating
and Financial Review and Prospects—Indebtedness” and Note 8 to our audited,
consolidated financial statements.




Our consolidated net sales for the
year ended on December 31, 2007 totaled Ps. 25,259 million, 99% of which were
made in Mexico.  At the end of 2007, our total assets were Ps. 12,039
million and we had 21 distribution centers in Mexico.




Our operations are currently
organized into four operative business divisions:  the Private
Pharmaceutical Products business division, which we refer to as “Private Pharma”
(84.2% of our total net sales in 2007); the Government Pharmaceutical business
division, which we refer to as “Government Pharma” (3.1% of our total net sales
in 2007); the Health, Beauty Aids, Consumer Goods, General Merchandise and Other
Products business division,  which we refer to as the “HBCG/Other
Products” business division (9.0% of our total net sales in 2007); and the
Publications business division (3.7% of our consolidated net sales in
2007).




Recent Developments




During 2008 we entered into new
businesses and expanded our operations overseas.  In May 2008, and as
part of our growth strategy, Grupo Casa Saba expanded into the Brazilian market.
We acquired 100% of the shares of Drogasmil Medicamentos e Perfumeria,
S.A,or Drogasmil, for a transaction price of approximately $185 million
Brazilian reals. We financed a portion of the acquisition by obtaining a
long-term ban for Ps. 640 million from a Mexican financial institution.
Currently, Drogasmil operates pharmacies in the states of Rio de Janeiro, Sao
Paulo and Paraná. In 2007, Drogasmil had sales of $270 million reals, which
represents approximately 7% of our total 2007 net sales.




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 Table of Contents


In addition, in April of 2008, we
continued to open new lines of business, through the acquisition of 50.1% of
Controladora de Clínicas
Ambulatorias y de Rehabilitación, S.A. de C.V., a company which consists
of two full-service clinics specializing in Orthopedics, Trauma, Sports
Medicine, Nutrition, Otorhinolaryngology and Plastic Surgery for short-stay
patients.  Each clinic is staffed with highly-trained, specialized
personnel that conduct out-patient surgeries and provide rehabilitative
therapy.  Both clinics are located in Mexico City.  Over the
course of the next several years, the Group is planning to invest in order to
open new clinics and to increase the number of specialized medical services
offered by such clinics.  With this acquisition, we are seeking to
diversify and increase our participation in the health sector.




Organizational Structure




Grupo Casa Saba is a holding company
that has an ownership interest in the subsidiaries through which we
operate.  Grupo Casa Saba and all of our significant subsidiaries
listed below are organized under the laws of Mexico, except where otherwise
indicated.




The following table sets forth our
significant subsidiaries and our direct or indirect percentage equity ownership
in such subsidiaries as of May 31, 2008:




Economic
      Interest
              (Direct or indirect)
      (2)Name of Subsidiary(1)
            
            2006
            2007Casa
      Saba, S.A de C.V.(3)
            (Casa
      Saba)
            99.9%
            99.9%Distribuidora
      Casa Saba, S.A. de C.V. (4)
            (Dicasa)
            99.9%
            99.9%Publicaciones
      Citem, S.A. de C.V.  (5)
            (Citem)
            99.9%
            99.9%Transportes
      Marproa, S.A. de C.V. (6)
            (Marproa)
            99.9%
            99.9%Farmacias
      ABC de México, S.A. de C.V. (7)
            (Farmacias
      ABC)
            
            99.9%Centennial,
      S.A. de C.V. (8)
            (Centennial)
            99.9%
            99.9%Distribuidora
      Solis Garza, S.A. de C.V. (currently known asDaltem
      Provee Norte, S.A. de C.V.) (9)
            (Distribuidora
      Solis)
            99.9%
            99.9%Drogueros,
      S.A. de C.V. (10)
            (Drogueros)
            99.9%
            99.9%Farmacias
      Solis Hospitalarias y Oncologicas, S.A. de C.V.(currently
      known as Farmacias Provee de Especialidades, S.A. de C.V)
    (11)
            (Farmacias
      Solis)
            99.9%
            99.9%Grupo
      Mexatar, S.A. de C.V. (12)
            (Mexatar)
            99.9%
            99.9%Inmuebles
      Visosil, S.A. de C.V. (13)
            (Visosil)
            99.9%
            99.9%Servicios
      Corporativos Saba, S.A. de  C.V. (14)
            (Servicios
      Corporativos Saba)
            99.9%
            99.9%Other
      companies (real estate and service companies) (15)
            
            99.9%
            99.9%Drogasmil
      Medicamentos e Perfumeria S.A. (16)
            (Drogasmil)
            -
            -Controladora
      de Clínicas Ambulatorias y de Rehabilitación, S.A.
              De
      C.V. (17)
            (Sports
      Clinic)
            -
            -


__________________


(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)  Direct
subsidiary that provides logistical and transportation services to Casa Saba,
S.A de C.V.




(5)  Direct
subsidiary through which we distribute publications.




(6) 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 our
distribution centers throughout Mexico.  Marproa also provides freight
services to third parties at market rates.




(7)  Direct
subsidiary through which we sell pharmaceutical products.




(8)  Indirect
subsidiary through which we distribute general merchandise and other
products.




(9)  Indirect
subsidiary through which we distribute pharmaceutical products to private and
government clients.




(10)
Indirect subsidiary through which we distribute pharmaceutical products to
private and government clients.






13
 Table of Contents


(11)  Indirect
subsidiary through which we sell pharmaceutical products.




(12)  Indirect
subsidiary through which we own Drogasmil Medicamentos e Perfumeria,
S.A.




(13)
Indirect subsidiary through which we lease real estate 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., an indirect subsidiary of Grupo
Casa Saba.




(14)  Indirect
subsidiary that provides administrative, legal, accounting, tax planning,
financial counseling and other professional services to Casa Saba, S.A de
C.V.




(15)  Real
estate and Service companies.




(16) This
entity was acquired in May of 2008; it is an entity organized under Brazilian
laws. See “Item 4.  Information on the Company – Recent
Developments”




(17) This
entity, of which we own 50.1% of the shares, was acquired in April of 2008.
See “Item 4.  Information on the Company – Recent
Developments”







Capital Expenditures




The table below sets forth our
capital expenditures, investments and acquisitions for the years ended
December 31, 2005, 2006 and 2007.  Our capital expenditure
program is focused on new investments in vehicles for our distribution fleet,
information technology and computer equipment.  For a discussion of
how we funded our capital expenditures, investments and acquisitions in 2007, 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
      31,2005
            
            
            2006
            
            
            2007(Millions
      of constant Pesos as of December 31, 2007)Distribution
      fleet
            
            Ps.49.5
            
            
            Ps.48.1
            
            
            Ps.
      38.9Technology
      and computer
              equipment
            
            
            41.0
            
            
            
            83.8
            
            
            
            41.2Acquisitions
            
            
            4.4
            
            
            
            0.0
            
            
            
            0.0Other
      general capital
              expenditures
            
            
            0.4
            
            
            
            34.1
            
            
            
            39.8Total
      capital expenditures
            
            Ps.95.3
            
            
            Ps.166.1
            
            
            Ps.
      119.9





In addition to the capital
expenditures described in the table above, we incurred work-in-process related
expenditures of approximately Ps. 44 million, primarily related to the
construction of our new distribution center in Hermosillo, Sonora, as well as
improvements to other storage facilities. In 2008,
we expect that our main capital expenditures will be related to IT investments
and developments as well as the renewal of our distribution fleet.




By the end of 2007, we completed the
implementation stage of two major IT projects with IBM and SAP focused on
increasing our existing competitive advantages and improving the efficiency of
our execution processes.  These projects included the installation of
the first two modules of SAP’s supply chain management tool as well the
installation of a state-of-the-art back up and disaster recuperation
system.  In addition, we unified various database drivers into IBM’s
DB2 platform, which we believe will help us simplify our operative
processes.




As in prior years, we expect to fund
the capital expenditures listed above with a combination of internally-generated
funds and bank loans.  In the event that we require additional funds,
we may access our short-term revolving credit facilities.




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 and other products.  We distribute the majority of
these products on a non-exclusive basis.  With 115 years of
experience, we supply the majority of Mexico’s pharmacies, mass merchandisers,
retail and convenience stores, supermarkets and other specialized channels
nationwide.


14
 Table of Contents




We currently distribute over 15,000
different products, including approximately:




●
            4,800
      pharmaceutical products;




●
            5,000
      health and beauty products;




●
            700
      general merchandise and other products, such as food and toiletries;
      and




●
            4,700
      publications.




We distribute these products
throughout Mexico through our nationwide distribution network to clients in the
following segments:




●
            more
      than 13,900
      pharmacies owned by private
individuals;




●
            approximately
      5,700
      privately-owned pharmacy chains and over 470
      government pharmacies;




●
            approximately
      2,250regional and national
  supermarkets;




●
            approximately
      250 racks and 200 nationwide
agents;




●
            over 70
      department stores; and




●
            approximately
      450 major wholesalers and more than 3,500 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 31,2005
            
            
            
            2006
            
            
            
            2007Private
      Pharmaceuticals(1)
            
            
            82.9%
            
            
            
            83.8%
            
            
            
            84.2%Government
      Pharmaceuticals
            
            
            3.7%
            
            
            
            3.5%
            
            
            
            3.1%HBCG/Other
      Products
            
            
            9.8%
            
            
            
            9.1%
            
            
            
            9.0%Publications
            
            
            3.6%
            
            
            
            3.7%
            
            
            
            3.7%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 product 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.




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.  By distributing pharmaceutical products, our role is generally
not that of a “demand creator”, given that we do not advertise products, nor do
we 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.




15
 Table of Contents


As of December 31, 2007, we
distributed products to our clients nationwide through a distribution network
consisting of 21 active distribution centers.  Grupo Casa Saba’s
warehouses have more than 100,000 square meters of warehouse
space.  Using a fleet of over 900 vans, trucks and cars, we filled
more than 5 million orders in 2007, 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
      continuous contact with clients and suppliers to enhance the supply chains
      in which we participate;




●
            Implementing
      IT solutions that will increase our operational
  efficiency;




●
            Analyzing
      the efficiency of our existing distribution centers in order to reduce
      operating expenses;




●
            Offering
      our clients both value-added and internet solutions for facilitating
      commercial decisions and promoting higher
sales;




●
            Providing
      training to our sales and operative forces so that they can respond more
      rapidly and effectively to our clients
needs;




●
            Strengtheningexisting business
      strategies;




●
            Continuing
      to focus on internal savings and operating efficiencies programs that will
      maximize our operations’
profitability;




●
            Entering
      new businesses; and




●
            Capitalizing
      on our favorable capital structure.




As a result of these measures, as of
December 31, 2007, we:




●
            Had
      commercial operations with almost all of the clients and suppliers of the
      private pharmaceutical market in
Mexico;




●
            Implemented
      state-of-the-art technology, including new back-up and disaster
      recuperation systems, as well as the first two modules of SAP, which we
      believe will enable us to ensure the security of our order processing
      system and improve our purchasing and inventory management
      practices;




●
            Began
      construction on a new distribution center with advanced technology that we
      believe will enable us to offer a better level of service to our clients
      at a lower cost;




●
            Offer
      value-added services to our clients such as targeted publications, special
      discount programs and an electronic procurement portal that helps
      facilitate purchasing for our
clients;


16
 Table of Contents




●
              Invested
      in extensive employee training programs aimed at  improving the
      quality of service that we offer to both our clients and our
      suppliers;


●
            Opened
      five new points-of-sale within the Farmacias Provee de Especialidades,
      S.A. de C.V. network (f/k/a “Farmacias
Solís”);




●
            Expanded
      the number of Teavana tea lounges and stores in the metropolitan area of
      Mexico City under our exclusive franchise arrangement with this
      company;




●
            Acquired
      “Farmacias ABC” and “Repartos a Domicilio,” both of which sell
      pharmaceutical products and are based in Guadalajara,
    Jalisco;




●
            Maintained
      a sound financial structure, which enabled us to close out the year with a
      solid cash balance of Ps. 684
million;




●
            Reviewed
      and, in some cases, changed the commercial terms of several of our clients
      and suppliers and, when required, discontinued unprofitable operations;
      and




●
            Continued
      operating under cost savings
schemes.




Maintaining
Continuous Contact with Clients and Suppliers




We are well aware that continuous
contact with our clients and a solid knowledge of the markets in which we
operate is key to finding new ways to increase our sales and further develop our
core pharmaceutical business.  Therefore, during 2007, we continued to
focus our efforts on working closely with our clients and suppliers in order to
identify their specific needs and customize our services to meet their
requirements.  All of these efforts were accomplished under our
minimum profitability parameters.  In terms of our suppliers, we
worked closely with them to determine the market’s needs and to create
innovative commercial schemes.




Implementing
IT solutions that will increase our operational efficiency




At Grupo Casa Saba we manage over
15,000 products, which requires a high level of efficiency and systematization
in terms of order fulfillment and delivery.  To assure the optimal
operation of its infrastructure, Grupo Casa Saba continuously renews its
distribution fleet and invests in upgrading and the modernization of its
logistics and information systems.




In March 2006, Grupo Casa Saba
signed an alliance with IBM and SAP to upgrade its technology systems, thereby
increasing its competitive advantages 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.




By the end of 2007, we completed the
implementation of these projects in a timely manner, including the installation
of systems containing the latest in back-up procedures and disaster
recuperation, the unification of various database drivers into IBM’s DB2
platform and, finally, the implementation of the first two modules of SAP’s
supply chain management tool.




With this investment in technology,
Grupo Casa Saba has obtained a system with state-of-the-art technology that is
flexible, tolerant to failures and that includes up-to-date back-up procedures
and disaster recovery.  We consider that these features will aid us by
ensuring the continuous processing of client transactions nationwide, help us to
improve purchasing and streamline inventory management procedures.




Analyzing
the Efficiency of our Existing Distribution Centers in order to Reduce Operating
Expenses




As part of our 2006 strategy, we
began analyzing the geographic location and efficiency of our existing
distribution center in order to identify facilities that were not operating at
maximum efficiency levels  As a result of this evaluation, we
determined that a new, more efficient distribution center in Hermosillo, Sonora
will better enable us to meet our regional distribution
needs.  Therefore, in 2007, we began construction on a new facility
that will eventually replace the old installations.  The new center
will have a larger storage capacity and semi-automatic product sorting
capabilities, which will enable us to service the surrounding area more
efficiently. We expect the facility to be operational in the second half of
2008.




17
 Table of Contents


Offering
our Clients Value-Added and Internet Solutions to Facilitate Commercial
Decision-Making and Promoting Higher Sales




In an increasingly competitive
business environment, service is key.  Therefore, we do our best to go
one step further to provide value added services to our clients.




In 2007, 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.comare
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 on-line.  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.comis a
value-added service that provides our clients with a faster, more convenient way
to link their demand to our inventory, given that they can 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 that doing so will allow us to provide a value-added
service that complements our existing business.




In addition, we offer a series of
value-added services that are intended to help promote sales within the
pharmacy.  For example, we offer to assist our clients with the design
and restructuring of their layouts in order to promote higher
sales.  We also send out a monthly in-house publication known as
“Farmaservicios”, primarily to our independent pharmacy clients.  This
publication contains timely and targeted information of interest for pharmacy
owners, managers and sales staff members as well as a section with
health-related tips that they can use in answering customer
inquiries.  Finally, during 2007, we offered several savings programs
that guaranteed low prices on leading items.




Providing
Training to our Sales and Operative Forces so that they can Respond More Rapidly
and Effectively to our Clients’ Needs




In an effort to improve our client
response time and our overall effectiveness in handling client requests, in
2007, we carried out an extensive employee training program.  The
majority of training recipients were sales and operative staff members and the
training consisted of video workshops, in-house and distance learning (virtual)
courses and certification processes.  These employees were selected to
receive training as they are largely responsible for interacting with our
clients and, hence, our front line when it comes to client service.




Strengthening
Existing Business Strategies




In 2006, we began distributing
vaccines, primarily to private physicians and private clinics in Mexico
City.  Due to an increase in the sales of our vaccine division, we
determined that there was a need to build two new storage facilities, specific
to this business area.  One of these units is located in Monterrey,
Nuevo Leon while the other is in Chihuahua, Chihuahua.




As part of our business strategy from
2006, we acquired “Distribuidora Solis,” a specialized pharmaceutical products
distributor located in northern Mexico.  At the time, this company
also had a pharmacy chain consisting of 8 pharmacies.  During 2007, we
continued to develop this division by opening five new points-of-sale, which
contributed to an increase in our overall sales of specialized pharmaceutical
products.




In the second half of 2006, we
entered into an agreement with a tea shop and tea lounge franchise named Teavana, which grants us the
exclusive rights for opening Teavana tea lounges and
stores in Mexico.  In 2007, we obtained all of the necessary legal
permits to move forward with the expansion of this franchise’s
operations.  As of May 2008, we have opened four new stores in key
areas within Mexico City.  In 2008, we expect to continue to position
the brand as well as promote the tea lounge concept among Mexican
consumers.


18
 Table of Contents


Developing
Internal Savings and Operating Efficiencies Programs to Maximize our Operations’
Profitability
  During 2007, we continued
implementing our profitability-focused strategy, which involved the ongoing
review and negotiation of commercial terms with our suppliers and clients to
obtain better profitability levels, even if, upon occasion, this resulted in our
company deciding not to make certain sales that did not meet our minimum profitability
parameters.  Likewise, diverse efficiency and continuous cost-savings
programs were successfully implemented, such as ongoing reengineering of routes
and the optimization of distribution centers, among others.




New
Businesses




During the fourth quarter of 2007 we
acquired “Farmacias ABC,” a company based in Guadalajara with operations in the
state of Jalisco.  The purchase price was approximately $69.9 million
pesos. This company also had a home delivery division known as “Repartos a
Domicilio”.




We have also begun operations in new
regions in which our management believes there can be a potential for attractive
growth and high profitability results.  In May 2008, Grupo Casa Saba
acquired Drogasmil, a Brazilian pharmacy chain that currently operates in the
states of Sao Paulo, Rio de Janeiro and Paraná.  As a result of this
acquisition, the Group now has operations in South America.




In addition, in April of 2008, we
continued to open new lines of business, through the acquisition of 50.1% of
Controladora de Clínicas Ambulatorias y de Rehabilitación, S.A. de C.V., a
company which consists of two full-service clinics specializing in Orthopedics,
Trauma, Sports Medicine, Nutrition, Otorhinolaryngology and Plastic Surgery for
short-stay patients.  With this acquisition, we are seeking to
diversify and increase our participation in the health sector.




Capitalizing
on our Favorable Capital Structure




Our healthy financial structure,
which had been absolutely free of any cost-bearing liabilities since 2004 up to
May of 2008 (when we acquired Drogasmil), and a growing cash flow generation,
has enabled us to access market opportunities, improve our profitability levels
and enhance the flexibility of our operations. Our capital structure has also
allowed us to pay out a cash dividend during 2007 and for the fifth consecutive
year.




As a result of the acquisition of
Drogasmil in Brazil, we acquired long-term liabilities in the amount of Ps.640
million. See “Item 4. Information on the Company—Recent Developments”.
Nonetheless, we intend to maintain a solid 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 14  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,
2007.




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 drugs that may be sold only in licensed pharmacies and
“over-the-counter” pharmaceutical products that may be sold without a
prescription in licensed pharmacies.  For the 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.




19
 Table of Contents


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:




Year Ended December
      31,(1)2005
            
            
            2006
            
            
            2007Sales in millions(2)
            
            
            US$9,009.7
            
            
            
            US$9,582.8
            
            
            
            U.S.$10,283.5Sales in millions of units(3)
            
            
            992.9
            
            
            
            983.6
            
            
            
            986.5Average unit price(3)
            
            
            US$9.07
            
            
            
            US$9.74
            
            
            
            US$10.42Growth in average unit
      price
            
            
            14.2
            %
            
            
            7.4
            %
            
            
            6.9
            %


____________________


(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 was responsible for determining 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, in
conjunction 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.  In 2003, the average price per unit increased 2.6% “in
dollar terms” as compared to 2002, affected by the 5.7% devaluation of the Peso
and the low GDP growth rate of 1.3% 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 as compared to the U.S. Dollar as well as the 3.2%
decrease in the number of units sold in the market.  During 2005, the
increase of 14.2% in average unit price resulted from price increases in peso
terms and the 4.7% appreciation of the peso against the U.S.
Dollar.  In 2006, the average unit price increased by 7.4%, while the
total number of units sold decreased by 0.9%.  In 2007, the average
unit price increased 6.9% in dollar terms, primarily as a result of price
increases and new product launches.




20
 Table of Contents


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.”




Private
Sector Pharmaceutical Distribution (Private Pharma)




Our private sector customers consist
primarily of over 13,900privately owned pharmacies, as well as national and regional
pharmaceutical and supermarket chains (comprising approximately 7,950
stores) and the pharmacies associated with private hospitals.  We were
the first nationwide wholesale pharmaceutical distributor 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 customer
coverage 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 2005, 2006 and 2007, Grupo Casa Saba and Nadro, Mexico’s only
other nationwide pharmaceutical distributor, together accounted for more than
54% of prescription and over-the-counter drug sales throughout the 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 whereby 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 our 115 years of
experience, we have developed a highly-sophisticated transportation and
inventory logistics system, 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 improving 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 purchase at prices that are substantially lower than those paid by private
entities.  Our sales to IMSS, ISSSTE, State Health Institutions, and
PEMEX are not in bulk and, therefore, are not offered 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 conducted with the laboratories for each specific
product.




The government institutions that
purchase products from us include:




●
            ISSSTE
      – TheInstituto de
      Seguridad y Servicios Sociales para los Trabajadores del Estado,
      the health and social security institution for Mexican federal government
      employees;




●
            PEMEX
      – The hospitals and pharmacies operated byPetróleos Mexicanos,
      the Mexican national oil company.  In 2003, sales in our
      Government Pharma Division decreased 29.2% with respect to 2002, mainly as
      a result of having a lower participation level in terms of our contracts
      with PEMEX.  Our lower participation in this sector is due to
      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 contribution of
      this division to the Group’s total net sales reached 3.0%.  This
      trend continued during 2005, in that the annual sales for the division
      grew considerably, by 27.8%, as compared to the previous
      year.  During 2006, the annual sales for our government pharma
      division decreased by 3.95 %, as a result of modifications made to PEMEX’s
      pharmaceutical products purchase scheme that made it less attractive for
      us to enter the bidding process. In 2007, our annual government pharma
      sales decreased by 7.7%, in part, due to an increase in theparticipation
      of  interchangeable generics in the government bidding
      process.  We cannot assure that we will participate in future
      PEMEX auction processes or that we will be awarded contracts with PEMEX
      similar to those we have had in previous
  years;




21
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●
            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 – The hospitals, clinics and pharmacies of each of the
      States of Mexico.  The government employees of the States of
      Mexico have the right to go to these institutions for their healthcare
      needs.




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 customer services 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 can place and track their orders and
shipments on-line.  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.  www.farmaservicios.com also
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 broke out the
divisions of General Merchandise and Other Products and Office
Products.  In 2004, however, 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 Group’s sales, which together
accounted for less than 1% of the Group’s total net sales.




We distribute health and beauty aids
(HBA), various consumer 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 and consumer goods, some of which are distributed on an exclusive
basis, such as:




●
            Mexana
      talcum powders from Schering Plough (since
  1999);




●
            Coppertone
      suntan lotions (since 1999);




●
            Brunswick
      Sea Food products (since 1994);


22
 Table of Contents




●
            Lander
      lotions (since 2003);




●
            Toblerone
      chocolates (since 2001);




●
            Alo
      coffee (since 2005);




●
            Lipovitan
      energizing beverage (since 2002);




●
            The
      Sensual Tea (since 2004);




●
            Pringles
      potato chips (since 2005); and




●
            Mustela
      products (since 2007).




During 2007, we stopped distributing
Canderel and Planet Pop products and we incorporated several additional brands
into our product catalog, including Mustela, Costalitos trash bags, Wrigley’s
gum and Metco natural sweetner.




As of the first quarter of 2008, we
reinitiated the distribution of Plante Pop items and stopped distributing
Pringles potato chips, Café Alo and the Toblerone line of chocolate
products.  All three of these product lines were managed under an
exclusive distribution agreement.




At times, 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
always seeking suppliers with whom we can enter into distribution agreements to
distribute HBA, other consumer products, general merchandise and other products,
so long as they provide acceptable margins.  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, consumer demand for our
products in this division could increase.




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 that we distribute consist
primarily of packaged and canned foods, candies, chocolates and freezer
products.  The other products that we distribute consist of
over-the-counter products, household cleansers and toiletries.  The
general merchandise and other products that we distribute are mostly products
sold on an exclusive basis in specified geographic 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.  We acquired Mexatar in December
1998.  As part of our business strategy, the distribution of
electronic products would continue only until our existing inventory of such
products lasts.  Currently, we no longer have these products in stock
and, therefore, have discontinued their distribution.  There can be no
assurance that we will enter into a distribution agreement with Casio or any
other supplier of similar products or, if we do, that the terms will be
favorable for us.


23
 Table of Contents


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
one of 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 2005, 2006, nor 2007.  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 approximately
200 nationwide agents and four 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
hotel magazine stores.  In addition, Citem offers one of the most
efficient forces of rack-jobbers, or shelf-keeping merchandisers, to the VIPS
and Portón restaurant chains.  These merchandisers keep the shelves of
more than 250 stores across Mexico, all of which duly
organized.  Citem also distributes products to 15 export clients,
consisting mainly of magazine wholesalers in North, Central and South
America.




Revenues from publication sales to
export clients in the United States, Central America, South America and the
Caribbean accounted for approximately 68%, 5%, 17% and 10% of our total
publication export sales in 2003, respectively.  By the end of 2004,
publication 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,
publication exports 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 2006,
publication exports to the United States accounted for 43.3% of our annual
publication export sales while Central America, South America and the Caribbean
accounted together for 56.8%.  As of December 31, 2007, 59% of Citem’s
export sales went to the United States while 28% were distributed in South
America.  Citem’s export sales to Central America were 9% and the
Caribbean received the remaining 3%.




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 product
catalog, client base, personnel and distribution units and methods, among other
changes.  As a result, several magazines and books were eliminated
from its supplier base, causing 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;
Citem’s sales increased 11.6%.  This increase was a result of Citem’s
new client and products, in that the inclusion of new titles improved the
division’s sales and operating results.  During 2004, due to
above-mentioned restructuring, 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 7.8% as a result of a solid
market positioning, penetration into new markets, a substantial editor base and
the inclusion of new titles.  During 2006, Citem’s sales grew 5.3%
based on higher sales of political and sports magazines.  Annual
publications sales for the year 2007 rose 2.8%, primarily as a result of the
addition of new entertainment and fashion magazines.




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 margins.  We cannot assure you that we will
enter into distribution agreements to distribute any or all of these products at
acceptable margins.




24
 Table of Contents


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.




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 handled by Mexican customs near the U.S. border, and
are typically made directly from the supplier to a Mexican customs
agent.  Once the customs agent completes the importation procedure,
the products are then sent to our distribution center via 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 distribution
centers.




Maintaining good relationships with
our suppliers and publishers is important to our competitive success because of
the tight inventory policies that are common in the Mexican pharmaceutical
industry.  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 160 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-Aventis, Pfizer, Roche, Bayer,
Glaxosmithkline and Novartis are among our major suppliers.




Health,
Beauty, Consumer Goods, General Merchandise and Other Products




We purchase health, beauty and
consumer goods from more than 150 suppliers located primarily in Mexico
City.  We purchased our catalog of over 700 general merchandise and
other products from a wide range of suppliers including, Coppertone, Toblerone,
Brunswick and Pringles.  In some cases, we negotiate directly with our
suppliers in other countries and directly import the products through a customs
agent.  Imported products are delivered to our warehouses by the
customs agent after complying with all the legal requirements, which in some
cases depends on the type of product.  In the past, 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 determined that we would
distribute keyboards and some electronics products, such as watches, only until
we exhausted our existing inventory.  Currently, we no longer have
these items in stock and, therefore, we are no longer distributing these
products.  There can be no assurance that we will enter into a
different distribution agreement with Casio or any other supplier, or that, if
we do, that it will be under favorable terms for us.




25
 Table of Contents


Publications
  Our Publications business
division distributes, through Citem, magazines, books, albums and stickers from
leading licensors and publishers in the market.  Nearly all of the
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 280
publishers.  In 2006, Citem continued operating with a solid editorial
base consisting of more than 240 publishers that allowed the company to sell
more than 4,800 publications.  For the year 2007, Citem worked with
more than 250 publishers and distributed more than 4,700 of their
publications.  Currently, Citem is distributing only publications
(magazine and books titles) that meet the Group’s minimum profit
requirement.  Purchases are made through our centralized
administration.  As a result of this profitability strategy, certain
titles were incorporated into or eliminated from Citem’s product
catalog.




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 2005, 2006 and 2007, 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, which if included
would increase that percentage).  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 pharmacy chains.  We believe that our distribution services are
superior to those of the regional distributors due to the speed with which we
distribute our products, as well as the quality, product catalog and value-added
services that 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 in this division just 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 that we face in our pharmaceutical products
distribution business unit.  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 and product-specialized wholesalers that
distribute to convenience stores, independent grocery stores and “mom and pop”
stores.  In terms of the lines that we distribute exclusively, we face
no competition from other wholesalers.




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.


26
 Table of Contents




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 some cases we extend 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 increases slightly.  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 68 days in 2005, 68 days in 2006 and 68 days in
2007.




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 conjunction
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.




The following chart sets forth the
average contracted maturity of accounts receivable due from various market
sectors.




Credit
      terms
            DaysPharmacies
            39Supermarkets
      and local wholesalers
            35Government
            45Publications
      to wholesalers
            45Publications
      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 information technology 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 is updating its IT
platform, thereby increasing its competitiveness as well as the efficiency of
its execution processes.  Grupo Casa Saba considers that the
state-of-the-art technology systems that it is developing jointly with IBM and
SAP will allow the Company to offer the best product distribution to its clients
and suppliers nationwide.




By the end of 2007, the Group had
completed the implementation of these projects which included the installation
of systems containing the latest in back-up procedures and disaster
recuperation, the unification of various database drivers into IBM’s DB2
platform and, finally, the implementation of the first two modules of SAP’s
supply chain management tool.




With this investment in technology,
Grupo Casa Saba has obtained a system with state-of-the-art technology that is
flexible, tolerant to failures and that includes the latest in back-up
procedures and disaster recovery.  We consider that all of these
features will ensure the continuous processing of client transactions
nationwide, help us to improve purchasing and streamline inventory management
procedures.


27
 Table of Contents




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 order
system, install individual workstations in a greater number of locations, and
track customer and supplier orders in the system’s network and ensure 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-based 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 automatically 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 pending
orders.  Additionally, through this system, we can also assist
customers with their own inventory control and business
management.  The www.farmaservicios.pdv
application can operate on a stand-alone PC or in a network environment,
depending on the customer’s particular needs.  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, 2007, we had more than 3,400 registered users, 21% more than we
did at the end of 2006.




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, in some cases,
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, 2007, 6 of our 21 distribution centers had automated pickers.  The
installation of additional automated pickers in our remaining 15 manual pick
distribution centers will depend upon whether or not 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 2007, we continued to update
all of our back-office information systems in order to improve our internal as
well as our administrative reporting processes.




28
 Table of Contents




Software




We license www.farmaservicios.pdv to our
clients for an annual fee.  We also operate with software designed by
third parties with whom 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 that pertain to the executive
branch of the Mexican government, the Mexican Ministry of Health and the Mexican
Ministry of Economy, regulate the pharmaceutical industry.  We are
required to obtain 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/or
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 drugs at a price that is 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.




Property, Plant and
Equipment




As of May 31, 2008, our principal
properties consisted of 21 distribution centers, complete with all of the
equipment necessary to operate these centers, and approximately 28 other
properties, which are not currently in use.  The majority of our fixed
assets is 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, 2008, we have
distribution centers that represent more than 100,000 square meters of warehouse
space.  From these centers, we filled more than 5 million orders in
2007, 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, as of May 31,
2008:




Distribution
      Center 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.
            Peninsular
            Mérida,
      Yucatán13.
            Citem
            Tlalnepantla,
      Mexico14.
            Reynosa
            Reynosa,
      Tamaulipas15.
            Tampico
            Tampico,
      Tamaulipas16.
            Tijuana
            Tijuana,
      Baja California17.
            Tláhuac
            Mexico
      City, Distrito Federal18.
            Tuxtla
            Tuxtla
      Gutiérrez, Chiapas19.
            Vallejo
            Mexico
      City, Distrito Federal20.
            Veracruz
            Veracruz,
      Veracruz21.
            Daltem
      Norte
            Monterrey,
      Nuevo Leon


29
 Table of Contents


In 2007, and as part of our strategy
to optimize our efficiency, we began construction on a new distribution center
in Hermosillo, Sonora that will replace the existing facility.  The
new center will have a larger storage capacity as well as semi-automatic picking
capabilities, thus allowing for more efficient distribution to the surrounding
region.




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 FRS, which differ in some significant respects from U.S.
GAAP.  Note 18 to our audited consolidated financial statements
provides a description of the primary differences between Mexican FRS and U.S.
GAAP, and describes the differences in presentation between the statement of
changes in the financial position under Mexican FRS and the requirements under
U.S. GAAP for a statement of cash


flows.  Note
18 also provides a description of our profit sharing and income tax
obligations.  Note 19 to our audited consolidated financial statements
provides a partial reconciliation to U.S. GAAP for net income and total
stockholders’ equity.




Mexican FRS requires that our
audited consolidated financial statements recognize certain effects of
inflation.  In accordance with Mexican FRS, 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, 2007.




Overview




At Grupo Casa Saba, we are keenly
aware of the important role that we play in the distribution chain, serving as
the link between clients and providers in order to successfully deliver
pharmaceutical and consumer products to the thousands of points-of-sale that we
visit each day. Our goal is to continue working to make our operations more
efficient and we understand that this depends on the support that we receive
from our staff members as well as our shareholders. With this in mind, during
fiscal year 2007, we made great efforts to strengthen our relations with
all of these actors.




In 2007, Grupo Casa Saba carried out
several strategic IT projects, which were focused on increasing our existing
competitive advantages and making us more efficient. One of these projects was
an investment in state-of-the-art systems that included the latest in back-up
procedures and disaster recuperation, both critical in ensuring that the
thousands of transactions that we process every day are transmitted without
interruption. In addition, we unified various database drivers into IBM’s DB2
platform, which will help us simplify our operative processes. By the end of
2007, we completed both of these projects and implemented the first two modules
of SAP’s supply chain management tool, which will enable us to improve
purchasing and streamline inventory management procedures. Together, these
systems will allow us to distribute our products more effectively, to the
benefit of our clients and providers, as well as the millions of Mexican
families that consume the items we deliver.




In terms of our distribution
centers, we made significant investments in the city of Hermosillo, Sonora,
where we are building a new facility.  This center will replace the
one that is currently operating in this city and will have a larger storage
capacity and semi-automatic sorting capabilities.




In an increasingly competitive
business environment, client service is key.  Therefore, we continue
to offer a series of value added services, such as targeted publications and
special savings programs. In addition, all of our clients have access to our
on-line purchasing portal, “farmaservicios.com”, a dynamic tool that facilitates
purchasing.




We believe that providing high
levels of services depends largely on having a well trained and motivated staff.
At Grupo Casa Saba, we recognize that our people are one of our greatest assets
and we are committed to furthering their professional development. Therefore, in
2007, we carried out an extensive training program in order to improve the
quality of the service that we offer to our clients and suppliers.




In terms of our financial results
for the year, our Private Pharma division, which represented 84.20% of our total
sales, grew 3.72% to reach $21,270 million pesos.  In addition, our
total sales rose 3.16%.  Gross income was $2,484 million pesos, which
resulted in a gross margin of 9.83%, 5 basis points less than in
2006.  This was principally due to the consolidation of the
sector.  Nevertheless, our ongoing efforts to reduce costs have
enabled us to successfully confront the challenges presented by the business
environment.


30
 Table of Contents




Despite the sector’s consolidation,
the year ended December 31, 2007 was an extremely gratifying one for us in
the financial markets, our share price rose 54.3% in the Mexican Stock Exchange
and 51.9% on the NYSE.  Also, during 2007 Grupo Casa Saba rewarded its
shareholders with a cash dividend of $170 million pesos, or $.6405 per share, an
amount that was 13.3% higher than the dividend paid last year.




At Grupo Casa Saba, we are committed
to continuing to lead the way in the sector. By investing in technology and
training for our people, we consolidated our position within the sector and,
once again, positioned the Group at the forefront in terms of service and
technology.




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.  Key Information—Risk Factors Relating to Economic and
Political Developments in Mexico.”




Economic
Situation




In 2005, the economy benefited from
sharp increases in oil prices and global economic recovery.  As a
result, the country’s GDP for the year grew by 3.0%, annual inflation reached a
low of 3.3% and the interest rate on 28-day CETES averaged
9.2%.  During 2006, the country’s GDP grew 4.8% mainly as a result of
presidential, congressional and state elections, which enhanced extraordinary
spending and a continued increase in oil prices.  Inflation reached
4.1% and the interest rate on 28-day CETES averaged 7.2%.  During
2007, the economy proved resilient in the face of a downturn in the US
economy.  GDP growth was 3.3%, inflation reached 3.8% and the interest
rate on 28-day CETES averaged 7.2%.




For each of the years ended on
December 31, 2005, 2006 and 2007, 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 that 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 debt and do not expect to incur any U.S.
Dollar-denominated debt 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 debt, 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 2007, 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 depreciated by approximately 1.0% against the U.S.
Dollar.  During the first quarter of 2008, the Peso appreciated by
approximately 2.5% against the U.S. Dollar.  Any future depreciation
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.




As a result of our recent
acquisition in Brazil, we now face currency exchange risk versus the Real, the
official currency of Brazil. As a result of this purchase, we acquired certain
Real- denominated liabilities for which we would be adversely affected in the
event that the Real appreciated against the Peso. Nonetheless, the asset
accounts and future revenues would have the opposite effect under such a
scenario. In the event that the Real depreciates against the Peso, the opposite
would hold true. We do not consider that our Brazilian operations are currently
representative enough to imply a material risk in this respect; however, we
cannot assure you that fluctuations in the Real will not adversely affect our
financial results in the future.


31
 Table of Contents




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 debt 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 affect 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 3.3%, 4.1% and 3.8% for
2005, 2006 and 2007, respectively.  High inflation rates can adversely
affect our business and our results of operations by adversely affecting
consumer purchasing power, thereby adversely lowering the demand for the
products that we distribute.  In addition, to the extent that
inflation exceeds our price increases or to the extent that we do not increase
our prices, high inflation rates can adversely affect our prices and our
revenues by adversely affecting our prices in “real” terms.




Mexico has had, and is expected to
continue to have, high nominal interest rates.  The interest rates on
28-day Mexican government treasury bonds averaged approximately 9.1%, 7.2% and
7.2% for 2005, 2006 and 2007, respectively.  In the first quarter of
2008, the 28-day Mexican CETES averaged 7.4%.  Accordingly, if we need
to incur Peso-denominated debt in the future, it will most likely be at higher
interest rates than in the United States.




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 31,2005
            
            
            
            2006
            
            
            
            2007Total
      Private Pharmaceuticals Market:Real Unit Price
      Increases
            
            
            6.2
            %
            
            
            
            5.2
            %
            
            
            
            3.4
            %Growth in Units
            
            
            2.1
            %
            
            
            
            -0.9
            %
            
            
            
            0.3
            %Grupo
      Casa Saba Private Pharmaceutical Products:Real Unit Price
      Increases
            
            
            7.4
            %
            
            
            
            11.4
            %
            
            
            
            2.8
            %Growth in Units
            
            
            -5.0
            %
            
            
            
            -5.9
            %
            
            
            
            1.5
            %Market
      Share of Grupo Casa Saba(1):
            
            
            24.0
            %
            
            
            
            23.1
            %
            
            
            
            24.7
            %Inflation(2)
            
            
            3.3
            %
            
            
            
            4.1
            %
            
            
            
            3.8
            %


_____________________


(1)  Based
on information from IMS Health, A.G. and Grupo Casa Saba’s own
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 IMS estimate of sales through non-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”.




32
 Table of Contents


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, 2007.




Year
      Ended December 31,2005
            
            
            
            2006
            
            
            
            2007(Millions
      of constant Pesos as of December 31, 2007)Pharmaceuticals:Private
      sector
            
            Ps.19,565.3
            
            
            
            Ps.20,506.3
            
            
            
            Ps.21,269.6%
      Growth
            
            
            2.1
            %
            
            
            
            4.8
            %
            
            
            
            3.7
            %Government
            
            
            880.3
            
            
            
            
            845.5
            
            
            
            
            780.5%
      Growth
            
            
            27.8
            %
            
            
            
            -4.0
            %
            
            
            
            -7.7
            %Health,
      Beauty, Consumer Goods, General Merchandise and Other
    Products
            
            
            2,312.6
            
            
            
            
            2,231.3
            
            
            
            
            2,281.0%
      Growth
            
            
            0.9
            %
            
            
            
            -3.5
            %
            
            
            
            2.2
            %Publications
            
            
            857.8
            
            
            
            
            903.5
            
            
            
            
            928.6%
      Growth
            
            
            7.8
            %
            
            
            
            5.3
            %
            
            
            
            2.8
            %Total
            
            Ps.23,616.0
            
            
            
            Ps.24,486.5
            
            
            
            Ps.
      25,259.7Total % Growth
            
            
            2.9
            %
            
            
            
            3.7
            %
            
            
            
            3.2
            %





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 31,2005
            
            
            
            2006
            
            
            
            2007Pharmaceuticals:Private
            
            
            82.9
            %
            
            
            
            83.8
            %
            
            
            
            84.2
            %Government
            
            
            3.7
            %
            
            
            
            3.5
            %
            
            
            
            3.1
            %Health,
      Beauty, Consumer Goods, General Merchandise and Other
    Products
            
            
            9.8
            %
            
            
            
            9.1
            %
            
            
            
            9.0
            %Publications
            
            
            3.6
            %
            
            
            
            3.7
            %
            
            
            
            3.7
            %100.0
            %
            
            
            
            100.0
            %
            
            
            
            100.0
            %Cost
      of Sales
            
            
            89.7
            %
            
            
            
            90.1
            %
            
            
            
            90.2
            %Gross
      Profit
            
            
            10.3
            %
            
            
            
            9.9
            %
            
            
            
            9.8
            %Operating
      expenses:Selling
expenses
            
            
            2.5
            %
            
            
            
            2.2
            %
            
            
            
            2.4
            %Administrative
      expenses
            
            
            3.7
            %
            
            
            
            3.3
            %
            
            
            
            3.3
            %6.2
            %
            
            
            
            5.5
            %
            
            
            
            5.6
            %Operating
income
            
            
            4.1
            %
            
            
            
            4.3
            %
            
            
            
            4.2
            %Comprehensive
      cost of financing, net
            
            
            0.0
            %
            
            
            
            0.0
            %
            
            
            
            0.1
            %Other
      income
            
            
            (0.2
            %)
            
            
            
            0.2
            %
            
            
            
            0.2
            %Income
      tax and employee profit sharing
            
            
            0.9
            %
            
            
            
            1.0
            %
            
            
            
            0.7
            %Net income
            
            
            3.3
            %
            
            
            
            3.7
            %
            
            
            
            3.6
            %100.0
            %
            
            
            
            100.0
            %
            
            
            
            100.0
            %





For a more detailed description of
each of our divisions, see “Item 4.  Information on the
Company—Operations.”




Results of Operations




In accordance with Mexican FRS, Peso
amounts presented below for 2005, 2006 and 2007 are reflected in constant Pesos
as of December 31, 2007.




33
 Table of Contents






Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006




Total Net
Sales.  Grupo Casa Saba’s total net sales amounted to
Ps. 25,259 million for the year ended December 31, 2007, an increase
of 3.16% as compared to the same period for 2006. This increase was primarily
due to the continued growth of our most important division, Private Pharma,
which increased 3.72%.




Sales by Division:


Net Private
Pharma Sales.  Net sales from our Private Pharma business
division increased 3.72%, to Ps. 21,270 million.  Sales for this
division were primarily driven by the sector’s growth as well as by our
commercial strategies.  Our Private Pharma business division continued
to be Grupo Casa Saba’s most important division, accounting for 84.20% of the
Group’s total net sales, 45 basis points higher than in 2006.




Net Government
Pharma Sales.  Net sales from our Government Pharma business
division decreased 7.69% due, in part, to a higher level of participation of
interchangeable generic medicines in the total value of government tenders
carried out during the year, which resulted in lower sales to PEMEX and other
government entities.  As a result, this division’s sales generated
3.09% of the Group’s total net sales in 2007, slightly lower than the 3.45% that
it registered in 2006.




Net Health,
Beauty, Consumer Goods, General Merchandise and Other Products
Sales.  Net sales from our Health, Beauty, Consumer Goods,
General Merchandise and Other business division increased 2.23% and represented
9.03% of our total net sales in 2007.  This percentage was slightly
lower (8 basis points) than it was during the previous year.




Net Publications
Sales.  Net sales from our Publications business division
increased 2.79% for the year ended December 31, 2007 and accounted for
3.68% of our total net sales for the year ended December 31,
2007.  This sales increase was primarily due to the inclusion of new
magazine titles related to the entertainment and fashion
industries.




Gross
Profit.  Cost of sales for the year ended December 31,
2007 amounted to Ps. 22,775 million, 3.21% higher than the same period in
2006.  As a result of the high level of competition within the sector,
Grupo Casa Saba’s gross margin decreased by 5 basis points, from 9.88% in 2006
to 9.83% in 2007.  The Company’s gross profit totaled Ps. 2,484
million for the year ended December 31, 2007, an increase of 2.65% as
compared to the same period in 2006.




Operating
Expenses.  Grupo Casa Saba continues to exert strict control
over its costs and expenses, which has enabled us to successfully confront the
challenges presented by the business environment.  Operating expenses
amounted to Ps. 1,424 million for the year ended December 31, 2007, an
increase of 4.31% as compared to the year ended December 31,
2006.




Operating
Income.  Operating income for the year ended December 31,
2007 was Ps. 1,059 million, an increase of 0.50% as compared to the year
ended December 31, 2006.  This was due to the pressure that we
confronted, in terms of our commercial margins, in the main markets where we
operate. As a result, the operating margin for the year ended December 31,
2007 was 4.19%, a decline of 11 basis points as compared to the year ended
December 31, 2006.




Comprehensive
Financing Cost, Net.  Pursuant to Mexican FRS, we report four
items within this line item:  interest expense, interest income,
foreign exchange (gain) loss and the (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 determining that money market conditions generated
a favorable cost-benefit tradeoff versus 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.


34
 Table of Contents




Our comprehensive financing cost, net
for the year ended December 31, 2007 was Ps. 18 million, compared to
the income of Ps. 4 million obtained in this line item for the year ended
December 31, 2006.  This was primarily due to the fact that the
Company received less interest income during the year ended December 31,
2007.




Income Taxes,
Asset Tax and Employee’s Statutory Profit Sharing.  Provisions
for taxes and employees’ statutory profit-sharing (Participación de los Trabajadores en
la Utilidad, or “PTU”) for the year ended
December 31, 2007 amounted to Ps. 190
million, an increase of 22%
from Ps. 243 million
for the same period in 2006.  The decrease was mainly the result of
higher provision for income taxes.  Income tax for the year ended
December 31, 2007 was Ps. 370 million, which added to a recovery
of asset tax paid in prior years of Ps. (56) million
and a deferred income tax of Ps. (126) million resulted in provisions
for taxes in an amount of Ps. 188 million compared to
Ps. 238 million for the same period in 2006.  Employee
profit-sharing for the year ended December 31, 2007 decreased to
Ps. 2 million
from Ps. 4 million for the same period in 2006, and deferred employee
profit-sharing did not take place for the year ended December 31,
2007, compared with a gain of Ps. 1 million for the same period
in 2006.




Net
Income.  The Group’s net income for the year ended
December 31, 2007 amounted to Ps. 905 million, a decrease of 1.25% as
compared to the year ended December 31, 2006.  Net profit as a
percentage of sales, or net margin, for the year ended December 31, 2007
was 3.74 %, 16 basis points lower than the 3.58% margin for the same
period in 2006.




Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005




Total Net
Sales.  Net sales increased by 3.7% to Ps. 24,486 million
for the year ended December 31, 2006 as compared to the same period for
2005.  This increase was mainly due to the solid growth of the private
pharmaceutical market in Mexico, the Group’s market presence and operating
performance and increases in sales by our Private Pharma and Publications
business divisions, which was partially offset by decreases in sales by our
Government Pharma and Health, Beauty, Consumer Goods, General Merchandise and
Other Products business divisions.




Sales by Division:




Net Private
Pharma Sales.  Net sales from our Private Pharma business
division increased by 4.8%, from Ps. 19,565 million for the year ended
December 31, 2005 to Ps. 20,506 million for the year ended
December 31, 2006.  Sales were boosted both by the growth in
value terms of the private pharmaceutical market and Grupo Casa Saba’s
competitive positioning in it.




Our Private Pharma division
continued to be the Group’s most important, increasing its percentage of total
net sales from 82.85% for the year ended December 31, 2005 to 83.75% for
the year ended December 31, 2006.




Net Government
Pharma Sales.  Net sales from our Government Pharma business
division decreased by 3.95% compared to Ps. 880 million for the year
ended December 31, 2005, totaling Ps. 845 million for the same
period in 2006.  This decrease resulted primarily from lower sales to
PEMEX, which modified its acquisition scheme for pharmaceutical
products.  As a result of this decrease, net sales in our Government
Pharma business division for the year ended December 31, 2006 represented
3.45% of total net sales, compared to 3.73% for the same period in
2005.  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 Productsbusiness
division decreased by 3.5%, to Ps. 2,231 for the year ended
December 31, 2006 compared to Ps. 2,312 million for the same
period in 2005.  The lower sales in this division reflect the decision
by some of the Group’s clients to no longer acquire these types of products
through Grupo Casa Saba.




As a result of the decrease in sales
posted by this division, its percentage to total net sales decreased from 9.8%
for the year ended December 31, 2005, to 9.11% for the year ended
December 31, 2006.






35
 Table of Contents






Net Publications
Sales.  Net sales in our Publications business division
increased by 5.33% to Ps. 903 million for the year ended
December 31, 2006 from Ps. 857 million for the year ended
December 31, 2005.  The growth was fueled by an increase in the
consumption of sports magazines, albums and posters related with the World
Soccer Championship in Germany and election-year political publications, as well
as a strategy focused on distribution according to type of client.




Consequently, net sales from our
Publications as a percentage of total sales rose, from 3.6% for the year ended
December 31, 2005 to 3.7% for the year ended December 31,
2006.


Gross
Profit.  Cost of sales for the year ended December 31,
2006 amounted to Ps. 22,066 million, an increase of 4.19% over the
year ended December 31, 2005.  Given the competitive market
conditions, greater client discounts were granted, reducing our gross margin by
44 basis points, which went from 10.32% in 2005 to 9.88% in
2006.  Gross profit amounted to Ps. 2,419 million for the
year ended December 31, 2006, down by 0.69% from
Ps. 2,436 million for the same period in 2005.




Operating
Expenses.  Grupo Casa Saba maintained strict cost and expense
controls in 2006, and implemented programs to increase the efficiency of its
warehouses, distribution routes, personnel, and general
operations.  This generated a 7.10% drop in operating expenses, which
amounted to Ps. 1,365 million for the year ended December 31,
2006 from Ps. 1,470 million for the same period in
2005.  Combined with the increase in sales, this lowered the ratio
expenses-to-sales ratio from 6.23% for the year ended December 31, 2005 to
5.58% for the year ended December 31, 2006.




Operating
Income.  Operating income for the year ended December 31,
2006 was Ps. 1,054 million, an increase of 9.06% from Ps. 966
million for the same period in 2005.  The increase was primarily the
result of higher sales and lower operating expenses.  Our operating
margin for the year ended December 31, 2006 was 4.3%, up 21 basis points
from 4.1% for the same period in 2005.




Comprehensive
Cost of Financing, Net.  Our comprehensive
financing cost, net for the year ended December 31, 2006 registered a gain
of Ps. 4 million, due primarily to increased interest income, lower
interest expense and an exchange gain of Ps. 2 million obtained during
the year ended 2006.




Income Taxes,
Asset Tax and Employee’s Statutory Profit Sharing.  Provisions
for taxes and employees’ statutory profit-sharing (Participación de los Trabajadores en
la Utilidad, or “PTU”) for the year ended
December 31, 2006 amounted to Ps. 243 million, an increase of 8.75%
from Ps. 223 million for the same period in 2005.  The
increase was mainly the result of higher provision for income
taxes.  Income tax for the year ended December 31, 2006 was
Ps. 367 million, which added to a recovery of asset tax paid in prior
years of Ps. (61) million and a deferred income tax of
Ps. (67.) million resulted in provisions for taxes in an amount of
Ps. 238 million compared to Ps. 224 million for the same
period in 2005.  Employee profit-sharing for the year ended
December 31, 2006 decreased to Ps. 4 million from
Ps. 5 million for the same period in 2005, and deferred employee
profit-sharing resulted in a cost of approximately Ps. 1 million for
the year ended December 31, 2006 compared with a gain of
Ps. 5 million for the same period in 2005.




Net
Income.  Net income for the year ended December 31, 2006
was Ps. 917 million, an increase of 16.6% from the
Ps. 786 million registered for the year ended December 31,
2005.  Net profit as a percentage of sales, or net margin, for the
year ended December 31, 2006 was 3.7%, 41 basis points higher than the
margin for the same period in 2005.




Aggregate Contractual Obligations




Below is a table containing a
description of Casa Saba’s aggregate contractual obligations as of December 31,
2007.




Tabular
Presentation of Aggregate Contractual Obligations




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)
              
              Ps.
              5,248
              
              
              Ps.
              5,248
              
              
              
              –
              
              
              
              –
              
              
              
              –Operating
      Leases (3)
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –Purchase
      Obligations (4)
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –Other
      Long-Term Liabilities reflected on our Balance Sheet Under Mexican FRS
      (5)
              
              Ps.
              594,046
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              Ps.
              594,046Total
              
              Ps.
              599,294
              
              
              Ps.
              5,248
              
              
              
              –
              
              
              
              –
              
              
              Ps.
              594,046


_______ __________


(1)  Current
Maturities of Long-Term Debt (see Note 8 to our audited consolidated financial
statements).




(2)  Includes
leasing obligations for Information Technology equipment and transport equipment
from Atención Corporativa de México, S.A. de C.V.




(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 Mexican Institute of Public Accountants,
or 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, 2005, 2006 and 2007, the carrying value of financial
instruments shown in the balance sheet approximates their fair value due to
their short-term nature.




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Off- Balance Sheet Agreements
  Grupo Casa Saba 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 liquidity,
capital expenditures or capital resources that are material to
investors.
  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 on an
on-going concern basis.  Our significant accounting policies are
described in Note 3 to our audited consolidated financial
statements.  We believe that 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 customers’ payment performance 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 determine that 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 judgment by our
management.  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 sheet reflects 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 report 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 NCPI to value those assets, as permitted by
Mexican FRS.  We believe this method more accurately presents the fair
value of the assets.




As we discuss in Note 3(g) to our
audited consolidated financial statements, we periodically assess the
recoverability of 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. Mexican FRS contemplates the reversal of the
recognition of impairment.  Property and equipment to be disposed of
are recorded as the lower of the carrying value and the fair market value
thereof, less sale related costs.  Additionally, we review the lives
assigned to these long-lived assets for purposes of depreciation or
amortization, as the case may be, when applicable.  This determination
is subjective and is an integral part of the determination of whether an
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.




At 2006 and 2007 fiscal year end,
the Group’s management determined that there were no impairment indications that
had a significant adverse impact in the carrying value of property and
equipment. Accordingly, fair value of property and equipment was equivalent to
or greater than the carrying value thereof at that date.




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 Mexican FRS
(Bulletin C-15 Impairment of the value of long-lived assets and their related
disposal) 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.


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(d)  
      Intangible assets and goodwill
  Intangible assets refer to costs
incurred and/or rights or privileges acquired that generate future specific
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 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. If there is no observable market for those assets
their value is reduced to the amount of goodwill or to zero. The Group’s
goodwill arises from business combinations through acquiring shares of capital
stock of subsidiary companies at a price above or below 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. 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 (c) above.
Negative goodwill (excess of fair value of the net asset acquired over
acquisition cost thereof) is recorded in income as a non-ordinary gain at the
acquisition date.




At 2006 and 2007 fiscal year end,
the Group completed the fair value based impairment test on its goodwill. As a
result, the Group determined there was no impact of impairment that should be
recorded.




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




The Group recognizes the labor
obligations for retirement pensions and seniority premiums for all their
employees, as well as severance benefits to employees when they complete the
employment relationship prior to retirement age due to causes other than
restructuring. These labor obligations are derived from defined benefit plans.
Retirement pensions are granted to all personnel that have completed at least
ten years of pension service and have reached sixty-five years of age. 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. Severance benefits are granted in the event of dismissal, in accordance
with certain formula referred in plan.




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(j) 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.




In accordance with Mexican FRS,
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.


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 Table of Contents






(f)
            Income
      Tax, Corporate Flat Tax (IETU-Spanish acronym), and employee profit
      sharing




As discussed in Note 12 f) to our
financial statements, the IETU Law went into effect on January 1,
2008.  As a result of the transition, the Company and its subsidiaries
performed a projection based on reasonable assumptions to identify the expected
trend of tax on earnings (income tax or IETU) that will be due in the next three
years, in accordance with the financial reporting standard interpretation IFRS-8
(Note 16 iii to our financial statements).  Accordingly, the Company
and its subsidiaries determined that income tax will be paid normally in future
years. Management restates this estimate periodically.




The deferred income tax effect is
determined by applying the “asset and liability method” in accordance with
Mexican FRS which is virtually identical to U.S. 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 are realized
will be applied.  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.




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 an 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.




(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.




As discussed in Note 12 f) to our
financial statements, the IETU Law went into effect on January 1,
2008.  As a result of the transition, the Company and its subsidiaries
performed a projection based on reasonable assumptions to identify the expected
trend of tax on earnings (income tax or IETU) that will be due in the next three
years, in accordance with the financial reporting standard interpretation IFRS-8
(Note 16 iii to our financial statements).  Accordingly, the Company
and its subsidiaries determined that income tax will be paid normally in future
years. Management restates this estimate periodically.




The deferred income tax effect is
determined by applying the “asset and liability method” in accordance with
Mexican FRS which is virtually identical to U.S. 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 are realized will be applied.  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 tax/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 sharing 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, 2006 and 2007, the Group determined that
there was no valuation allowance to be recognized.


The Group prepares its income tax
return and asset tax return on a consolidated basis.
 
 39
 Table of Contents




(h)  
      Tax and legal contingencies




We are subject to various claims and
contingencies related to tax and legal proceedings as described in Note 15 to
our consolidated financial statements.  Due to their nature, such tax
and 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 tax and legal
proceedings are considered probable and the amount can be reasonably estimated,
we account for a liability for the estimated loss.




Indebtedness




As of December 31, 2007 we did
not have any cost-bearing liabilities.  As of June 15, 2008, we
had arranged for short-term loan revolving credit lines for a total aggregate
principal amount of Ps. 1,280 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 3 percentage points.  The basis points
which will be added to TIIE depend on negotiations and prevailing market
conditions.  As of this date, we have long-term cost-bearing
liabilities in the amount of Ps. 640 million, which were incurred in
connection with our acquisition of Drogasmil.




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. 1,280
million.  Net working capital (current assets minus current
liabilities) as of December 31, 2007 was Ps. 5,120.3 million
compared to Ps. 4,846.4 million as of December 31,
2006.




Our cash flows are subject to
seasonal fluctuations and market conditions.  To maintain a larger
winter inventory and to ensure adequate  inventory levels 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, 2007, were Ps. 4,872.7 million or 22.8% higher than
the Ps. 3,966.9 million they amounted to on December 31,
2006.  As of December 31, 2007, our inventory days were
77.0 days, 12.3 days higher than the 64.7 days registered for the
year ended December 31, 2006.  As of December 31, 2006, our
inventory days were 64.7 days, 1.2 days lower than the 65.9 days
registered for the year ended December 31, 2005.  Accounts
Receivable for the year ended December 31, 2007 registered 68.4 days
while accounts payable accounted for 81.8 days for the same
period.  Accounts Receivable for the year ended December 31, 2006
registered 67.6 days while accounts payable were 67.5 days for the
same period.  For the year ended December 31, 2005, inventory
days were 65.9, account receivable days reached 68.5 and accounts payable days
were at 74.0.




Accounts
Receivable




As of December 31, 2007, due to
higher sales, a different sales mix, a highly competitive environment and
commercial negotiations with clients, accounts receivable net increased to
Ps. 4,796.3 million or 4.3% compared to Ps. 4,600.4 million
as of December 31, 2006.  Accounts receivable days as of
December 31, 2007 increased 0.8 days to 68.4 days from 67.6 days
for 2006.  As of December 31, 2005, accounts receivable days were
68.5.




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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, 2007, trade
accounts payable increased to Ps. 5,178.2 million or 25.2% compared to
Ps. 4,135.9 million as of December 31, 2006.  As a
result, our trade accounts payable days increased to 81.8 in 2007 compared to
67.5 days for the year ended December 31, 2006.  As of
December 31, 2005, our trade accounts payable days were
74.0.


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 2007
were approximately Ps. 163.9 million, which consisted of
Ps. 38.9 million for the purchase of transport and delivery equipment,
Ps. 41.2 million for technology and computer equipment, particularly
the acquisition of new software licenses, Ps. 39.8 million for
other general expenditures and Ps. 44 million related to work-in-progress
expenditures.  These expenditures were mainly funded with internal
resources.  For 2008 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 2006
were approximately Ps. 166.1 million, which consisted of
Ps. 48.1 million for the purchase of transport and delivering
equipment, Ps. 83.8 million for technology and computer equipment,
particularly the acquisition of new software licenses, Ps. 0 for
acquisitions and Ps. 34.1 million for other general
expenditures.  These expenditures were mainly funded with internal
resources.




Our capital expenditures during 2005
were approximately Ps. 95.3 million, which consisted of
Ps. 49.5 million for the purchase of transport and delivering
equipment, Ps. 41.0 million for technology and computer equipment, Ps,
4.4 for acquisitions and Ps. 0.4 million for other general
expenditures.




Trend
Information




During 2007, 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.




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 factors generated a 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 the demand for these
products, thus 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.


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 Table of Contents




Accounting Pronouncements and Related
Effects




Under Mexican FRS




(i)  
      Recently
      Issued Accounting
  Pronouncements




In December 2007, the CINIF issued
the following Mexican FRS, effective January 1, 2008:




i)       FRS
B-10, “Impact of inflation”. This Standard supersedes Bulletin B-10,
“Recognition of the impact of inflation on the financial information” and sets
forth standards to carry out this recognition by recognizing two
economic environments: a) inflationary (inflation equal to or higher than 26%
accumulated in the three prior years); and b) non-inflationary (inflation below
that percentage). In addition:




The entity should not recognize the
impact of inflation, effective the period in which the change is confirmed from
an inflationary economic environment to non-inflationary. However, the impact of
restatement recognized up to the last period in which the entity operated in an
inflationary environment should be maintained in the financial statements. In
the change from a non-inflationary economic environment to an inflationary
environment, the entity should retrospectively recognize the impact of inflation
not recognized in the periods in which the environment was
non-inflationary.




The Standard eliminates the valuation
of inventories at replacement costs, as well as the valuation method of assets
from a nonresident source. Moreover, the accumulated effect of the gain or loss
on holding nonmonetary assets and the gain or loss on holding monetary assets
segregated in stockholders’ equity will be reclassified to retained
earnings.




As a result, the Group will no longer
recognize the impact of inflation in its financial statements, effective 2008,
since the economic environment in which it operates changed from inflationary to
non-inflationary. Adoption of this Mexican FRS will not have a material impact
on the Group’s consolidated financial position and operating
income.




ii)     FRS
D-4, “Tax on earnings”. This Standard supersedes Bulletin D-4, “Accounting
treatment of income tax, asset tax, and employee profit sharing”. In
addition:




FRS D-4 replaces the accounting
treatment of employee profit sharing in FRS D-3 "Employee fringe benefits".
Further it sets forth that the deferred income tax balance derived from the
initial application of Bulletin D-4 be reclassified to retained earnigs, unless
the amount is related to a comprehensive item that has not been recycled yet. In
that case, that amount should be incorporated into the comprehensive item. Up to
fiscal 2007, that initial application balance used to be presented in
stockholders’ equity. Adoption of this Mexican FRS will no have a material
impact on the Group’s consolidated financial position and operating
income.




iii)     IFRS-8,
“Effects of corporate flat tax” (IETU-Spanish acronym). This Standard sets forth
that the effect of the tax on earnings due in the period (income tax or IETU) is
presented in income. IETU tax credits form part of that tax due. In
addition:




The deferred IETU asset or liability is
determined on temporary differences, tax losses, and tax credits. The deferred
effect on temporary items is calculated based on the “asset and liability
method” by considering the differences between book and tax values of assets and
liabilities at the date of the financial statements. The IETU tax rate will be
that in effect on the date on which it is estimated that temporary differences
are reversed and/or tax losses and tax credits are applied. The deferred IETU
asset and/or liability are classified as a noncurrent item. Asset tax
recoverable is recognized as a deferred tax asset under certain circumstances,
provided that it can be offset against the tax on earnings.




In accordance with IFRS, the Group
carried out a projection to identify the expected trend of the tax on earnings
(income tax or IETU) that will be due in the next three years. As a result, the
Group determined that normally income tax will be paid in future years.
Accordingly, the Group recognized deferred income tax and, therefore, deferred
IETU will not be recorded. Management restates this estimate
periodically.


42
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iv)    FRS D-3,
“Employee fringe benefits”. This Standard supersedes Bulletin D-3, “Labor
obligations”. In addition:




●
            the
      Standard does not recognize an opening net transition asset or obligation,
      unless a new defined fringe benefit plan is established. In that event,
      prior services should be amortized over the remaining labor life of
      employees. The actuarial gain or loss can be recognized in income as
      accrued, in accordance with a certain “fluctuation
  range”;




●
            additional
      employee retirement liability and its offsetting entry are
      eliminated;




●
            actuarial
      gains and losses and prior services of severance benefits to employees due
      to causes other than restructuring are recognized in income, unless a
      certain FRS permits it to be
capitalized;




●
            it
      incorporates the regulations of employee profit sharing set forth in
      Bulletin D-4, discussed in paragraph ii) above. Deferred employee profit
      sharing should be recognized by applying the asset and liability method;
      and




●
            it
      incorporates the regulations applicable to benefits for dismissal due to
      restructuring set forth in Bulletin C-9 "Liability, provisions, contingent
      assets and liabilities and commitments" of Mexican
  FRS.




In addition, the Group is in the
process of defining the recognition of the following effects:




The unrecognized net transition
obligation for pensions and seniority premium existing as of December 31, 2007
in the amount of Ps. 36.6 million may be amortized over a five year period,
since the remaining life of employees exceeds that period. The Group will define
if existing actuarial losses in the amount of Ps. 42.6 million at that date will
be applied against the net transition obligation referred to above, and the
remaining against income in the amount of Ps. 5.9 million. As of January 1,
2008, the additional employee retirement liability and its offsetting entries
intangible asset and other comprehensive item amounting to Ps. 52.3 million, Ps.
33.1 million, and Ps. 19.1 million, respectively, have been
eliminated.




v)     FRS
B-2, “Statement of cash flows”. This Standard supersedes Bulletin B-12
“Statement of changes in financial position” (statement of changes). In
addition: a) the statement of cash flows presents cash receipts and
disbursements that occurred in the period, while the statement of changes shows
the changes in the entity’s financial structure; and (b) in an inflationary
environment, the statement of cash flows eliminates the impact on inflation
recognized in the financial statements. The statement of changes does not
require that elimination.




The FRS B-2 effect should be recognized
prospectively, therefore, the financial statements of periods prior to fiscal
2008 that are presented comparatively with the current period should include the
statement of changes.




vi)    FRS B-15,
“Foreign currency translation”. This Standard supersedes Bulletin B-15,
“Transactions in foreign currency and translation of financial statements of
foreign operations”. In addition:




a)     the
classifications of integrated foreign operation and foreign entity disappear,
and the items recording currency, functional currency, and reporting currency
are incorporated;




b)  
  the translation of financial information of a foreign transaction
refers to the change from the recording currency to the functional
currency,  and  from the functional currency to the
reporting currency;




c)     the
financial statements can be presented in a reporting currency other than its
functional currency; and


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d)     the
accounting changes derived from the initial application of the Standard should
be recognized prospectively, except for the effect of the change from reporting
currency that should be recognized retrospectively.




At 2007 year end, the Group had not
carried out foreign transactions which require that the financial information be
translated in order to include it in the financial statements of the reporting
entity. However, this does not mean that the Group cannot realize them in the
future.




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 July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN
48), “Accounting for Uncertainty in Income Taxes: an interpretation of FASB
Statement No. 109”. FIN 48 establishes the criterion that an individual tax
position has to meet for some or all of the benefits of that position to be
recognized in the Group’s consolidated financial statements. On initial
application, FIN 48 is applied to all tax position for which the statute of
limitations remains open. Only tax positions that meet the more-likely than-not
recognition threshold at the adoption date are recognized or continue to be
recognized. The cumulative effect of applying FIN 48 will be reported as an
adjustment to retained earnigs at the beginning of the period in which it is
adopted.




Interpretation 48 is effective for
fiscal years beginning after December 15, 2006, and was adopted by the Group on
January 1, 2007. The adoption of FIN 48 did not have a significant effect on its
financial statements.





FASB 157, “Fair Value
Measurements”





In September 2006, the FASB issued
Statement 157, “Fair Value Measurements” (FASB 157). The Statement does not
change existing accounting rules governing what can or what must be recognized
and reported at fair value in the Group’s financial statements, or disclosed at
fair value. Additionally, FASB 157 does not eliminate practicability exceptions
that exist in accounting pronouncements amended by this Statement when measuring
fair value. As a result, the Group was not required to recognize any new
instruments at fair value.





The Statement requires the Group to
apply valuation techniques that (1) place greater reliance on observable inputs
and less reliance on unobservable inputs and (2) are consistent with the market
approach, the income approach, and/or the cost approach. The Statement also
requires the Group to include enhanced disclosures of fair value measurements in
its financial statements.





FASB 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods that fall within those fiscal years. The adoption of Statement
157 did not have a significant effect on its consolidated financial
statements.





EITF Issue 06-9, “Reporting a Change in
(or the Elimination of) a Previously Existing Difference between the Fiscal
Year-End of a Parent Company and That of a Consolidated Entity or between the
Reporting Period of an Investor and That of an Equity Method
Investee,”





In November 2006, a consensus was
reached on EITF Issue 06-9. The guidance in EITF Issue 06-9 addresses how the
reporting entity should recognize the effect of a change to (or elimination of)
an existing difference between its reporting period and the reporting period of
a consolidated subsidiary or an equity method investee. A reporting entity
should recognize the effect of a change to (or elimination of) an existing
difference between its reporting period and the reporting period of a
consolidated subsidiary or an equity method investee as a change in accounting
principle in accordance with the provisions of Statement 154.





The consensus is effective for changes
to, or eliminations of, previously existing differences in the reporting periods
of a parent and a subsidiary (or investor and equity method investee) that occur
in interim or annual reporting periods beginning after November 29, 2006
(January 1, 2007 for a calendar-year entity). The Group’s adoption of these
provisions had no impact on its consolidated results and financial
position.


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FASB 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”





In February 2007, the FASB issued
Statement 159, “The Fair Value Option for Financial Assets and Financial
Liabilities: Including an amendment of FASB Statement No. 115”, to reduce
earnings volatility caused by related assets and liabilities measured
differently under U.S. GAAP. Statement 159 allows making an irrevocable
instrument-by-instrument election to measure eligible items at fair value in
their entirety. In addition, unrealized gains and losses will be reported in
earnings at each reporting date.





Statement 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007 (January
1, 2008 for a calendar-year entity). Earlier application is permitted for
existing eligible items as of the beginning
of a fiscal year that begins on or before November 15, 2007, but requires
concurrent adoption of Statement 157.





In the year in which Statement 159 is
initially applied, the cumulative-effect adjustment is (1) measured as the
difference between the carrying amounts and the fair values of financial
instruments at the date of application and (2) recorded in the opening balance
of retained earnings or in other appropriate components of equity or net assets
in the statement of financial position. The differences may include unamortized
deferred fees, costs, premiums, and discounts; valuation allowances such as the
allowance for loan losses; and accrued interest. Any changes in fair value due
to the concurrent adoption of Statement 157 will be included in the
cumulative-effect adjustment if the fair value option (FVO) is also elected for
that item.





The Company is currently evaluating the
impact of adopting SFAS 159 on its financial position and results of
operations.





Statement 141R, “Business
combinations”





In December 2007, the Financial
Accounting Standards Board (FASB) issued Statement 141 (revised 2007), “Business
Combinations”(Statement 141R) to
change how an entity accounts for the acquisition of a business. When effective,
Statement 141R will replace existing Statement 141 in its entirety.





Statement 141R carries forward the
existing requirements to account for all business combinations using the
acquisition method (formerly called the purchase method). In general, Statement
141R will require acquisition-date fair value measurement of identifiable assets
acquired, liabilities assumed, and noncontrolling interests in the acquiree.
Statement 141R will eliminate the current cost–based purchase method under
Statement 141.





The new measurement requirements will
result in the recognition of the full amount of acquisition-date goodwill, which
includes amounts attributable to noncontrolling interests. The acquirer will
recognize in income any gain or loss on the remeasurement to acquisition-date
fair value of consideration transferred or of previously acquired equity
interests in the acquiree. Neither the direct costs incurred to effect a
business combination nor the costs the acquirer expects to incur under a plan to
restructure an acquired business will be included as part of the business
combination accounting. As a result, those costs will be charged to expense when
incurred, except for debt or equity issuance costs, which will be accounted for
in accordance with other generally accepted accounting principles.





Statement 141R will also change the
accounting for contingent consideration, in process research and development,
contingencies, and restructuring costs. In addition, changes in deferred tax
asset valuation allowances and acquired income tax uncertainties in a business
combination that occur after the measurement period will impact income taxes
under Statement 141R.





Statement 141R is effective for fiscal
years and interim periods within those fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. The Company intends to adopt
Statement 141R effective January 1, 2009 and apply its provisions prospectively.
The Company is going to evaluate the impact that the adoption of Statement 141R
will have on its consolidated results and financial position.





141R effect on income taxes in a
business combination


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The Company currently records all
changes to a valuation allowance for acquired deferred tax assets or the effect
of changes in an acquired tax position that occur after the acquisition date by
initially reducing the related goodwill to zero, next by reducing other
noncurrent intangible assets related to the acquisition to zero, and lastly by
reducing income tax expense. However, Statement 141R amends Statement 109 and
Interpretation 48 to require the Company to recognize changes to the valuation
allowance for an acquired deferred tax asset or the effect of changes to an
acquired tax position as adjustments to income tax expense or contributed
capital, as appropriate, and not as adjustments to goodwill. This accounting
will be required when Statement 141R becomes effective (January 1, 2009 for the
Company) and applies to valuation allowances and tax positions related to
acquisitions accounted for originally under Statement 141 as well as those
accounted for under Statement 141R.





The Company does not have a valuation
allowance at December 31, 2007 related to deferred tax assets acquired in a
business combination. Any change in the valuation allowance subsequent to
December 31, 2008 will be recorded as a reduction of income tax expense rather
than as a reduction of goodwill.





141R effect on goodwill impairment
testing





Statement 141R amends the goodwill
impairment test requirements in Statement 142. For a goodwill impairment test as
of a date after the effective date of Statement 141R, the value of the reporting
unit and the amount of implied goodwill, calculated in the second step of the
test, will be determined in accordance with the measurement and recognition
guidance on accounting for business combinations under Statement 141R. This
change could effect the determination of what amount, if any, should be
recognized as an impairment loss for goodwill recorded before the effective date
of Statement 141R. This accounting will be required when Statement 141R becomes
effective (January 1, 2009 for the Company) and applies to goodwill related to
acquisitions accounted for originally under Statement 141 as well as those
accounted for under Statement 141R.





The Company has Ps. 217,214 of goodwill
at December 31, 2007 related to previous business combinations. The Company has
not determined what effect, if any, Statement 141R will have on the results of
its impairment testing subsequent to December 31, 2008.





Statement 160, “Noncontrolling
interests”





In December 2007, the FASB issued
Statement 160, “Noncontrolling Interests in Consolidated Financial Statements:
an amendment of ARB No. 51”. The new Statement changes the accounting for,
and the financial statement presentation of, noncontrolling equity interests in
a consolidated subsidiary. Statement 160 replaces the existing minority-interest
provisions of Accounting Research Bulletin (ARB) 51, Consolidated Financial
Statements, by defining a new term—noncontrolling interests—to replace what were
previously called minority interests. The new standard establishes
noncontrolling interestsas a component of the
equity of a consolidated entity.





The underlying principle of the new
standard is that both the controlling interest and the noncontrolling interests
are part of the equity of a single economic entity: the consolidated reporting
entity. Classifying noncontrolling interests as a component of consolidated
equity is a change from the current practice of treating minority interests as a
mezzanine item between liabilities and equity or as a liability. The change
affects both the accounting and financial reporting for noncontrolling interests
in a consolidated subsidiary.





Statement 160 includes reporting
requirements intended to clearly identify and differentiate the interests of the
parent and the interests of the noncontrolling owners. The reporting
requirements are required to be applied retrospectively. Statement 160 is
effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. Early adoption is
prohibited.





The Company intends to adopt Statement
160 effective January 1, 2009 and apply its provisions
prospectively.





The Company currently does not believe
that the adoption of Statement 160 will have a significant effect on its
financial statements.





EITF Issue 07-6, “Accounting for the
sale of real estate that includes a buy-sell clause”


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In December 2007, the FASB ratified a
consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue
07-6, “Accounting for the Sale of Real Estate Subject to the Requirements of
FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause,” to clarify
whether a buy-sell clause is a prohibited form of continuing involvement that
would preclude partial sales treatment under FASB Statement 66, Accounting for
Sales of Real Estate. EITF Issue 07-6 applies to real estate sales transactions
that include a buy-sell clause and are subject to the requirements of Statement
66. The scope of this Issue includes the sale of real estate to an entity that
is both (a) partially owned by the seller and (b) subject to a buy-sell clause
included in the arrangement between the seller and the other investor (the
buyer) of the jointly owned entity.





According to the guidance in EITF Issue
07-6, a buy-sell clause, in and of itself, does not constitute a prohibited form
of continuing involvement that would preclude partial sales treatment under
Statement 66. However, all of the relevant facts and circumstances of the
arrangement containing the buy-sell clause should be evaluated to determine if
the clause either gives the buyer an in-substance option to put to the seller
its interest in the jointly owned entity or gives the seller an in-substance
option to reacquire the real estate by acquiring the buyer’s interest in the
jointly owned entity.





The consensus in EITF Issue 07-6 is
effective for new agreements entered into in fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2007. Early adoption is
not permitted.





The Company intends to adopt EITF Issue
07-6 effective January 1, 2008. The Company currently does not believe that the
adoption of this consensus will have a significant effect on its financial
statements.The impact of applying this consensus will depend on the terms of the
contractual arrangements in real estate transactions that are entered into by
the Company on or after January 1, 2008 that may include buy-sell clauses or
other similar arrangements.





EITF Issue 07-1, “Accounting for
collaborative arrangements”





In December 2007, the FASB ratified a
consensus opinion reached by the EITF on EITF Issue 07-1, “Accounting for
Collaborative Arrangements.” The guidance in EITF Issue 07-1 defines
collaborative arrangements and establishes presentation and disclosure
requirements for transactions within a collaborative arrangement (both with
third parties and between participants in the arrangement).





The consensus in EITF Issue 07-1 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008. The consensus requires retrospective
application to all collaborative arrangements existing as of the effective date,
unless retrospective application is impracticable. The impracticability
evaluation and exception should be performed on an arrangement-by-arrangement
basis.





The Company intends to adopt EITF Issue
07-1 effective January 1, 2009 and retrospectively apply the requirements of
this consensus to its collaborative arrangements in existence on that
date.





The Company is evaluating the impact
EITF Issue 07-1 will have on its financial statements. The Company currently
does not believe that the adoption of EITF Issue 07-1 will have a significant
effect on its financial statements.





Staff Accounting Bulletin (SAB) 110,
“Share-Based Payment”





In December 2007, the SEC staff issued
Staff Accounting Bulletin (SAB) 110, “Share-Based Payment,” which amends SAB
107, Share-Based Payment, to permit publiccompanies, under
certain circumstances, to use the simplified method in SAB 107 foremployee option grants
after December 31, 2007. Use of the simplified method afterDecember 2007 is
permitted only for companies whose historical data about theiremployees’ exercise
behavior does not provide a reasonable basis for estimating theexpected term of the
options.





SAB 110 is effective for employee
options granted afterDecember 31, 2007. The
Company intends to adopt SAB 110 effective January 1, 2008.The Company currently
does not believe that the adoption of this Bulletin will have an effect on its
financial statements.


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SAB 109, “Written loan commitments
recorded at fair value”





In November 2007, the SEC issued SAB
109, “Written Loan Commitments Recorded at Fair Value Through Earnings”, which
supersedes SAB105, “Application of
Accounting Principles to Loan Commitments”. SAB 109 reflects thestaff’s current view
that the fair value measurement of derivative and other written loancommitments that are
accounted for at fair value through earnings should include theexpected net future
cash flows related to the associated servicing of the loan.


The SEC staff expects registrants to
apply its views on including the expected net future cash flows from the
servicing of a loan in the measurement of fair value prospectively to derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007.





The Company intends to adopt SAB 109
effective January 1, 2008.The Company currently
does not believe that the adoption of SAB 109 will have an effect on its
financial statements.





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 the number of years of
service they have as directors.  All of these individuals were elected
for a one-year term by our shareholders at our annual shareholders’ meeting,
which was held on April 29, 2008.




Directors
                Name
      and Date of Birth
            
            Principal
      Occupation
            
            Business
      Experience
            
            First
      ElectedIsaac
      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 Djamus
              (07/27/69)
            
            Deputy
      Chief Executive Officer
            
            Executive
      Director – Grupo
              Comercial
      Hotelera, S.A. de C.V.
            
            February
      2000Juan
      Carlos Peralta del Río
              (24/09/75)
            
            Vice  President
            
            Vice  President
      - IUSA
              Footwear
      International S.A. de C.V
            
            April
      2008José
      Elstein Japchik
              (12/08/34)
            
            Director
            
            Fariel,
      S.A. de C.V.
            
            April
      2006Gabriel
      Alarcón Velázquez
              (02/23/37)
            
            Director
            
            Banco
      de Comercio
            
            April
      2006





On April 29, 2008, the Board and the
Audit Committee accepted  Patricio Trad Cepeda’s resignation and
elected Juan Carlos Peralta del Rió (24/09/75), Vice President of IUSA Footwear
International, S.A. de C.V, as an independent Board member.  The Board
also appointed Mr. Peralta as a member of the Audit Committee.




Francisco Fuentes Ostos is the
Secretary of our Board of Directors, without being a member of the
Board.  Moisés Saba Ades, Alberto Saba Ades and Manuel Saba Ades are
sons of Isaac Saba Raffoul.  Gabriel Saba Djamus is the nephew of
Isaac Saba Raffoul.  Manuel Saba Ades, Moisés Saba Ades and Alberto
Saba Ades are cousins of Gabriel Saba Djamus.  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.


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 Table of Contents


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, 2008.




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.B.
      de C.V.
            
            Partner
      – Chevez, Ruiz,
              Zamarripa
      y Cia, S.C.
            
            February
      2000Alejandro
      Sadurni Gómez
              (10/8/59)
            
            Chief
      Financial Officer
            
            Former
      Chief Financial
              Officer
      of Administration –
              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.  Directors and alternate directors are elected for
one-year terms by our shareholders at each annual shareholders’ 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.




According to the Mexican Securities
Market Law the Board of Directors shall have up to 21 members and each member
may have its alternate.  The members of the Board of Directors shall
be appointed by the shareholders’ meeting and the shareholders controlling 10%
of the capital stock of the company may appoint or revoke in the shareholders’
meeting a member of the Board of Directors.




In accordance with the Mexican
Securities Market Law and our bylaws, 25% of the members of our Board of
Directors must qualify as “independent directors”.  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 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 the Chairman of the
Audit and Corporate Practices Committee may call for a meeting of the Board of
Directors.  Also, our bylaws provide that the Board of Directors must
approve with input from the Audit and Corporate Practices Committee, on an
individual basis (i) any transaction with related parties, subject to certain
limited exceptions, (ii) the appointment of our Chief Executive Officer, his
compensation and removal for justified causes, (iii) our financial statements
and those of our subsidiaries, (iv) unusual or non-recurrent transactions and
any transactions or series of related transactions during any calendar year that
involve (a) the acquisition or sale of assets with a value equal to or exceeding
5% of our consolidated assets; or (b) providing collateral or guarantees or the
assumption of liabilities, equal to or exceeding 5% of our consolidated assets,
(v) agreements with our external auditors and (vi) accounting policies, within
GAAP.




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.


49
 Table of Contents




Committees of Our Board of
Directors




We have an Executive Committee,
whose members are Messrs. Manuel, Alberto and Moisés Saba Ades, who were all
reelected by the shareholders at our annual shareholders’ meeting held on April
29, 2008.  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 the Mexican Securities Market Law, we also have an Audit and
Corporate Practices Committee.  As of April 29, 2008, the
Audit Committee is formed by Messrs. José Elstein Japchik, Gabriel Alarcón
Velázquez and Juan Carlos Peralta del Río, all independent members of the Board
of Directors.  As required by the Mexican Securities Market Law, both
the Chairman and a majority of the members of the Audit Committee are
independent directors.  The Audit Committee carries out the
responsibilities of the audit and corporate practice committee.  Among
other duties and responsibilities, the Audit and Corporate Practices Committee
must:




●
            supervise
      our external auditors and analyze their
report;




●
            analyze
      and supervise the preparation of our financial
  statements;




●
            inform
      the Board of Directors of our internal controls and their
      adequacy;




●
            request
      reports of our Board of Directs and executive officers whenever it deems
      appropriate;




●
            inform
      the Board of any irregularities that it may
  encounter;




●
            receive
      and analyze recommendations and observations made by the stockholders’
      meetings;




●
            supervise
      the activities of our Chief Executive
Officer;




●
            provide
      an annual report to the Board of
Directors;




●
            provide
      opinions to our Board of Directors;




●
            request
      and obtain opinions form independent third parties;
  and




●
            assist
      the Board in the preparation of annual reports and other reporting
      obligations.




The
Chairman of the Audit and Corporate Practices Committee, shall prepare an annual
report to our Board of Directors with respect to the findings of the Audit and
Corporate Practices Committee, which shall include among
others:  (i)the status of the internal controls and internal audits
and any deviations and deficiencies thereof, taking into consideration the
reports of external auditors and independent experts; (ii) the results of any
preventive and corrective measures taken based on results of investigations in
respect of non-compliance of operating and accounting policies; (iii) the
evaluation of external auditors; (iv) the main results from the review of our
financial statements and those of our subsidiaries; (v) the description and
effects of changes to accounting policies; (vi) the measures adopted as result
of observation of stockholders, directors, executive officers and third parties
relating to accounting, internal controls, and internal or external audits;
(vii) compliance with stockholders’ and directors’ resolutions; (viii)
observations with respect to relevant directors and officers; (ix) the
transactions entered into with related parties; and (x) the remunerations paid
to directors and officers.




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
      AppointedManuel
      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 Djamus
              (07/27/69)
            
            Deputy
      Chief Executive Officer
            
            Executive
      Director – Grupo
              Comercial
      Hotelera, S.A. de C.V.
            
            February
      2000









50
 Table of Contents






Name
      and Date of

              Birth
            
            Current
      Position
            
            Business
      Experience
            
            First
      Appointed


Alejandro
      Sadurni Gomez
                (10/08/59)
              
              Chief
      Financial Officer
              
              Former
      Chief Financial
                Officer
      of Administration –INMAS,
      S.A. de C.V.
              
              February
      2000


Héctor
      Manzano de la Torre
              (04/21/67)
            
            Sales
      Director
            
            Former
      Manager of Citem,
              S.A.
      de C.V.
            
            September
      1991Oscar
      Gutiérrez Melgar
              (17/04/67)
            
            Purchasing
      Director
            
            Former
      Manager of Drogueros,
              S.A.
      de C.V.
            
            November
      1985Jesus
      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
      1999Juan
      Restrepo Molina
              (10/29/55)
            
            Sales
      Director
            
            Sales
      Director, Novartis
              OTC
      Mexico
            
            May
      2007Jorge
      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, 2007, the aggregate
compensation paid by us to our executive officers for services rendered in all
capacities was approximately Ps. 30.2 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, 2007, we had
7,104 employees, 3,694 of which were sales representatives for our
Pharmaceutical and HBCG/Other Products businesses and other divisions, 1,035 of
which were administrative employees and 2,375 of which were operational
employees.  A significant majority of our employees, 83.4% as of
December 2006 and 85.4% as of December 2007, are represented by
unions.  We believe that our relations with our employees and the
unions to which they are affiliated are good.  In 2007, the number of
employees increased by 34.2% compared to 2006.




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 fifteen 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.


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 Table of Contents


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"
of Mexican FRS. Severance benefits which arise from restructuring causes, should
continue to follow the guidelines of Bulletin C-9, “Liability, provisions,
contingent assets and liabilities, and commitments” of Mexican
FRS.




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.




During 2005, 2006 and 2007,
contributions to the fund based on actuarial computations amounted to
Ps. 15.6, Ps. 16.2 and Ps. 15.5 million, respectively
(Ps. 14.5 and 15.6 million at fiscal year-end constant Pesos,
respectively).  As of December 31, 2005, 2006 and 2007, fund assets
consisted primarily of investments in equity securities as well as in fixed
income securities issued by Mexican companies that are traded on the Mexican
Stock Exchange.




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, 2008, 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, 2008, 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, 2008, our
controlling shareholder directly and indirectly owned 225,606,456 Ordinary
Shares, representing 85% of our issued and outstanding capital
stock.  As of June 2008, approximately 11.2% of our Ordinary Shares
were held through ADSs by more than 32 registered holders.




The following table shows
information, as of May 31, 2008, 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
            
            
            Percentage
              StakeIsaac
      Saba Raffoul
            
            
            225,606,456
            
            
            
            85%Directors,
      executive officers and key employees(1)
            
            
            225,606,456
            
            
            
            85%Total
            
            
            225,606,456
            
            
            
            85%


____________________


(1)  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.


52
 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.B. 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 2007, 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 and Corporate Practices
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 and Corporate
Practices Committee makes 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 and Corporate Practices 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 2007




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
2007, we maintained our lease for office space with Xtra Inmuebles and do not
have plans to terminate this agreement.  In 2007, we expensed
Ps. 4.8 million as compared to Ps. 5.0 million in 2006 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.




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 2005, 2006 and
2007.  During 2007, we expensed a total amount
of  Ps. 10.6 million as compared to Ps. 10.9 million in 2006
related to the 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.


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 Table of Contents


Legal and Advisory
Services.  During 2007, 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, without being a member of such Board.  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 2007, 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 independent alternate 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, 2006 and 2007,
the receivable balances from Aeroxtra, S.A. de C.V. were 2.1 and 2.0
million.  For Xtra Inmuebles, S.A. de C.V., were Ps. 2.1 million
and Ps. 2.2 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 2006 and 2007, 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 “Item 19.  Exhibits—Index to Consolidated Financial
Statements,” which are incorporated herein by reference.




Material Legal Proceedings




As of December 31, 2007, 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 that 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”.




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.




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The table below shows the high and low
sales prices in U.S. Dollars for our ADSs on the NYSE for the five most recent
full financial years ending December 31, 2007 and each month in the six-month
period ending May 31, 2008.







US
      Dollar per ADS(1)High
            
            
            Low2003
            
            U.S.$
            12.50
            
            
            U.S.$
            9.402004
            
            U.S.$
            14.99
            
            
            U.S.$
            10.702005
            
            U.S.$
            18.50
            
            
            U.S.$
            14.752006
            
            U.S.$
            26.15
            
            
            U.S.$
            16.52First
      Quarter
            
            
            22.60
            
            
            
            16.52Second
      Quarter
            
            
            22.45
            
            
            
            19.65Third
      Quarter
            
            
            22.90
            
            
            
            19.68Fourth
      Quarter
            
            
            26.15
            
            
            
            21.262007
            
            U.S.$
            42.85
            
            
            U.S.$
            26.10First
      Quarter
            
            
            35.24
            
            
            
            26.10Second
      Quarter
            
            
            34.58
            
            
            
            29.75Third
      Quarter
            
            
            42.85
            
            
            
            30.41Fourth
      Quarter
            
            
            39.99
            
            
            
            35.302008First
      Quarter
            
            U.S.$
            39.00
            
            
            U.S.$
            32.00MonthDecember
      2007
            
            U.S.$
            39.99
            
            
            
            37.51January
      2008
            
            
            39.00
            
            
            
            35.01February
      2008
            
            
            38.94
            
            
            
            36.00March
      2008
            
            
            36.99
            
            
            
            32.00April
      2008
            
            
            35.25
            
            
            
            31.95May
      2008
            
            
            37.25
            
            
            
            34.00June
      (through June 16, 2008)
            
            
            34.00
            
            
            
            33.75


(1) Source:  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, 2007, there were 265,419,360 Ordinary
Shares issued and outstanding.  At the end of June 2008,
approximately 11.2% of the outstanding shares 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 anónimabursátilde capital
variable.  Securities are traded on the Mexican Stock Exchange
from 8:30 am to 3:00 pm 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.




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 Table of Contents


Settlement is effected three 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,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.




The table below shows, for the five
most recent full financial years ending December 31, 2007 and each month and the
six month period ending May 31, 2008 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)Year
              
              High
              
              
              Low2003
              
              Ps.
              13.30
              
              
              Ps.
              10.002004
              
              Ps.
              16.60
              
              
              Ps.
              12.702005
              
              Ps.
              20.50
              
              
              Ps.
              16.702006
              
              Ps.
              26.15
              
              
              Ps.
              16.95First
      Quarter
              
              
              24.20
              
              
              
              16.95Second
      Quarter
              
              
              24.50
              
              
              
              23.95Third
      Quarter
              
              
              24.30
              
              
              
              22.50Fourth
      Quarter
              
              
              27.80
              
              
              
              23.002007
              
              Ps.
              44.50
              
              
              Ps.
              28.80First
      Quarter
              
              
              37.40
              
              
              
              28.80Second
      Quarter
              
              
              36.50
              
              
              
              34.00Third
      Quarter
              
              
              44.50
              
              
              
              36.21Fourth
      Quarter
              
              
              42.90
              
              
              
              41.002008First
      Quarter
              
              Ps.
              41.68
              
              
              
              36.80MonthDecember
      2007
              
              Ps.
              42.90
              
              
              
              42.30January
      2008
              
              
              41.68
              
              
              
              41.68February
      2008
              
              
              39.60
              
              
              
              39.60March
      2008
              
              
              37.00
              
              
              
              36.80April
      2008
              
              
              36.80
              
              
              
              36.80May
      2008
              
              
              36.80
              
              
              
              36.00


(1)
Source:  Infosel and Economática




56
 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.




At the end of June 2008,
approximately 11.2% of the Ordinary Shares were publicly held through ADRs on
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. 328.4
million and Ps. 610.2 million in constant Pesos as of December 31, 2007) 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 29, 2008, 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, 2007, 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 these Ordinary Shares.




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—Share
Repurchases.”




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 Mexican Securities Market Law became effective on June
28, 2006 and, in some cases, it allowed an additional period of 180 days (after
December 2006) for issuers to incorporate in their bylaws the new corporate
governance and other requirements derived from the new law.  The new
Mexican Securities Market Law changed the Mexican securities law in various
material respects.  In particular, the new law includes with respect
to public companies:




●
            their
      identification as sociedad anónima
      bursátil (a stock corporation with stock registered in the CNBV and
      listed on the Mexican Stock Exchange) and a new set of corporate
      governance requirements;




●
            the
      redefinition of the 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 at the shareholders’ meeting and the CNBV will have the
      authority to challenge such
independence;




57
 Table of Contents






●
            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.




The Mexican Securities Market Law does not substantially modify the
reporting obligations of issuers of equity securities listed on the Mexican
Stock Exchange.  The Mexican Securities Market Law reinforces insider
trading restrictions and specifically includes, with such restrictions, trading
in options and derivatives the underlying security of which is issued by such
entity.  Among other changes, the Mexican Securities Market Law
provides for a course of action available to anyone who trades (as a
counterparty) with someone in possession of privileged information to seek the
appropriate indemnification. In addition, under this law insiders must abstain
from purchasing or selling securities of the issuer within 90 days from the last
sale or purchase, respectively.




The Mexican Securities Market Law has, in some respects,
modified the rules governing tender offers conducted in Mexico.  Under
the new law, tender offers may be voluntary or mandatory.  All tenders
offers must be open for at least 20 business days and purchases thereunder are
required to be made pro-rata to all tendering shareholders.  Any
intended purchase resulting in a 30% or greater holding requires the tender to
be made for the greater of 10% of the company’s capital stock or the share
capital intended to be acquired; if the purchase is aimed at obtaining control,
the tender must be made for 100% of the outstanding shares.  In
calculating the intended purchase amount, convertible securities, warrants and
derivatives, the underlying security of which are such shares, must be
considered.  The  Mexican Securities Market Law also permits
the payment of certain amounts to controlling shareholders over and above the
offering price if these amounts are fully disclosed, approved by the Board of
Directors and paid in connection with non-compete or similar
obligations.  The  law also introduces exceptions to the
mandatory tender offer requirements and specifically provides for the
consequences, to a purchaser, of not complying with these tender offer rules
(lack of voting rights, possible annulment of purchases, etc.) and other rights
available to prior shareholders of the issuer.




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The  Mexican Securities
Market Law ratifies that public companies may insert provisions in their bylaws
pursuant to which the acquisition of control of the company, by the company’s
shareholders or third parties, may be prevented, if such provisions (i) are
approved by shareholders without the negative vote of shareholders representing
5% or more of the outstanding shares; (ii) do not exclude any shareholders or
group of shareholders; and (iii) do not restrict, in an absolute manner, the
change of control.




Bylaws




In 2006, a new Mexican Securities
Market Law became effective, therefore all listed companies were required to
incorporate certain provisions into their corporate bylaws.  As a
consequence, in December 2006, 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.




The current bylaws of Casa Saba
include most of the provisions above-mentioned.  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.”




Organization and Register




Grupo Casa Saba, S.A.B. de C.V., is
a sociedad anónimabursátilde 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.


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Directors




Under the Mexican
Securities Market Law, any shareholder or director that votes on a transaction
in which his interest’s conflict may abstain to 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.  The
Mexican Securities
Market Law provides 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.




We have amended our bylaws in order
to submit, among others, the following matters to the Board of
Directors:  (i) our general strategy; (ii) with input from the Audit
and Corporate Practices Committee, on an individual basis (i) any transaction
with related parties, subject to certain limited exceptions, (ii) the
appointment of our Chief Executive Officer, his compensation and removal form
justified causes, (iii) our financial statements and those of our subsidiaries;
(iv) unusual or non-recurrent transactions and any transactions or series of
related transactions during any calendar year that involve (a) the acquisition
or sale of assets with a value equal to or exceeding 5% of our consolidated
assets; or (b) the giving of collateral or guarantees or the assumption of
liabilities, equal to or exceeding 5% of our consolidated assets, (v) agreements
with our external auditors; and (vi) accounting policies, within GAAP; (iii)
creation of special committees and granting them the power and authority; (iv)
matters related to anti-takeover provisions provided for in our bylaws; and (v)
the exercise of our general powers in order to comply with our corporate
purpose.




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 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, the secretary of the Board or the Audit and Corporate
Practices Committee.  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 OfficialFederalGazette 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 Company’s stock
registry book 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 to 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.  The shareholder
must then deliver their share certificates or the corresponding certificate from
the depositary of the shares, as may be the case, to the Secretary.




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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 relating to attendance at shareholder’s
meetings, which are set forth in the paragraph above, 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
3. Key Information—Dividends.”




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.”




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 void.




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
shareholders’ 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 shareholders’ 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 established 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.”




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Forfeiture of
Shares.As
required by Mexican law, our bylaws for Ordinary Shares provide that, our
non-Mexican shareholders formally agree with the Foreign Affairs
Ministry:




●
            to
      be consider 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 interest 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 he or she may have, including
any rights under the United States securities laws, with respect to his or her
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 shall be indefinite.




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.




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.




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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.




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.




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 a
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 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, 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.




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.




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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.




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
      Convention for the Avoidance of Double Taxation entered into and 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:




●
            Individuals
      are residents of Mexico if they have established their principal place of
      residence in Mexico or, if they have established their principal place of
      residence outside Mexico, if their core of vital interests (centro de intereses
      vitales) is located in Mexico.  Individuals’ core of
      vital interests will be deemed to be located in Mexico if, among other
      things,




●
            at
      least 50% of the individuals’ aggregate annual income derives from Mexican
      sources or




●
            the
      individuals’ principal center of professional activities is located in
      Mexico;




●
            Individuals
      are residents of Mexico if they are state employees, regardless of the
      location of the individuals’ core of vital interests;
  and




●
            Mexican
      nationals who filed a change of tax residence to a country or jurisdiction
      that does not have a comprehensive exchange of information agreement with
      Mexico in which his/her income is subject to a preferred tax regime
      pursuant to the provisions of the Mexican Income Tax Law, will be
      considered Mexican residents for tax purposes during the year of filing of
      the notice of such residence change and during the following three
      years.




●
            Unless
      otherwise proven, a Mexican national is deemed a resident of Mexico for
      tax purposes.




●
            Legal
      entities are residents of Mexico if they maintain their principal place of
      business or their place of effective management in
  Mexico.




●
            If
      non-residents of Mexico are deemed to have a permanent establishment in
      Mexico for tax purposes, all income attributable to the permanent
      establishment will be subject to Mexican taxes, in accordance with
      applicable Mexican tax law.




The applicable corporate income tax
rate was 28% in 2007 and thereon.




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




Dividends paid from distributable
earnings that have not been subject to taxation at the corporate level are
subject to a dividend tax at an effective rate of 40.85% for the year ended
December 31, 2006, and 38.89% for 2007 and following years, at the
corporate-level.  The corporate-level dividend tax on the distribution
of earnings is not final and may be credited against income tax payable during
the fiscal year in which the dividend tax was paid and in the following two
years.  Dividends paid from distributable earnings, after corporate
income tax has been paid with respect to these earnings, are not subject to this
corporate-level dividend tax.




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Sales or Other
Dispositions.Gain on the sale or other disposition of ADSs or
Ordinary Shares by a non-resident holder will generally not be subject to
Mexican tax.  Deposits and withdrawals of Common Shares in exchange
for ADSs will not give rise to Mexican tax or transfer duties.




●
            Gain
      on the sale of ADSs or Ordinary Shares by a non-resident holder will not
      be subject to any Mexican tax if the transaction is carried out through
      the Mexican Stock Exchange or other stock exchange or securities markets
      approved by the Mexican Ministry of Finance and Public
      Credit.  Gain on sales or other dispositions of the Common
      Shares made in other circumstances generally would be subject to Mexican
      tax at a rate of 25% based on the total amount of the transaction or,
      subject to certain requirements applicable to the seller, at a rate of 29%
      for the year ended December 2006, and 28% thereafter, of gains realized
      from the disposition, regardless of the nationality or residence of the
      transferor, provided that the transferor is not a resident of a country
      with a preferred tax regime.




●
            For
      tender offers conducted on the Mexican Stock Exchange or other approved
      stock exchanges or securities markets, non-resident holders who held the
      Common Shares as of the date they were initially registered with the CNBV
      may apply the above exemption to the extent
  that:




●
            five
      uninterrupted years have elapsed since the initial public offering of the
      Common Shares;




●
            our
      shares have a public float of at least 35% on the authorized stock
      exchanges or markets on which they were initially
  listed;




●
            the
      offer is for all shares representing our share capital and at the same
      price for all shareholders; and




●
            all
      shareholders are permitted to accept more competitive offers than those
      received prior to or during the tender offer period, without
      penalty.




Under the Tax Treaty, a holder that
is eligible to claim the benefits of the Tax Treaty and proves such eligibility
will be exempt from Mexican tax on gains realized on a sale or other disposition
of the Common Shares, in a transaction that is not carried out through the
Mexican Stock Exchange or such other approved securities markets,  so
long as the holder did not own, directly or indirectly, 25% or more of our share
capital (including ADSs) during the twelve-month period preceding the sale or
other disposition.




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, issue,
registration, or similar taxes or duties payable by non-resident holders of the
ADSs.




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 U.S. Holders.  A “U.S. Holder” is a
beneficial owner of ADSs or Ordinary Shares that, for U.S. Federal income tax
purposes, is an individual who is:





●
            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






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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 total
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
included 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 current and accumulated earnings and profits (“E&P”), as
calculated for U.S. Federal income tax purposes, such distributions will be
taxed as dividends.




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 are 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 current and accumulated 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).




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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 or 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 included 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 in 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.




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 (i.e, where the U.S. Holder has a
holding period greater than one year) 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 a 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.




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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.




Documents on
Display




For further information pertaining
to us and our Ordinary Shares and ADSs, please consult 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 FRS, 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.




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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 on the Mexican Stock Exchange since
December 2003, 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 December 2003.  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.




NYSE
      Standards
            
            Our
      Corporate Governance PracticeA
      majority of the Board of Directors must be
      independent.  Exception for “controlled companies,” which would
      include our Company if we were a U.S. issuer.
            
            The
      Mexican Securities Market Law requires that listed companies have at least
      25% of independent directors.  The 25% of the members of our
      Board are 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.


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NYSE
      Standards
            
            Our
      Corporate Governance PracticeNominating/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 three member audit committee, which are independent under
      applicable Mexican standards and for 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.





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.




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Foreign Exchange Rate Risk




As of December 31, 2007, we had no
cost-bearing liabilities in U.S. Dollars. To the extent that we incur U.S.
Dollar-denominated debt in the future, we would be subject to foreign exchange
rate risk. Furthermore, as of December 31, 2007, we had no cost-bearing
liabilities in Pesos.




However, as of June, 2008, and as
part of our acquisition in Brazil, we incurred Ps. 640 million in long-term
liabilities in order to fund part of this transaction. Nevertheless, such
cost-bearing liabilities are in Pesos.




Item
      12.
            Description
      of Securities Other than Equity
Securities




Not applicable.




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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




(a)  
      Disclosure 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. There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. 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 (which include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure) 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 2007, there were no significant
changes in the Company’s internal controls or in other factors that could
significantly affect such controls.




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




Management’s Report on Internal
Control over Financial Reporting is included under Item 18 on page F-2.




(c)  
      Attestation Report of the Registered Public Accounting
  Firm




The report of Salles, Sáinz-Grant
Thorton, S.C., an independent registered public accounting firm, on management’s
assessment of our internal control over financial reporting is included under
Item 18 on page F-4.




Item 16.
            [Reserved]




Item
      16A.
            Audit Committee Financial Expert




At our annual ordinary shareholders’
meeting held on April 29, 2008, our shareholders reelected and / or appointed
the following individuals as members of the Audit Committee:  Mr. Jose
Elstein Japchik, Mr. Gabriel Alarcón Velázquez and Mr. Juan Carlos Peralta del
Río. Our Board of Directors has determined that the “audit committee financial
expert” within the meaning of this Item 16A, is Mr. Jose Elstein
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.




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Item
      16C.
              Principal Accountant Fees and
Services


For
      the year ended December 31,2006
            
            
            2007(Ps.
      millions)Audit
      Fees
            
            Ps.     4.8
            
            
            Ps.     4.9Audit-Related
      Fees
            
            
            3.8
            
            
            
            2.5Tax
      Fees
            
            
            6.4
            
            
            
            8.7Other
      Fees
            
            
            0.0
            
            
            
            0.0Total
            
            Ps.   15.0
            
            
            Ps.   16.1





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 at the shareholders meeting and was hired to render tax and financial
audit.




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.
              Exemptions from the Listing Standards for Audit
  Committees


Not applicable.


Item
      16E.
              Purchases of Equity Securities by the Issuer and Affiliated
      Purchasers


Not applicable.




74
 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-1Management’s
      Report on Internal Control over Financial Reporting
            F-2Report
      of Independent Registered Public Accounting Firm
            F-3Attestation
      Report of the Registered Public Accounting Firm
            F-4Consolidated
      Balance Sheets as of December 31, 2006 and 2007
            F-5Consolidated
      Statements of Income for each of the years ended
              December
      31, 2005, 2006 and 2007
            F-6Consolidated
      Statements of Stockholders’ Equity for the years ended
              December
      31, 2005, 2006 and 2007
            F-7Consolidated
      Statements of Changes in Financial Position for the
              years
      ended December 31, 2005, 2006 and 2007
            F-8Notes
      to Consolidated Financial Statements
            F-9





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.B. 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.B. 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.B. 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.





75
 Table of Contents





SIGNATURE




GRUPO CASA SABA, S.A.B. 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, 2008
              GRUPO CASA SABA, S.A.B. DE
      C.V.By:
              /s/ Manuel Saba
      AdesName:
      Manuel Saba AdesTitle:  Chief
      Executive Officer









76






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Consolidated
      Financial Statements of Grupo Casa Saba, S.A.B. de C.V.
                PageManagement’s Report on Internal Control over
      Financial Reporting
                F-2Report of Independent Registered Public
      Accounting Firm
                F-3Attestation Report of the
      Registered Public Accounting Firm
                F-4Consolidated Balance Sheets as of December 31,
      2006 and 2007
                F-5Consolidated Statements of Income for each of
      the years ended
                  December 31, 2005, 2006 and
      2007
                F-6Consolidated Statements of Stockholders’
      Equity for the years ended
                  December 31, 2005, 2006 and
      2007
                F-7Consolidated Statements of Changes in
      Financial Position for the
                  years ended December 31, 2005, 2006 and
      2007
                F-8Notes to Consolidated Financial
      Statements
                F-9
    
  F-1
 Index
 MANAGEMENT’S ANNUAL REPORT ON INTERNAL
CONTROL
 OVER
FINANCIAL REPORTING
   Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended. Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
 
 Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of the
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the assets that could have a material effect on the financial
statements.
 
 Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute
assurance that misstatement of our financial statements would be prevented or
detected. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate. Based on our evaluation under the framework in Internal
Control-Integrated Framework, our management has concluded that our internal
control over financial reporting was effective as of December 31, 2007.
 
 Our internal control over financial
reporting as of December 31, 2007 has been audited by Salles Sainz-Grant
Thornton, S.C., an independent registered public accounting firm, as stated in
its report, which can be found on page F-4 of Item 18.
   By:
       /s/ Manuel Saba Ades
                  
                  
                  By: 
      /s/ Alejandro Sadurni GomezName: 
      Manuel Saba Ades
                  
                  
                  Name: 
      Alejandro Sadurni GomezTitle: 
      Chief Executive Officer
                  
                  
                  Title: 
      Chief Financial Officer
 June 30, 2008
   F-2
 Index
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 To the
Board of Directors and Stockholders of
 
 Grupo
Casa Saba, S.A.B. de C.V.:
  We have audited the accompanying
consolidated balance sheets of Grupo Casa Saba, S.A.B. de C. V. and Subsidiaries
(all incorporated in Mexico and collectively the Group) as of December 31, 2006
and 2007, 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, 2007, all stated in thousands of 2007
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. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the financial reporting standards 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.B. de C.V. and Subsidiaries as of
December 31, 2006 and 2007, 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, 2007, in conformity with financial
reporting standards applicable in Mexico.
 
 The accounting principles used by the
Group in preparing the accompanying consolidated financial statements conform to
financial reporting standards applicable in Mexico (Mexican FRS), 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, 2007 and consolidated stockholders’ equity as of
December 31, 2006 and 2007 from Mexican FRS 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 18) and 19). 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.
 
 We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States of America), the Group’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated April 24, 2008 expressed an
unqualified opinion on the effectiveness of the Group’s internal control over
financial reporting.
 
 
 /s/ 
      Salles Sainz-Grant Thornton, S.C.Salles Sainz-Grant Thornton, S.C.Mexico
      City, México
                      April
      24, 2008 (except for Notes 18, 19, 20
                      &
      21 as to which the date is June 19, 2008)
  
 F-3
 Index
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON
 INTERNAL
CONTROL OVER FINANCIAL REPORTING
  
  To the
Board of Directors and Stockholders of
 Grupo
Casa Saba, S.A.B. de C.V.:
  We have
audited Grupo Casa Saba, S.A.B. de C.V. and Subsidiaries (all incorporated in
Mexico and collectively the Group) internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control­-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Group’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting as of December, 31, 2007. Our responsibility is to express
an opinion on the Group’s internal control over financial reporting based on our
audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the  assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  A
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A Company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with Mexican financial
reporting standards, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
  In our
opinion, Grupo Casa Saba, S.A.B. de C.V. and Subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by COSO.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States of America), the consolidated balance sheets of
Grupo Casa Saba, S.A.B. de C.V. and Subsidiaries as of December 31, 2006 and
2007, 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, 2007, and our report dated April 24, 2008
expressed an unqualified opinion on those consolidated financial
statements.
 
 Accounting
practices adopted in Mexico vary in certain significant respects from generally
accepted accounting principles in the United States of America (“U.S. GAAP”).
Information related to the nature and effect of such differences is presented in
Notes 18) and 19) to the consolidated financial statements.
  
 /s/ 
      Salles Sainz - Grant Thornton, S.C.Salles Sainz - Grant Thornton, S.C.Mexico
      City, México
                        April
      24, 2008 (except for Notes 18, 19, 20
                        &
      21 as to which the date is June 19, 2008)
 
 F-4
 Index
  Grupo
Casa Saba, S.A.B. de C.V. and Subsidiaries
  Consolidated balance sheets
 as
of December 31, 2006 and 2007
 (Amounts
stated in thousands of 2007 year end constant Mexican pesos
(Ps.)
 and
thousands of U.S. dollars ($))
   2006
                
                
                2007
                
                
                Convenience
      translation 2007
                
                
                
                2006
                
                2007
                
                Convenience
      translation 2007CURRENT
      ASSETS:
                
                
                
                
                
                
                
                
                
                CURRENT
      LIABILITIES:Cash and cash
      equivalents (Note 3.d)
                
                Ps.
                639,557
                
                
                Ps.
                684,312
                
                
                $
                62,691
                
                Bank loans
      (Note 8)
                
                Ps.
                17,044
                
                
                Ps.
                
                
                
                $
                -Accounts
      receivable, net (Notes 3.f and 4)
                
                
                4,600,405
                
                
                
                4,796,267
                
                
                
                439,392
                
                Trade accounts
      payable
                
                
                4,135,894
                
                
                
                5,178,161
                
                
                
                474,377Inventories,
      net (Notes 3.c and 5)
                
                
                3,966,952
                
                
                
                4,872,712
                
                
                
                446,395
                
                Other payables
      and accrued liabilities
                
                
                215,883
                
                
                
                67,841
                
                
                
                6,215Prepaid
      expenses
                
                
                14,232
                
                
                
                16,782
                
                
                
                1,537
                
                Employee
      profit sharing (Notes 3.k and 12.d)
                
                
                5,960
                
                
                
                3,817
                
                
                
                350Total current
      assets
                
                
                9,221,146
                
                
                
                10,370,073
                
                
                
                950,015
                
                Total current
      liabilities
                
                
                4,374,781
                
                
                
                5,249,819
                
                
                
                480,942RETIREMENT
      PENSIONS, SENIORITY PREMIUMAND SEVERANCE BENEFITS (Note
      3.j)
                
                
                108,894
                
                
                
                103,130
                
                
                
                9,448DEFERRED
      INCOME TAX (Notes 3.k and 9)
                
                
                747,251
                
                
                
                593,849
                
                
                
                54,403PROPERTY AND
      EQUIPMENT, net (Notes 3.c, 3.g and 6)
                
                
                1,198,242
                
                
                
                1,269,821
                
                
                
                116,330
                
                DEFERRED
      EMPLOYEE PROFITSHARING (Notes 3.k and
    9)
                
                
                4,028
                
                
                
                197
                
                
                
                18Total
      liabilities
                
                
                5,234,954
                
                
                
                5,946,995
                
                
                
                544,811STOCKHOLDERS'
      EQUITYCapital stock
      (Note 11)
                
                
                1,123,764
                
                
                
                1,123,764
                
                
                
                102,949Premium on
      stock sold
                
                
                869,878
                
                
                
                869,878
                
                
                
                79,691GOODWILL, net
      (Note 3.h)
                
                
                184,826
                
                
                
                217,214
                
                
                
                19,899
                
                Reserve for
      share repurchases (Note 11)
                
                
                1,062,201
                
                
                
                1,062,201
                
                
                
                97,309Retained
      earnings
                
                
                4,938,724
                
                
                
                5,668,439
                
                
                
                519,292Deficit on
      restatement (Note 3.c)
                
                
                (2,381,779
                )
                
                
                (2,571,740
                )
                
                
                (235,600
                )Accrued
      deferred income tax effect
                
                
                (40,695
                )
                
                
                (40,695
                )
                
                
                (3,728
                )Additional
      employee retirement liability (Note 3.j)
                
                
                (28,076
                )
                
                
                (19,127
                )
                
                
                (1,752
                )OTHER ASSETS,
      net
                
                
                174,757
                
                
                
                182,607
                
                
                
                16,729
                
                Total
      stockholders' equity
                
                
                5,544,017
                
                
                
                6,092,720
                
                
                
                558,161Total
      assets
                
                Ps.
                10,778,971
                
                
                Ps.
                12,039,715
                
                
                $
                1,102,973
                
                Total
      liabilities and stockholders' equity
                
                Ps.
                10,778,971
                
                
                Ps.
                12,039,715
                
                
                $
                1,102,973
  The accompanying
notes are an integral part of these consolidated financial
statements
  F-5
 Index
 Grupo Casa Saba, S.A.B. de C.V. and
Subsidiaries
 
 Consolidated statements of income
 for
the years ended December 31, 2005, 2006 and 2007
 (Amounts
stated in thousands of 2007 year end constant Mexican pesos (Ps.)
 and
thousands of U.S. dollars ($))
 
 2005
                
                
                
                2006
                
                
                
                2007
                
                
                Convenience
      translation 2007Net sales
      (Note 3.o)
                
                Ps.
                23,615,926
                
                
                
                Ps.
                24,486,493
                
                
                
                Ps.
                25,259,662
                
                
                
                $
                2,314,067Cost of
      sales
                
                
                21,178,991
                
                
                
                
                22,066,417
                
                
                
                
                22,775,405
                
                
                
                
                2,086,481Gross
      profit
                
                
                2,436,935
                
                
                
                
                2,420,076
                
                
                
                
                2,484,257
                
                
                
                
                227,586Operating
      expensesSelling
                
                
                586,222
                
                
                
                
                548,927
                
                
                
                
                594,300
                
                
                
                
                54,444Administrative
                
                
                884,170
                
                
                
                
                817,014
                
                
                
                
                830,552
                
                
                
                
                76,0881,470,392
                
                
                
                
                1,365,941
                
                
                
                
                1,424,852
                
                
                
                
                130,532Operating
      income
                
                
                966,543
                
                
                
                
                1,054,135
                
                
                
                
                1,059,405
                
                
                
                
                97,054Other income,
      net
                
                
                42,303
                
                
                
                
                46,331
                
                
                
                
                51,756
                
                
                
                
                4,741Comprehensive
      gain or loss on financing, netInterest
      income
                
                
                (29,384
                )
                
                
                
                (31,079
                )
                
                
                
                (16,625
                )
                
                
                
                (1,523
                )Interest
      expense
                
                
                14,066
                
                
                
                
                10,608
                
                
                
                
                11,156
                
                
                
                
                1,022Exchange loss
      (gain) (Note 3.l)
                
                
                2,896
                
                
                
                
                (1,805
                )
                
                
                
                1,884
                
                
                
                
                173Loss on
      monetary position (Note 3.c)
                
                
                10,729
                
                
                
                
                17,925
                
                
                
                
                21,433
                
                
                
                
                1,963(1,693
                )
                
                
                
                (4,351
                )
                
                
                
                17,848
                
                
                
                
                1,635Non-ordinary
      item
                
                
                
                
                
                
                
                (50,278
                )Income before
      provisions
                
                
                1,010,539
                
                
                
                
                1,155,095
                
                
                
                
                1,093,313
                
                
                
                
                100,160Provisions
      for income tax
                
                
                224,313
                
                
                
                
                238,532
                
                
                
                
                188,226
                
                
                
                
                17,244Net
      income
                
                Ps.
                786,226
                
                
                
                Ps.
                916,563
                
                
                
                Ps.
                905,087
                
                
                
                $
                82,916Net income per share (Note 3.n)
                
                Ps.
                2.962
                
                
                
                Ps.
                3.453
                
                
                
                Ps.
                3.410Weighted
      average sharesoutstanding
      (in thousands)
                
                
                265,419
                
                
                
                
                265,419
                
                
                
                
                265,419
    The accompanying
notes are an integral part of these consolidated financial
statements
    F-6
 Index
   Grupo
Casa Saba, S.A.B. de C.V. and Subsidiaries
  Consolidated statements of stockholders'
equity
 for
the years ended December 31, 2005, 2006 and 2007
 (Amounts
stated in thousands of 2007 year end constant Mexican pesos (Ps.)
)
 
 Capital
      stock
              
              
              
              
              
              Reserve
      for
              
              
              
              
              
              
              
              
              Accrued
      deferred
              
              
              Additional
      employeeHistorical
              
              
              Restatement
              
              
              Premium on
      stock sold
              
              
              share
      repurchases
              
              
              Retained
      earnings
              
              Deficit on
      restatement
              
              income tax
      effect
              
              retirement
      liability
              
              TotalBalances as
      of
                January 1,
      2005
              
              Ps.
              167,903
              
              
              Ps.
              955,861
              
              
              Ps.
              869,878
              
              
              Ps.
              1,062,201
              
              
              Ps.
              3,536,570
              
              
              Ps.
              (2,052,317
              )
              
              Ps.
              (40,695
              )
              
              Ps.
              
              
              
              Ps.
              4,499,401Dividends
      paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (140,315
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (140,315
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              786,226
              
              
              
              (132,955
              )
              
              
              
              
              
              
              (30,563
              )
              
              
              622,708Balances as
      of
                December 31,
      2005
              
              
              167,903
              
              
              
              955,861
              
              
              
              869,878
              
              
              
              1,062,201
              
              
              
              4,182,481
              
              
              
              (2,185,272
              )
              
              
              (40,695
              )
              
              
              (30,563
              )
              
              
              4,981,794Dividends
      paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (160,320
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (160,320
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              916,563
              
              
              
              (196,507
              )
              
              
              
              
              
              
              2,487
              
              
              
              722,543Balances as
      of
                December 31,
      2006
              
              
              167,903
              
              
              
              955,861
              
              
              
              869,878
              
              
              
              1,062,201
              
              
              
              4,938,724
              
              
              
              (2,381,779
              )
              
              
              (40,695
              )
              
              
              (28,076
              )
              
              
              5,544,017Dividends
      paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (175,372
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (175,372
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              905,087
              
              
              
              (189,961
              )
              
              
              
              
              
              
              8,949
              
              
              
              724,075Balances as
      of
                December 31,
      2007
              
              Ps.
              167,903
              
              
              Ps.
              955,861
              
              
              Ps.
              869,878
              
              
              Ps.
              1,062,201
              
              
              Ps.
              5,668,439
              
              
              Ps.
              (2,571,740
              )
              
              Ps.
              (40,695
              )
              
              Ps.
              (19,127
              )
              
              Ps.
              6,092,720
     The accompanying
notes are an integral part of these consolidated financial
statements
 F-7
 Index
 Grupo
Casa Saba, S.A.B. de C.V. and Subsidiaries
 
 Consolidated statements of changes in financial
position
 for
the years ended December 31, 2005, 2006 and 2007
 (Amounts
stated in thousands of 2007 year end constant Mexican pesos (Ps.)
 and
thousands of U.S. dollars ($))
 2005
                
                
                
                2006
                
                
                
                2007
                
                
                
                Convenience
      translation 2007Operating
      activities:Net
      income
                
                Ps.
                786,226
                
                
                
                Ps.
                916,563
                
                
                
                Ps.
                905,087
                
                
                
                $
                82,916Add (less) -
      Non cash items:Depreciation
      and amortization
                
                
                140,367
                
                
                
                
                76,407
                
                
                
                
                86,019
                
                
                
                
                7,880Allowance for
      doubtful accounts
                
                
                76,063
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Loss on sale
      of property and equipment
                
                
                4,798
                
                
                
                
                7,588
                
                
                
                
                14,020
                
                
                
                
                1,285Provision for
      retirement pensions, senioritypremium and
      severance benefits
                
                
                20,795
                
                
                
                
                20,721
                
                
                
                
                19,859
                
                
                
                
                1,819Deferred
      income tax
                
                
                95,481
                
                
                
                
                (67,277
                )
                
                
                
                (126,331
                )
                
                
                
                (11,573
                )Deferred
      employee profit sharing
                
                
                (5,429
                )
                
                
                
                1,030
                
                
                
                
                (3,684
                )
                
                
                
                (338
                )1,118,301
                
                
                
                
                955,032
                
                
                
                
                894,970
                
                
                
                
                81,989Changes in
      assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                
                
                (574,322
                )
                
                
                
                (107,174
                )
                
                
                
                (195,862
                )
                
                
                
                (17,943
                )Inventories
                
                
                112,661
                
                
                
                
                (287,415
                )
                
                
                
                (1,095,721
                )
                
                
                
                (100,380
                )Prepaid
      expenses
                
                
                (1,932
                )
                
                
                
                (2,701
                )
                
                
                
                (2,550
                )
                
                
                
                (234
                )Trade
      accounts payable
                
                
                (201,701
                )
                
                
                
                (215,488
                )
                
                
                
                1,042,267
                
                
                
                
                95,483Other
      payables and accrued liabilities
                
                
                63,230
                
                
                
                
                (24,694
                )
                
                
                
                (148,042
                )
                
                
                
                (13,562
                )Employee
      profit sharing
                
                
                1,433
                
                
                
                
                1,442
                
                
                
                
                (2,143
                )
                
                
                
                (196
                )(600,631
                )
                
                
                
                (636,030
                )
                
                
                
                (402,051
                )
                
                
                
                (36,832
                )Net
      cash provided by operating activities
                
                
                517,670
                
                
                
                
                319,002
                
                
                
                
                492,919
                
                
                
                
                45,157Investing
      activities:Additions of
      property and equipment,net of
      retirements
                
                
                48,866
                
                
                
                
                120,148
                
                
                
                
                162,707
                
                
                
                
                14,906Increase in
      other assets
                
                
                44,413
                
                
                
                
                59,285
                
                
                
                
                49,275
                
                
                
                
                4,514Reserve for
      retirement pensions, senioritypremium and
      severance benefits
                
                
                13,276
                
                
                
                
                2,476
                
                
                
                
                16,548
                
                
                
                
                1,516Net cash used
      in investing activities
                
                
                106,555
                
                
                
                
                181,909
                
                
                
                
                228,530
                
                
                
                
                20,936Financing
      activities:Dividends
      paid
                
                
                (140,315
                )
                
                
                
                (160,320
                )
                
                
                
                (175,372
                )
                
                
                
                (16,066
                )Bank loans,
      net of payments made
                
                
                
                
                
                
                
                17,044
                
                
                
                
                (17,044
                )
                
                
                
                (1,561
                )Deferred
      income tax
                
                
                (35,778
                )
                
                
                
                (125,533
                )
                
                
                
                (27,071
                )
                
                
                
                (2,480
                )Deferred
      employee profit sharing
                
                
                (287
                )
                
                
                
                (120
                )
                
                
                
                (147
                )
                
                
                
                (14
                )Net cash used
      in financing activities
                
                
                (176,380
                )
                
                
                
                (268,929
                )
                
                
                
                (219,634
                )
                
                
                
                (20,121
                )Net increase
      (decrease) in cashand
      cash equivalents
                
                
                234,735
                
                
                
                
                (131,836
                )
                
                
                
                44,755
                
                
                
                
                4,100Cash and cash
      equivalents atbeginning of year
                
                
                536,658
                
                
                
                
                771,393
                
                
                
                
                639,557
                
                
                
                
                58,591Cash and cash
      equivalents atend of
      year
                
                Ps.
                771,393
                
                
                
                Ps.
                639,557
                
                
                
                Ps.
                684,312
                
                
                
                $
                62,691Supplementary
      information:Income tax
      and asset tax paid
                
                Ps.
                288,099
                
                
                
                Ps.
                415,508
                
                
                
                Ps.
                355,121
                
                
                
                $
                32,533Employee
      profit sharing paid
                
                Ps.
                2,789
                
                
                
                Ps.
                2,246
                
                
                
                Ps.
                991
                
                
                
                $
                90Interest
      paid
                
                Ps.
                4,434
                
                
                
                Ps.
                2,773
                
                
                
                Ps.
                3,598
                
                
                
                $
                329
    The accompanying
notes are an integral part of these consolidated financial
statements
 F-8
 Index
  GRUPO CASA SABA,
S.A.B. DE C.V. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
 
 AS OF DECEMBER 31,
2005, 2006 AND 2007
 
 (Amounts stated in
thousands of 2007 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.B. 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 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 product lines is shown in
Note 14).
 
 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)2006
                  
                  2007Direct
      interest:Casa Saba,
      S.A de C.V.
                  
                  (Casa
      Saba)
                  
                  99.9%
                  
                  99.9%Distribuidora
      Casa Saba, S.A. de C.V.
                  
                  (Dicasa)
                  
                  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%Farmacias ABC
      de México, S.A. de C.V.
                  
                  (Farmacias
      ABC)
                  
                  
                  
                  99.9%Other real
      estate and service companies (20 subsidiaries)
                  
                  
                  
                  99.9%
                  
                  99.9%Indirect
      interest:Centennial,
      S.A. de C.V.
                  
                  (Centennial)
                  
                  99.9%
                  
                  99.9%Distribuidora
      Drogueros, S.A. de C.V.
                  
                  (Didrosa)
      (*)
                  
                  99.9%
                  
                  99.9%Distribuidora
      Solis Garza, S.A. de C.V. (now Daltem Provee Norte, S.A. de
      C.V.)
                  
                  (Daltem)
                  
                  99.9%
                  
                  99.9%Drogueros,
      S.A. de C.V.
                  
                  (Drogueros)
                  
                  99.9%
                  
                  99.9%Farmacias
      Solis Hospitalarias y Oncologicas, S.A. de C.V.
                  
                  (Farmacias
      Solis)
                  
                  99.9%
                  
                  99.9%Grupo
      Mexatar, S.A. de C.V.
                  
                  (Mexatar)
                  
                  99.9%
                  
                  99.9%Servicios
      CorporativosDrogueros, S.A. de C.V.
                  
                  (Secodro)
      (*)
                  
                  99.9%
                  
                  99.9%Inmuebles
      Visosil, S.A. de C.V.
                  
                  (Visosil)
                  
                  99.9%
                  
                  99.9%Servicios
      Corporativos Saba, S.A. de  C.V.
                  
                  (Secosa))
                  
                  99.9%
                  
                  99.9%Other service
      companies (4 subsidiaries)
                  
                  
                  
                  99.9%
                  
                  99.9%
 
 (*) In 2006, these subsidiaries were included
in “Other real estate and service companies”.
 
  F-9
 Index
  During 2006 and 2007, the Group’s management
and its stockholders 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
documents for collection agreements dated January 31, and March 31, 2006, the
Group’s subsidiaries Centennial and Casa Saba sold certain collection rights
applicable to individuals and legal entities to the Company at a discount in the
amount of Ps. 135,912 and Ps. 194,871, respectively (Ps.126,624 and Ps. 181,975
historical Mexican pesos). The selling price of the assignment agreed upon
amounted to Ps. 65,835 and Ps. 142,540, respectively (Ps. 61,336 and Ps. 133,169
historical Mexican pesos).
 
 b)     
Through an assignment of documents for collection agreements dated December 31,
2007, the Group’s subsidiaries Centennial, Casa Saba, Citem and Drogueros sold
certain collection rights applicable to individuals and legal entities to the
Company at a discount in the amount of Ps. 44,761, Ps. 123,739, Ps. 53,449 and
Ps. 17,944, respectively. The selling price of the assignment agreed upon
amounted to Ps.24,214 and Ps. 86,730, Ps. 33,636 and Ps. 9,837,
respectively.
 
 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 2006 and 2007 fiscal year end, that gain amounted to
Ps. 44,207 (Ps. 42,605 historical Mexican pesos) and Ps. 23,397,
respectively.
 
 c)      Pursuant
to a certain contract dated September 28, 2005, the Group decided to renew its
technological platform to make execution processes more efficient, as well as to
redocument its applications. At 2007 fiscal year, the amount incurred was Ps.
65,999 (Ps. 63,608 historical Mexican pesos), and was included in the line item
“Other assets”. This technological platform was placed in service and will be
amortized at beginning of fiscal 2008.
 
 d)In March 2006, the
subsidiary Alycom Saba, S.A. de C.V. was incorporated to rendering
administrative, legal, accounting, tax, finance, treasury, and electronic data
processing services to the Group’s subsidiaries.
 
 e)     
Through a stock purchase agreement dated April 5, 2006, the Company acquired all
of the issued and outstanding shares of the capital stock of Servicios
Administrativos Xtra, S. A. de C. V., and obtained control thereof. The
subsidiary changed its corporate name to Servicios Administrativos Grupo Casa
Saba, S. A. de C. V. in September 2007 and to Daltem Provee Nacional, S.A. de
C.V. in March 2008. The subsidiary renders complementary services to the Group’s
subsidiaries. The agreed upon selling price amounted to Ps.25,000 historical
Mexican pesos. The acquisition was accounted for by applying the purchase
method, which requires the recognition and initial valuation of the net assets
of the subsidiary acquired. Consequently, the cost of the acquired entity was
allocated by the Company to acquired assets and assumed liabilities by
considering their applicable fair value at acquisition date. As a result, an
excess of fair value of the net assets acquired over the acquisition cost was
determined in the amount of Ps. 53,238 historical Mexican pesos. This excess was
partially applied as a write-down of the value of the fixed assets acquired in
the amount of Ps.6,197, whereas the remaining amount was applied as an
non-ordinary item to income, in accordance with Mexican FRS. This provision is
virtually identical to U.S. GAAP.
 
 f) Through a stock
purchase agreement dated October 16, 2006, the Company acquired all of the
issued and outstanding shares of the capital stock of Distribuidora Solis Garza,
S.A. de C.V. (now Daltem) and Farmacias Solis, and obtained control thereof,
through its subsidiaries Distribuidora Citem, S. A. de C. V. (Distribuidora
Citem) and Visosil. Distribuidora Citem acquired all shares except one, which
was acquired by Visosil. The acquired companies distribute pharmaceutical
products. The agreed upon selling price amounted to Ps. 35,480 historical
Mexican pesos (Ps. 30,158 for Daltem and Ps. 5,322 for Farmacias Solis). Those
acquisitions were accounted for by applying the purchase method. As a result, an
excess of fair value of the net assets acquired over the acquisition cost was
determined in the amount of Ps. 5,114 historical Mexican pesos. This excess
was applied as a write-down of the value of the fixed assets acquired, in
accordance with Mexican FRS. This provision is virtually identical to U.S.
GAAP.
  F-10
 Index
  g)At a General Extraordinary
Stockholders’ Meeting held on December 5, 2006, the stockholders resolved to
approve the amendment of the Company’s bylaws to adapt them to the most recent
amendments to the Securities Market Law (LMV-Spanish acronym), effective June
28, 2006. Those amendments strengthen the transparency of information, as well
as the corporate governance of companies. As a result, corporations that had
representative shares of their capital stock listed on the National Registry of
Securities in Mexico became Publicly Traded Limited Liability Companies (S.A.B.–
Spanish acronym). The foregoing neither affected the rights that may be
exercised by the Company’s stockholders, nor did it relieve the Company from
meeting its obligations as an issuer, in terms of the LMV.
 
 h)Through a stock purchase
agreement dated November 14, 2007, the Company acquired all of the issued and
outstanding shares of the capital stock of Farmacias ABC, and obtained control
thereof, The acquired Company distributes pharmaceutical products. The agreed
upon selling price amounted to Ps.69,947 historical Mexican pesos. This
acquisition was accounted for by applying the purchase method. As a result, an
excess of acquisition cost over the fair value of the net assets acquired was
determined in the amount of Ps. 32,551 historical Mexican pesos. This carrying
value of goodwill is subject to periodic impairment valuation. The Company has
chosen the 4th quarter
as the measuremet date to perform its impairment test.
 
 i) 
     Through a stock purchase agreement dated November
14, 2007, the Company acquired all of the issued and outstanding shares of the
capital stock of Repartos a Domicilio, S.A. de C.V., which is included in “Other
real estate and services companies”, and obtained control thereof, The acquired
Company distributes pharmaceutical products. The agreed upon selling price
amounted to Ps. 51 historical Mexican pesos, which is equivalent at the fair
value of the net assets acquired. This acquisition was accounted for by applying
the purchase method.
 
 As a result of the transactions referred to in
h) and i) above, the results of operations of Farmacias ABC and Repartos a
Domicilio, S. A. de C. V. are included in the accompanying consolidated
financial statements, effective the acquisition date.
 
 j)       Pursuant
to the General Extraordinary Stockholders’ Meeting held on January 8, 2007, the
stockholders of La Nueva Leona, S. A. de C. V., which is included in “Other real
estate and service companies”, resolved the approval of a capital stock increase
in the amount of Ps. 10,000, which apply to 10,000,000 shares fully subscribed
for and paid by the Company.  Consequently, effective that date the
Company has full control thereof.
 
 k)  
   The following subsidiaries were recently incorporated: (i)
Servicios Corporativos Citem, S.A. de C.V. and Seadefarm, S. A. de C. V. were
incorporated on October 31, 2007, (ii) Servicios Corporativos Doctorgen, S. A.
de C. V. was incorporated on November 27, 2007, and (iii) Distribuidora
Centennial, S. A. de C. V. was incorporated on December 5, 2007. Those
subsidiaries will mainly render administrative, legal, accounting, tax, finance,
treasury, and electronic data processing services to certain subsidiaries of the
Group.
 
 Pursuant to various Minutes of Extraordinary
and Ordinary Stockholders’ Meetings held on April 3, November 26, and December
4, 2007, the stockholders of subsidiaries La Nueva Leona, S. A. de C. V.,
Bloques y Ladrillos, S. A. de C. V. (included in “Other real estate and service
companies”), and Distribuidora Solis Garza, S.A. de C.V. resolved to have the
corporate names changed to Comercializadora Casa Saba, S. A. de C. V.,
Medicamentos Doctorgen, S. A. de C.V. and Dalten Provee Norte, S.A. de C.V.,
respectively.
 
 
 2.      Basis
of presentation:
 
 The accompanying financial statements have been
prepared based on the Mexican Financial Reporting Standards issued by the
Research and Development Board of Financial Reporting Standards (CINIF-Spanish
acronym). Consequently, CINIF renamed the accounting principles generally
accepted (Mexican GAAP) as Financial Reporting Standards or Mexican
FRS.
  Certain accounting principles applied by the
Group in accordance with Mexican FRS differ in certain material respects to U.S.
GAAP, as discussed in Note 18. A partial reconciliation of the consolidated net
income and stockholders’ equity from Mexican FRS to U.S. GAAP is included in
Note 19. The most significant Mexican FRS followed by the Group is described in
Note 3).
  F-11
 Index
  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, 2007. 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. 10.9157 (pesos) per U.S. dollar as
quoted by Banco de Mexico in the Official Daily Gazette as of January 2, 2008.
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, certain
provisions, income tax and valuation of contingencies. Actual results may differ
from these estimates and assumptions.
 
 b)      Basis
of consolidation
 
 The accompanying financial statements are
presented on a consolidated basis under Mexican FRS. Those financial statements
include that 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’ audited financial statements, prepared in
accordance with Mexican FRS. 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 FRS 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 recognize 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.
  F-12
 Index
  
 The impact of inflation on the financial
information is recognized under Bulletin B-10, “Recognition of the Impact of
Inflation on the Financial Information (Integrated document)” or Bulletin B-10
of Mexican FRS 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, 2007, 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 income as a
component of comprehensive gain or loss on 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.
 
 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. Deficit on restatement 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 exchange fluctuation are included in income as a component of comprehensive
gain or loss on financing.
  e)      Financial
instruments
 
 All financial assets and financial liabilities
derived from any type of financial instrument are recognized in the balance
sheet, and assessed at fair value. The valuation effect, as well as costs and
returns generated by financial instruments acquired for trading purposes
(trading securities) are recorded as part of the comprehensive gain or loss on
financing when incurred or earned, respectively.
   F-13
 Index
  As of December 31, 2006 and 2007, the carrying
value of financial instruments approximates its fair value due to their
short-term nature and the available financing rates are considered for the
Group, in connection with bank loans with similar terms and due dates. At the
issue date of the financial statements, the Group had not entered into
derivative financial instrument transactions or hedge transactions.
  f) Allowance for
doubtful accounts
 
 The allowance for doubtful accounts represents
the Group’s estimate of the probable loss in all trade receivables by
considering the historical trend of payment performance of customers and factors
surrounding the specific credit risk thereof.
 
 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) of
Mexican FRS, 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. In that event, an impairment loss is determined by the
excess of carrying value of long-lived assets over recovery value thereof. 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 allows the reversal of the recognition of impairment under
certain circumstances. 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 2006 and 2007 fiscal year end, the Group’s
management determined that there were no impairment indications that had a
significant adverse impact in the carrying value of property and equipment.
Accordingly, fair value of property and equipment was equivalent to or greater
than the carrying value thereof at that date.
 
 h)Intangible assets and
goodwill
 
 Intangible assets refer to costs incurred
and/or rights or privileges acquired that generate future specific 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 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. If
there is no observable market for those assets their value is reduced to the
amount of goodwill or to zero. The Group’s goodwill arises from business
combinations through acquiring shares of capital stock of subsidiary companies
at a price above or below 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. 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. Negative goodwill (excess of fair
value of the net asset acquired over acquisition cost thereof) is recorded in
income as a non-ordinary gain at the acquisition date.
  At 2006 and 2007 fiscal year end, the Group
completed the fair value based impairment test on its goodwill. As a result, the
Group determined there was no impact of impairment that should be
recorded.
 
 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 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.
  F-14
 Index
  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 that substantially
exceed the immediate needs of the Group or represent contractual obligations
(restrictive covenants or significant events related to
liabilities).
 
 j) Labor
obligations
 
 i) The Group recognizes
the labor obligations for retirement pensions and seniority premiums for all
their employees, as well as severance benefits to employees when they complete
the employment relationship prior to retirement age due to causes other than
restructuring. These labor obligations are derived from defined benefit plans.
Retirement pensions are granted to all personnel that have completed at least
ten years of pension service and have reached sixty-five years of age. 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. Severance benefits are granted in the event of dismissal, in accordance
with a certain formula referred to in plan.
 
 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" of Mexican FRS. Severance benefits which
arise from restructuring causes, should continue to follow the guidelines of
Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and
commitments” of Mexican FRS.
 
 The Group has created a fund placed in an
irrevocable trust in the financial institution IXE Banco, S.A. to meet the labor
obligations derived from defined benefits. During 2006 and 2007, the
contributions to the fund based on actuarial computations amounted to Ps. 16,174
(Ps. 15,588 historical Mexican pesos) and Ps.15,512, 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.
 
 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 actuarial
assumptions are stated in real terms (nominal rates discounted by
inflation).
  December
      31,2006
                  
                  2007
 Labor
      liabilityAccumulated
      benefit obligation
                  Ps.
                  
                  
                  162,707
                  
                  
                  Ps.
                  
                  
                  171,767Additional
      benefit related to futurecompensation
      increases
                  
                  
                  
                  30,999
                  
                  
                  
                  
                  
                  38,685Projected
      benefit obligation
                  
                  
                  
                  193,706
                  
                  
                  
                  
                  
                  210,452Fair value of
      plan assets
                  
                  
                  
                  73,446
                  
                  
                  
                  
                  
                  90,240Funded
      status
                  
                  
                  
                  120,260
                  
                  
                  
                  
                  
                  120,212Unrecognized
      net transition obligation
                  
                  
                  
                  (42,433
                  )
                  
                  
                  
                  
                  (36,636
                  )Negative
      amendments
                  
                  
                  
                  15,515
                  
                  
                  
                  
                  
                  9,922Unrecognized
      net loss
                  
                  
                  
                  (47,038
                  )
                  
                  
                  
                  
                  (42,632
                  )Unfunded
      accrued pension cost, seniority premium and severance benefits to be
      recognized
                  
                  
                  
                  46,304
                  
                  
                  
                  
                  
                  50,866Additional
      employee retirement liability
                  
                  
                  
                  62,590
                  
                  
                  
                  
                  
                  52,264Net
      present liability
                  Ps.
                  
                  
                  108,894
                  
                  
                  Ps.
                  
                  
                  103,130
   F-15
 Index
  December
      31,2006
                    
                    2007
 Net
      periodic costService
      cost
                    Ps.
                    8,910
                    
                    
                    Ps.
                    
                    
                    8,292Interest
      cost
                    
                    9,154
                    
                    
                    
                    
                    
                    9,968Expected
      return on plan assets
                    
                    (3,787
                    )
                    
                    
                    
                    
                    (4,996
                    )Amortization
      of unrecognized net transition obligation
                    
                    5,502
                    
                    
                    
                    
                    
                    5,027Amortization
      of amendments
                    
                    (1,079
                    )
                    
                    
                    
                    
                    (880
                    )Amortization
      of unrecognized net loss
                    
                    2,021
                    
                    
                    
                    
                    
                    1,777Other
                    
                    
                    
                    
                    
                    
                    
                    671Net
      periodic cost
                    Ps.
                    20,721
                    
                    
                    Ps.
                    
                    
                    19,859
  Assumptions
      (real rates)Discount
      rate
                    
                    5.5%
                    
                    
                    
                    
                    5.0%Salary
      increase rate
                    
                    1.0%
                    
                    
                    
                    
                    0.5%Return on
      plan assets
                    
                    6.5%
                    
                    
                    
                    
                    6.0%
  Change
      in projected benefit obligationActual
      projected benefit obligation atbeginning of
      year
                  Ps.
                  
                  
                  175,456
                  
                  
                  Ps.
                  
                  
                  193,221Service
      cost
                  
                  
                  
                  14,487
                  
                  
                  
                  
                  
                  8,583Interest
      cost
                  
                  
                  
                  8,335
                  
                  
                  
                  
                  
                  10,316Amendments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,254Actuarial
      loss
                  
                  
                  
                  8,783
                  
                  
                  
                  
                  
                  25,736Benefits
      paid
                  
                  
                  
                  (13,045
                  )
                  
                  
                  
                  
                  (15,037
                  )Effect on
      curtailment on benefit obligation
                  
                  
                  
                  (310
                  )
                  
                  
                  
                  
                  (3,311
                  )Effect on
      settlement on benefit obligation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13,310
                  )Projected
      benefit obligation at end of year
                  Ps.
                  
                  
                  193,706
                  
                  
                  Ps.
                  
                  
                  210,452Change
      in plan assetsFair value of
      plan assets at beginning of year
                  Ps.
                  
                  
                  72,879
                  
                  
                  Ps.
                  
                  
                  89,011Actual return
      on plan assets
                  
                  
                  
                  13,851
                  
                  
                  
                  
                  
                  25,998Employer
      contributions
                  
                  
                  
                  386
                  
                  
                  
                  
                  
                  403Benefits
      paid
                  
                  
                  
                  (10,680
                  )
                  
                  
                  
                  
                  (13,044
                  )Benefits paid
      as result of settlement effect
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (12,128
                  )Asset
      reversion
                  
                  
                  
                  (2,990
                  )Fair value of
      plan assets at end of year
                  Ps.
                  
                  
                  73,446
                  
                  
                  Ps.
                  
                  
                  90,240Funded
      status
                  Ps.
                  
                  
                  120,260
                  
                  
                  Ps.
                  
                  
                  120,212Unrecognized
      net transition obligation
                  
                  
                  
                  (42,433
                  )
                  
                  
                  
                  
                  (36,636
                  )Negative
      amendments
                  
                  
                  
                  15,515
                  
                  
                  
                  
                  
                  9,922Unrecognized
      net loss
                  
                  
                  
                  (47,038
                  )
                  
                  
                  
                  
                  (42,632
                  )Unfunded
      accrued pension cost, seniority premium and severance benefits to be
      recognized
                  Ps.
                  
                  
                  46,304
                  
                  
                  Ps.
                  
                  
                  50,866
 F-16
 Index
 December
      31,2006
                      
                      2007
 Amounts
      recognized in the statement of financial
      position consist of:Unfunded
      accrued pension cost, seniority premium and severance benefits to be
      recognized
                  Ps.
                  46,304
                  
                  Ps.
                  
                  
                  50,866Accrued
      benefit liability
                  Ps.
                  62,590
                  
                  Ps.
                  
                  
                  52,266Intangible
      asset
                  
                  (34,514
                  )
                  
                  
                  
                  (33,139
                  )Accumulated
      other comprehensive income
                  
                  (28,076
                  )
                  
                  
                  
                  (19,127
                  )Ps.
                  -
                  
                  Ps.
                  
                  
                  -Net amount
      recognized
                  Ps.
                  46,304
                  
                  Ps.
                  
                  
                  50,866
 
 At 2006 and 2007 fiscal year end, the
additional employee retirement liability (net present liability over net
projected obligation) exceeded the limit amount for recording an intangible
asset as an offsetting entry in certain subsidiaries. The intangible asset is
recorded up to the algebraic sum of the unrecognized net transition obligation
plus prior services and amendments of plan. Therefore, at fiscal year end
2006 and 2007, the excess of additional employee retirement liability over the
intangible asset was recognized in stockholders’ equity as a debit item in the
amount of Ps. 28,076 (Ps.27,059 historical Mexican pesos) and Ps. 19,127,
respectively, under Mexican FRS.
 
 k)Income Tax, Corporate Flat
Tax (IETU-Spanish acronym), and employee profit sharing
 
 i) The Group records the
provision for both income tax and employee profit sharing due based on the
amount payable determined based on taxable income that is obtained as provided
for in the tax provisions in effect.
 
 ii)As discussed in Note 12 f),
the IETU Law went into effect on January 1, 2008. As a result of the transition,
the Company and its subsidiaries performed a projection based on reasonable
assumptions to identify the expected trend of tax on earnings (income tax or
IETU) that will be due in the next three years, in accordance with the financial
reporting standard interpretation IFRS-8 (Note 16 iii)). Accordingly, the
Company and its subsidiaries determined that income tax will be paid normally in
future years. Therefore, at 2007 fiscal year
end, the Group recognized deferred income tax, as referred below. Management
restates this estimate periodically.
 
 iii)  The deferred income tax effect
is determined by applying the “asset and liability method” in accordance with
Mexican FRS which is virtually identical to U.S. 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 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.
  F-17
 Index
  In the event that it is likely that a portion
or the entire deferred income tax/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 sharing 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, 2006 and 2007,
the Group determined that there was no valuation allowance to be
recognized.
  iv)The Group prepares its
income tax return and asset tax return on a consolidated basis. The Group and
its consolidated subsidiaries meet the characteristics set forth in the Income
Tax Law for Holding Company and controlled companies, respectively. 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) Comprehensive gain or
loss on financing (RIF - Spanish acronym)
 
 The RIF consists of interest, the effect of
exchange rate fluctuations, the gain or loss on monetary position, and changes
in fair value of financial instruments. The RIF effect is recorded in income,
except as discussed in the following paragraph.
 
 Effective January 1, 2007, FRS D-6
“Capitalization of the comprehensive gain or loss on financing” requires that
RIF attributable to ratable assets be capitalized. The amount of the ratable
asset including the capitalized RIF should not exceed the amount of the expected
economic benefit. Capitalization starts when activities to prepare the asset for
its use or sale are being carried out, the investment has started, and interest
has been accrued. Capitalization ends when activities for the use of the asset
are completed or financing is liquidated. During 2007, the Group had not
acquired ratable assets subject to capitalization.
 
 Foreign currency denominated transaction is
recorded at the current exchange rate at the date on which they are entered into
or paid. Foreign currency denominated monetary item on the balance sheet is
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 as a component of the RIF.
 
 m) Comprehensive
income
 
 Comprehensive income consists of the net income
for the period, plus (less) other results (i.e. deficit on restatement and
additional employee retirement liability) for the same period reflected in the
stockholders’ equity pursuant to specific accounting provisions. 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 Mexican FRS.The
Group has not carried out transactions that may result in the
potential issuance of shares with a dilutive effect.
 
 o)Revenue
recognition
 
 Revenues are recognized in the period in 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 determinable, and (iv) the collection is reasonably
assured.
 
 F-18
 Index
  p)Accounting
changes
  As of January
1, 2007, FRS B-3 “Income Statement” went into effect. Consequently, the 2006
income statement was changed to present it in accordance with that Standard. The
changes are referred to: (i) revenues, costs, and expenses are classified as
ordinary and non-ordinary; (ii) costs and expenses are classified by their
function, which allows for determining gross profit; (iii) special items in
income discussed in some FRS are classified as ordinary in "other revenues and
expenses". Extraordinary items are classified as non-ordinary; and (iv) employee
profit sharing is classified as an ordinary expense in “other revenues and
expenses”, instead of being presented as tax on earnings. Adoption of this
Standard had no material effect on the Group’s consolidated statement of
income.
 
 4.      Receivables:
  2006
                    
                    2007Trade
      receivables
                    Ps.
                    
                    4,575,945
                    
                    
                    Ps.
                    
                    4,869,385Allowance for
      doubtful accounts
                    
                    
                    (361,461
                    )
                    
                    
                    
                    (330,861
                    )4,214,484
                    
                    
                    
                    
                    4,538,524Other
      receivables
                    
                    
                    79,936
                    
                    
                    
                    
                    149,142Related
      parties
                    
                    
                    30,837
                    
                    
                    
                    
                    4,413Value added
      tax recoverable
                    
                    
                    96,358
                    
                    
                    
                    
                    98,923Income tax
      recoverable
                    
                    
                    173,541
                    
                    
                    
                    
                    3,779Asset tax
      recoverable
                    
                    
                    5,249
                    
                    
                    
                    
                    1,486Ps.
                    
                    4,600,405
                    
                    
                    Ps.
                    
                    4,796,267
 
  5.         Inventories:
  2006
                      
                      2007Pharmaceutical
      products
                      Ps.
                      
                      2,733,997
                      
                      
                      Ps.
                      
                      3,449,272Beauty care
      products
                      
                      
                      341,182
                      
                      
                      
                      
                      524,624Books and
      magazines
                      
                      
                      273,339
                      
                      
                      
                      
                      272,383Electric
      appliances
                      
                      
                      3,370
                      
                      
                      
                      
                      3,207Groceries
                      
                      
                      73,203
                      
                      
                      
                      
                      96,317Other
                      
                      
                      12,315
                      
                      
                      
                      
                      13,9423,437,406
                      
                      
                      
                      
                      4,359,745Estimate for
      slow-moving inventory
                      
                      
                      (7,281
                      )
                      
                      
                      
                      (6,517
                      )3,430,125
                      
                      
                      
                      
                      4,353,228Merchandise-in-transit
                      
                      
                      536,827
                      
                      
                      
                      
                      519,484Ps.
                      
                      3,966,952
                      
                      
                      Ps.
                      
                      4,872,712
  Merchandise-in-transit represents
pharmaceutical products for which title and risk of loss has been transferred to
the Group.
 
 
 6.         Property
and equipment:
  2006
                    
                    
                    
                    2007Total
                    
                    Original
      cost
                    
                    Restatement
                    
                    TotalBuildings
                    Ps.
                    
                    944,369
                    
                    Ps.
                    
                    291,201
                    
                    Ps.
                    
                    662,544
                    
                    Ps.
                    
                    953,745Machinery and
      equipment
                    
                    
                    103,391
                    
                    
                    
                    78,720
                    
                    
                    
                    63,639
                    
                    
                    
                    142,359Transportation
      equipment
                    
                    
                    303,003
                    
                    
                    
                    189,089
                    
                    
                    
                    89,314
                    
                    
                    
                    278,403Office
      equipment
                    
                    
                    155,327
                    
                    
                    
                    65,114
                    
                    
                    
                    116,916
                    
                    
                    
                    182,030Computer
      equipment
                    
                    
                    359,067
                    
                    
                    
                    194,577
                    
                    
                    
                    181,448
                    
                    
                    
                    376,0251,865,157
                    
                    
                    
                    818,701
                    
                    
                    
                    1,113,861
                    
                    
                    
                    1,932,562Less-accumulated
      depreciation
                    
                    
                    (1,019,541
                    )
                    
                    
                    (338,819
                    )
                    
                    
                    (710,684
                    )
                    
                    
                    (1,049,503
                    )845,616
                    
                    
                    
                    479,882
                    
                    
                    
                    403,177
                    
                    
                    
                    883,059Land
                    
                    
                    352,626
                    
                    
                    
                    65,096
                    
                    
                    
                    287,821
                    
                    
                    
                    352,917Construction-in-progress
                    
                    
                    
                    
                    
                    
                    33,845
                    
                    
                    
                    
                    
                    
                    
                    33,845Ps.
                    
                    1,198,242
                    
                    Ps.
                    
                    578,823
                    
                    Ps.
                    
                    690,998
                    
                    Ps.
                    
                    1,269,821
  As of
December, 31, 2005, 2006, and 2007, the annual depreciation expensed amounted to
Ps..87,557, Ps. 64,418
and Ps. 77,108.
  As of
December 31, 2006 and 2007, the net restated value of the property and equipment
of the subsidiary Drogueros included in the foregoing summary amounted to Ps.
150,443 and Ps. 164,017, respectively. The restatement for that property and
equipment is determined by using the applicable NCPI factor to the original cost
thereof from their respective dates of acquisition.
  The
average annual depreciation rates for 2006 and 2007 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 January 1, 2007, FRS C-13 “Related
parties” went into effect with retrospective application. The concept of related
parties includes: a) relatives of stockholders, members of the board of
directors and key management personnel; and b) the fund of the Group’s employee
benefit remunerations plan or some other entity that is a related party
thereof.
 
 As of December 31, 2006 and 2007, the related
party balances and transactions were as follows:
 
 2006
                    
                    
                    
                    
                    2007Aeroxtra,
      S.A. de C.V.
                    Ps.
                    
                    2,075
                    
                    
                    Ps.
                    
                    2,000Xtra
      Inmuebles, S.A. de C.V.
                    
                    
                    2,104
                    
                    
                    
                    
                    2,214Farmacias
      ABC
                    
                    
                    12,626Comercializadora
      Casa Saba, S.A. de C.V.
                      (former la
      Nueva Leona, S.A. de C.V.)
                    
                    
                    13,826Grupo Xtra,
      S.A. de C.V.
                    
                    
                    206
                    
                    
                    
                    
                    199Ps.
                    
                    30,837
                    
                    
                    Ps.
                    
                    4,413
 
 During 2006, the related party transactions
were as follows:
 
 Selling
      (purchase)
                      products
                    
                    
                    
                    Rendered
                      (received)
      services
                    
                    
                    
                    Granted
      (received) financingAeroxtra
                    Ps.
                    
                    
                    
                    Ps.
                    
                    (10,874
                    )
                    Ps.Xtra
      Inmuebles
                    
                    
                    
                    
                    
                    
                    (4,972
                    )Comercializadora
      Casa Saba, S.A. de C.V.
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    13,826Farmacias
      ABC
                    
                    
                    (12,626
                    )Total
                    Ps.
                    
                    (12,626
                    )
                    Ps.
                    
                    (15,846
                    )
                    Ps.
                    
                    13,826
   F-19
 Index
  During 2007, the related party transactions
were as follows:
  Rendered
      (received) services
                      
                      
                      
                      
                      Interest
      income (expenses)Aeroxtra
                      Ps.
                      
                      (10,556
                      )
                      
                      Ps.Xtra
      Inmuebles
                      
                      
                      (4,792
                      )
                      
                      
                      
                      (162
                      )Ps.
                      
                      (15,348
                      )
                      
                      Ps.
                      
                      (162
                      )
 As of December 31, 2006 and
2007, the total benefits granted to key management personnel or significant
directors amounted to Ps. 31,128 and Ps. 30,262, respectively.
 
 During 2006 and 2007, the Group had no other
material related party agreements.
   8.      Bank
loans:
 
 During the year ended December 31, 2006, Casa
Saba obtained various unsecured loans from Scotiabank Inverlat, S.A. and Banco
Santander Serfin, S.A. in various amounts. These loans bore variable interest at
market rates. Interest is included as a component of comprehensive gain or loss
on financing. The proceeds from these loans were used for working capital. Each
loan was paid in full on its due date. At 2006 year end, the Group had bank
debts payable in short term in the amount of Ps. 17,044 (Ps. 16,427 historical
Mexican pesos). Applicable interest rates are adjusted monthly, in accordance
with market rates in effect. At 2007 year end, the Group had no bank debts
outstanding.
 
 As of December 31, 2007, the Group had the
following credit lines, subject to the liquid assets of banks, as
follows:
 Financial
      Institution
                      
                      
                      
                      AmountBanco
      Nacional de Mexico, S.A.
                      
                      Ps.
                      
                      
                      100,000Banco
      Santander Mexicano, S.A.
                      
                      
                      
                      
                      290,000Scotiabank
      Inverlat, S.A.
                      
                      
                      
                      
                      50,000Ps.
                      
                      
                      440,000
 9.      Deferred
income tax and employee profit sharing:
 
 As discussed in Note 2 k), the Company and its
subsidiaries determined that the trend is that income tax will be paid normally
in future years. Accordingly, at 2007 year end, the Company and its subsidiaries
recognized deferred income tax and, therefore, deferred IETU will not be
recorded. If those entities determine that IETU will be due based on estimates
and that event will qualify as permanent, the deferred income tax balance will
be adjusted to the resulting amount of IETU. If the event is circumstantial, the
Group will recognize deferred income tax, even though IETU will be due in the
period.
 
 As of December 31, 2006 and 2007, the deferred
income tax liability was as follows:
 
 2006
                    
                    
                    2007Cumulative
      inventory
                    Ps.
                    2,658,644
                    
                    
                    Ps.
                    2,072,978Allowance for
      doubfoul accounts and
                      estimate for
      slow-moving inventory
                    
                    (349,851)
                    
                    
                    
                    (319,127)Property and
      equipment
                    
                    511,349
                    
                    
                    
                    435,622Other
                    
                    410,363
                    
                    
                    
                    251,531Excess of
      accounting over tax values of
                      assets and
      liabilities
                    
                    3,230,505
                    
                    
                    
                    2,441,004Tax loss
      carryforwards
                    
                    (11,898)
                    
                    
                    
                    (14,525)Controlled
      subsidiaries’s tax loss
                      carryforwards
      generated before the
                      consolidation
      tax
                    
                    (317,075)
                    
                    
                    
                    (305,588)2,901,532
                    
                    
                    
                    2,120,891Income tax
      rate
                    
                    28%
                    
                    
                    
                    28%Deferred
      income tax
                    
                    812,429
                    
                    
                    
                    593,849Less-Asset tax
      recoverable
                    
                    (65,178)Deferred
      income tax liability
                    Ps.
                    747,251
                    
                    
                    Ps.
                    593,849
   F-20
 Index
 
 The Group records the deferred income tax
effect of the year in income, except for the deferred income tax effect that may
be generated by temporary differences attributable to stockholders’ equity. In
that event, the deferred income tax effect is applied to the specific
stockholders’ equity account that generates it, without being applied to income,
in accordance with Mexican FRS. This provision is virtually identical to
U.S.GAAP.
 
 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. 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. Management estimates
a high likelihood that the deferred income tax asset will be realized by taking
into account the Group’s business plan and that IETU will not be generated as a
permanent event.
 
 As of December 31, 2005, 2006 and 2007, the
provision for deferred income tax applied to income amounted to Ps. 95,481, Ps.
(67,277) and (126,331), respectively; whereas the provision for deferred
employee profit sharing amounted to Ps. (5,429), Ps. 1,030 in 2005 and 2006.
There was no effect in fiscal 2007.
 
 
 10.    Foreign
currency position:
 
 As of December 31, 2006 and 2007, assets and
liabilities denominated in U.S. dollars were as follows:
 
 2006
                    
                    
                    
                    
                    2007Current
      assets
                    
                    $
                    
                    3,210
                    
                    
                    
                    
                    $
                    2,997Current
      liabilities
                    
                    
                    
                    3,662
                    
                    
                    
                    
                    
                    3,872Net position
      in U.S. dollars
                    
                    $
                    
                    (452
                    )
                    
                    
                    
                    $
                    (875
                    )Net position
      (at fiscal year end
                      constant
      Mexican pesos)
                    
                    Ps.
                    
                    (4,911)
                    
                    
                    
                    
                    Ps.
                    (9,541
                    )
 
 As of December 31, 2006 and 2007, the Group
valued its U.S. dollars denominated assets and liabilities at the fiscal year
end exchange rate of Ps. 10.88 (pesos) per dollar, and Ps. 10.92 (pesos) per
dollar, respectively, published by the Central Bank of Mexico in the Official
Daily Gazette.
 
 As of April 24, 2008, issue date of the
accompanying financial statements, the net consolidated U.S. dollar position was
similar to that of December 31, 2007 and the exchange rate was Ps. 10.49 (pesos)
per dollar.
 
 As of December 31, 2006 and 2007, the Group did
not have hedging instruments against foreign exchange risks.
 
 
 11.    Stockholders’
equity:
 
 Capital structure
 
 As of December 31, 2006 and 2007, paid-in
capital stock was as follows:
   Number
      of shares
                    
                    
                    
                    
                    Par
      value2006
                    
                    
                    
                    2007Fixed capital
      shares without
                      retirement
      rights
                    
                    
                    265,149,080
                    
                    
                    
                    
                    Ps.
                    167,730
                    
                    
                    
                    Ps.
                    167,730Variable
      capital shares
                    
                    
                    270,280
                    
                    
                    
                    
                    
                    173
                    
                    
                    
                    
                    173265,419,360
                    
                    
                    
                    
                    Ps.
                    167,903
                    
                    
                    
                    Ps.
                    167,903At fiscal
      year end constant  Mexican pesos
                    
                    
                    
                    
                    
                    
                    
                    Ps.
                    1,123,764
                    
                    
                    
                    Ps.
                    1,123,764
 
 F-21
 Index
  As of December 31, 2006 and
2007, capital stock comprised of Series “Sole” 265,419,360 common shares fully
subscribed for and paid, with no par value shown. Variable capital stock has no
limits, in accordance with the amendment to the Company’s bylaws (See Note 1
g)).
 
 
 Repurchase and resale of own shares (restricted
earnings)
  The Company may acquire the
shares representative of its capital stock with a charge to stockholders’
equity, without reducing capital stock, or with a charge to capital stock. In
this last event, they become treasury shares, without requiring a resolution
adopted by the stockholders. The General Ordinary Stockholders’ Meeting
determines the amount that should be allocated toward share repurchases for each
year. Those funds may not exceed the balance of the Company’s net earnings,
including retained earnings. The amount of the reserve for own share repurchases
is appropriated from retained earnings.
 
 At the General Ordinary 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. At 2006 and 2007 year end, the Stockholders’
Meeting resolved to maintain the same level of the reserve approved by its
similar on April 22, 2003. During 2006 and 2007, the stockholders resolved not
to agree a specific number of shares and peso amount for repurchase its own
shares.
 
 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, 2006 and 2007, the Company’s legal
reserve amounted to Ps. 103,643 and Ps. 149,467, respectively, which is included
in 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” (CUFIN-Spanish
acronym). Any dividends paid out in excess of CUFIN are subject to a 38.9% in
fiscal 2007 (40.9% in fiscal 2006) tax rate payable by the Company and its
subsidiaries, 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 CUFIN is determined as provided for in currently enacted tax legislation. As
of December 2006, and 2007, the consolidated balance of CUFIN amounted to Ps.
1,059,371 and Ps. 2,118,183, respectively.
 
 In April 2006 and 2007, dividends were declared
at the Company’s Stockholders’ Meetings in the amounts of Ps. 160,320 and Ps.
175,372, respectively (Ps. 150,000 and Ps. 170,000 historical Mexican pesos), of
retained earnings. Dividends paid did not exceed the consolidated balance of
CUFIN at those dates. 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.
   F-22
 Index
 
 Dividends among companies of the
Group
 
 Dividends distributed among the Group’s
companies that are not paid out of the CUFIN 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 consolidated.
During 2006 and 2007, no corporate changes of that nature occurred in the
Group.
   12.    Tax
system:
 
 a)      Consolidated
income tax due
 
 i)       In
fiscal 2005, 2006 and 2007, the annual income tax rate is 30%, 29% and 28%,
respectively, in conformity with currently enacted tax legislation.
 
 The Group determines the amount of income and
asset taxes on a consolidated basis. For this purpose, the Company (Holding
Company) includes the amount of “consolidating tax equity” in tax consolidation,
that is, the amount of taxable income/tax loss generated in the year by its
controlled companies is included in tax consolidation at 100% of the equity
stake that the Holding Company holds in the capital stock of its controlled
companies. In addition, the Holding Company also includes at 100% its individual
taxable income/tax loss generated in the year in tax consolidation.
 
 Taxes are computed in Mexican pesos as of the
date on which the transactions occurred. Under Mexican FRS, 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 thereof up
to the time when they are sold. Nevertheless, the Income Tax Law established a
transition regime that is summarized in the following paragraph.
 
 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 entities will treat the value of “cumulative inventory” as
taxable income for income tax purposes. At 2004 year end, cumulative inventory
determined as provided for in the Income Tax Law amounted to Ps. 3,184,264
historical Mexican pesos. The accumulation of cumulative inventory is annual,
effective fiscal 2005 up to 2012. Accumulation term was determined as provided
for in the Income Tax Law.
 
 At 2006 and 2007 fiscal year end, the
cumulative inventory amount added to the taxable income for income tax purposes
amounted to Ps. 499,666 (Ps. 481,564 historical Mexican pesos) and Ps. 499,604,
respectively.
 
 iii)     One
of the Group’s consolidated subsidiaries (Transportes Marproa, S.A. de C.V.
(Marproa), of which assets and revenues are not material to the Group’s
consolidated operations), is authorized to pay its income and asset taxes
separately from the Group under a tax regime known as the “administrative
facilities”. This regime grants certain benefits regarding ascertainment of
disbursements made by Marproa and others relative to crediting “consumption
taxes”.
 
 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, and the cumulative inventory effect of the
year.
 At 2006 and 2007 year end,
the Group generated consolidated taxable income for income tax in the amount of
Ps. 1,256,468 (Ps. 1,210,948, historical Mexican pesos) and Ps. 1,278,265,
respectively.
   F-23
 Index
  b)      Consolidated
asset tax due
  Effective January 1,
2007, consolidated asset tax is determined by applying a 1.25% annual tax rate
on the restated average value of the consolidated assets. Up to December 31,
2006, the consolidated asset tax was determined by applying a 1.8% annual tax
rate to the difference between the restated average value of the assets less the
average face value of certain debts (net lending position). For this purpose,
the Group considered the value of assets and value of debts of the controlled
companies and the value of assets and debts of the Holding Company in the 100%
consolidating tax equity.
  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. In fiscal 2006 and 2007, the
consolidated Group did not generate asset tax payable. In those years, the Group
made a recovery of asset tax paid in prior years in the amount of Ps. 61,245
(Ps. 59,026 historical Mexican pesos) and Ps. 56,698, respectively. This effect
is shown in the accompanying income statement.
  Effective January 1,
2008, the new IETU Law repeals the Asset Tax Law, and establishes the
possibility of claiming a refund on asset tax actually paid up to December 31,
2007, in accordance with a certain mechanism set forth in transition provisions.
At 2007 year end, the Group did not have a recoverable consolidated
balance.
 
 c)      Tax
loss carryforwards
 
 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.
 
 ii)      Tax
loss carryforwards of the subsidiaries expire over a ten year term, effective
the date on which the tax losses are incurred. The effect of these tax loss
carryforwards should be reversed in the tax consolidation on the year when the
subsidiary loses its carryforward right. The management deems this tax loss
carryforwards amount is not material.
 
 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.
 
 e)      Provision
for income tax
 
 In accordance with Mexican FRS, 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 31,2005
                  
                  2006
                  
                  2007Statutory
      income tax rate
                  
                  
                  30
                  %
                  
                  
                  29
                  %
                  
                  
                  28
                  %Permanent
      differences:Comprehensive
      cost of financing vs.annual
      inflationary adjustment
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  (0
                  )Non-deductible
      items
                  
                  
                  (3
                  )
                  
                  
                  (1
                  )
                  
                  
                  (5
                  )Cumulative
      inventory
                  
                  
                  (4
                  )
                  
                  
                  (12
                  )
                  
                  
                  (9
                  )Other
                  
                  
                  
                  
                  
                  
                  8.9
                  
                  
                  
                  7.8Temporary
      differences:Depreciation
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  1Application
      of prior year tax losscarryforwards
                  
                  
                  (2.8
                  )
                  
                  
                  (1
                  )
                  
                  
                  (2
                  )22.2
                  %
                  
                  
                  25.9
                  %
                  
                  
                  20.8
                  %
 
 
 F-24
 Index
 In fiscal 2005, 2006 and 2007, the Group
generated consolidated taxable income for income tax purposes in the amounts of
Ps. 1,107,252, Ps. 1,256,468 and Ps. 1,278,265, respectively (Ps.1,025,570, Ps.
1,210,948 and Ps. 1,278,265 historical Mexican pesos,
respectively).
 
 At fiscal 2005 year end, income tax due was
fully offset by the prior year consolidated tax loss carryforwards. The income
tax effect offset amounted to Ps. 203,345.
 
 f)       Corporate
Flat Tax Law (LIETU - Spanish acronym)
  Effective January 1,
2008, the new Law repeals the Asset Tax Law and grants certain tax credits to
taxpayers. IETU is a direct tax with a flat rate that taxes the net remaining
cash flow of the entities that is used to pay production factors.
 
 The new Law does not
contain a specific regime for tax consolidation purposes. Every entity that
forms part of the Group on consolidation should pay IETU individually. For that,
every entity may consider the amounts delivered to the holding company in terms
of the Income Tax Law as its own income tax, which may be credited against
IETU.
  IETU of the period is obtained by applying the appropriate tax rate to taxable
income determined on a cash flow basis. Taxable income is obtained by reducing
the authorized deductions from the taxable income considered by IETU. The annual
IETU tax rate will be 16.5%, 17%, and 17.5% for fiscal 2008, 2009, and 2010,
respectively.
  While IETU co-exists with income tax, IETU is paid if it exceeds income tax of
the same period. IETU of the period is reduced by income tax (applicable to
taxable income and that of dividends paid) of the same period that has actually
been paid. If IETU is less than income tax, the Company is not subject to IETU.
Moreover, if the authorized deductions exceed taxable income (negative base),
the Company is not subject to IETU.
  The IETU Law allows some tax credits to be offset against IETU of the period.
Tax credits are determined in accordance with specific procedures applicable to
some items set forth in the new Law. The benefits of those tax credits cannot
exceed certain percentages and its offset cannot exceed ten years, effective
2008. The significant items generating tax credits are: i) authorized deductions
that exceed taxable income in the period (the excess is offset against income
tax of the period or IETU that may be generated in future years), salaries and
contributions of social security, investments in fixed assets and deferred
charges made between January 1, 1998 and August 31, 2007, as well as inventories
existing as of December 31, 2007.
 
  13.   
Tax on earnings:
 
 2006
                  
                  2007Income
      tax
                  
                  Ps.
                  
                  367,054
                  
                  
                  Ps.
                  
                  369,578Asset
      tax
                  
                  
                  
                  
                  
                  
                  
                  
                  1,677Deferred
      income tax
                  
                  
                  
                  (67,277
                  )
                  
                  
                  
                  (126,331
                  )Recovery of
      asset tax paid in prior years
                  
                  
                  
                  (61,245
                  )
                  
                  
                  
                  (56,698
                  )Ps.
                  
                  238,532
                  
                  
                  Ps.
                  
                  188,226
  F-25
 Index
  14.    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, 2005, 2006 and 2007, revenue
attributable to each product line, was as follows:
 
 Millions
      of Mexican pesos2005
                  
                  2006
                  
                  2007Pharmaceutical
      products
                  Ps.
                  
                  20,445
                  
                  Ps.
                  
                  21,352
                  
                  Ps.
                  
                  22,050Health and
      beauty aids/other products
                  
                  
                  2,078
                  
                  
                  
                  1,995
                  
                  
                  
                  2,119Entertainment
      products
                  
                  
                  858
                  
                  
                  
                  904
                  
                  
                  
                  929Food/non-perishable
      products
                  
                  
                  230
                  
                  
                  
                  235
                  
                  
                  
                  162Office/electronic
      products
                  
                  
                  5Total
                  Ps.
                  
                  23,616
                  
                  Ps.
                  
                  24,486
                  
                  Ps.
                  
                  25,260
   15.         Contingencies
and commitments:
 
 a)      On
June 24, 2004, the Tax Administration System (SAT-Spanish acronym) determined an
income tax liability payable by Casa Saba for the presumed excess of tax loss
carryforwards that were offset unduly against taxable income in fiscal 2005.
Pursuant to the foregoing, Casa Saba filed a petition for a tax liability remission with the
pertinent authorities, in accordance with the provisions set forth in the
Federal Revenue Law, in effect in 2007. In November 2007, Casa Saba paid the tax
liability in the amount of Ps. 4,610, thereby fully concluding this
matter.
 
 b)      In
February 2005, the Company and some of its subsidiaries filed an appeal for
constitutional relief (amparo) (file 185/2005) with the Federal Tax Court
against the tax amendment that binds companies, effective January 1, 2005, to
adopt the change of the tax deduction of merchandise when acquired to the tax
deduction of the cost of sales at the time such merchandise is sold (Note 12a).
In October 2007, the authorities ruled against the appeal for constitutional
relief. In the opinion of legal advisors, that ruling does not generate any
contingency for the Company and its subsidiaries, since they have been applying
the provisions whose unconstitutionality was contested.
 
 c)      In
May 2006, the subsidiary Servicios Administrativos Xtra, S. A. de C. V. (now
Daltem Provee) filed an appeal for constitutional relief (file 4326/07/-17-11-8)
with the Federal Tax Court against the provision of the Income Tax Law that
limits the period for setting off the amount of tax losses generated on the sale
of stock against taxable income may be generated in the future. At the date of
the auditor’s report, the Federal Tax Court had not handed down a ruling in this
matter. The subsidiary’s legal advisors believe that there are reasonable
elements for having a favorable ruling handed down.
 
 d)      In
May 2007, the subsidiary Servicios Administrativos Casa Saba, S. A. de C. V.
(now Daltern Provee) filed an appeal for constitutional relief (file 868/2007)
with the Federal Tax Court against the provision of the Income Tax Law of 2002
that limits the period for setting off the amount of tax losses generated on the
sale of stock against taxable income may be generated in the future and the
computation of the tax cost thereof. At the date of the auditor’s report, the
subsidiary obtained the appeal for constitutional relief. However, the
authorities filed an appeal for review. Notwithstanding the foregoing, the
subsidiary’s legal advisors consider that there are reasonable elements for
having a favorable ruling handed down.
 
 e)      In
February 2007, the Group filed an appeal for constitutional relief (file
147/2007 and 284/2007 regarding subsidiary Transportes Marproa, S.A. de C.V.)
with the Federal Tax Court against the tax amendment that binds taxpayers,
effective January 1, 2007 to: (i) determine asset tax by applying a 1.25% annual
rate to the restated average value of assets, and (ii) not reduce the value of
debts contracted by taxpayer from the taxable basis in connection with this
asset tax (Note 12 b)). At the date of the auditor’s report, the Federal Tax
Court had not handed down a ruling in this matter.
 
 Management believes that the matters discussed
in paragraphs b), c), d) and e) above do not represent contingencies payable by
the Group that would require a disbursement of economic resources in the
future.
  F-26
 Index
  f)       In
accordance with the Income Tax Law, companies that carry out related party
transactions are subject to tax obligations, with respect to the determination
of prices agreed upon. Such prices should be comparable to prices that would be
used with or between independent parties in arm’s length transactions. The tax
authorities could reject the amounts determined and demand payment of taxes and
related expenses. The Group’s management estimates that all related party
transactions were agreed upon on arm’s length basis.
 
 g)      The
Group is involved in various lawsuits and claims derived from the normal course
of its operations. Management believes that they will have no significant impact
on the Group’s consolidated financial position and operating
income.
 
 h)      In
accordance with currently enacted tax legislation, the Tax Authority has the
power to review the five fiscal years prior to the last income tax return filed
by the Company and its subsidiaries.
   16.    New
accounting pronouncements:
 
 In December 2007, the CINIF issued the
following Mexican FRS, effective January 1, 2008:
  i)       FRS
B-10, “Impact of inflation”. This Standard supersedes Bulletin B-10,
“Recognition of the impact of inflation on the financial information” and sets
forth standards to carry out this recognition by recognizing two economic
environments: a) inflationary (inflation equal to or higher than 26% accumulated
in the three prior years); and b) non-inflationary (inflation below that
percentage). In addition:
 
 The entity should not recognize the impact of
inflation, effective the period in which the change is confirmed from an
inflationary economic environment to non-inflationary. However, the impact of
restatement recognized up to the last period in which the entity operated in an
inflationary environment should be maintained in the financial statements. In
the change from a non-inflationary economic environment to an inflationary
environment, the entity should retrospectively recognize the impact of inflation
not recognized in the periods in which the environment was
non-inflationary.
 
 The Standard eliminates the valuation of
inventories at replacement costs, as well as the valuation method of assets from
a nonresident source. Moreover, the accumulated effect of the gain or loss on
holding nonmonetary assets and the gain or loss on holding monetary assets
segregated in stockholders’ equity will be reclassified to retained
earnings.
 
 As a result, the Group will no longer recognize
the impact of inflation in its financial statements, effective 2008, since the
economic environment in which it operates changed from inflationary to
non-inflationary. Adoption of this Mexican FRS will not have a material impact
on the Group’s consolidated financial position and operating
income.
  ii)      FRS
D-4, “Tax on earnings”. This Standard supersedes Bulletin D-4, “Accounting
treatment of income tax, asset tax, and employee profit sharing”. In
addition:
 
 FRS D-4 replaces the accounting treatment of
employee profit sharing in FRS D-3 "Employee fringe benefits". Further it sets
forth that the deferred income tax balance derived from the initial application
of Bulletin D-4 be reclassified to retained earnigs, unless the amount is
related to a comprehensive item that has not been recycled yet. In that case,
that amount should be incorporated into the comprehensive item. Up to fiscal
2007, that initial application balance used to be presented in stockholders’
equity. Adoption of this Mexican FRS will not have a material impact on the
Group’s consolidated financial position and operating income.
 
 F-27
 Index
 
 iii)      IFRS-8,
“Effects of corporate flat tax” (IETU-Spanish acronym). This Standard sets forth
that the effect of the tax on earnings due in the period (income tax or IETU) is
presented in income. IETU tax credits form part of that tax due. In
addition:
 
 The deferred IETU asset or liability is
determined on temporary differences, tax losses, and tax credits. The deferred
effect on temporary items is calculated based on the “asset and liability
method” by considering the differences between book and tax values of assets and
liabilities at the date of the financial statements. The IETU tax rate will be
that in effect on the date on which it is estimated that temporary differences
are reversed and/or tax losses and tax credits are applied. The deferred IETU
asset and/or liability are classified as a noncurrent item. Asset tax
recoverable is recognized as a deferred tax asset under certain circumstances,
provided that it can be offset against the tax on earnings.
 
 In accordance with IFRS, the Group carried out
a projection to identify the expected trend of the tax on earnings (income tax
or IETU) that will be due in the next three years. As a result, the Group
determined that normally income tax will be paid in future years. Accordingly,
the Group recognized deferred income tax and, therefore, deferred IETU will not
be recorded. Management restates this estimate periodically.
  iv)      FRS
D-3, “Employee fringe benefits”.This Standard supersedes Bulletin D-3, “Labor obligations”. In
addition:
 
 ●
                  the Standard does not recognize an
      opening net transition asset or obligation, unless a new defined fringe
      benefit plan is established. In that event, prior services should be
      amortized over the remaining labor life of employees. The actuarial gain
      or loss can be recognized in income as accrued, in accordance with a
      certain “fluctuation range”.
 ●
                  additional employee retirement
      liability and its offsetting entry are
  eliminated.
 ●
                  actuarial gains and losses and
      prior services ofseverance benefits to employees due to causes
      other than restructuringare
      recognized in income, unless a certain FRS permits it to be
      capitalized.
 ●
                  it incorporates the
      regulations of employee profit sharing set forth in Bulletin D-4,
      discussed in paragraph ii) above. Deferred employee profit sharing should
      be recognized by applying the asset and liability
  method.
 ●
                  it incorporates the regulations
      applicable to benefits for dismissal due to restructuring set forth in
      Bulletin C-9 "Liability, provisions, contingent assets and liabilities and
      commitments" of Mexican FRS.
 
 In addition,the Group is in the process of defining
the recognition of the following effects:
 
 The unrecognized net transition
obligation for pensions and seniority premium existing as ofDecember 31,2007inthe amount of Ps. 36,636 may be
amortized over a five year period, since the remaining life of employees exceeds
that period.The Group will define if existing
actuarial losses in the amount of Ps. 42,634 at that date will be applied
against the net transition obligation referred to above, and the remaining
against income in the amount of Ps. 5,998. As ofJanuary 1, 2008, the additional employee retirement
liability and its offsetting entries intangible asset and other comprehensive
item amounting to Ps. 52,266, Ps. 33,139, and Ps. 19,127, respectively, have
been eliminated.
 
 
 v)     
FRS B-2, “Statement of cash flows”.This Standard supersedes
Bulletin B-12 “Statement of changes in financial position” (statement of
changes).In addition: a)
the statement of cash flows presents cash receipts and disbursements that
occurred in the period, while the statement of changes shows the changes in the
entity’s financial structure; and (b) in an inflationary environment, the
statement of cash flows eliminates the impact on inflation recognized in the
financial statements. The statement of changes does not require that
elimination.
 
 The FRS B-2 effect should be recognized
prospectively, therefore, the financial statements of periods prior to fiscal
2008 that are presented comparatively with the current period should include the
statement of changes.
 
 F-28
 Index
 
 vi)      FRS
B-15, “Foreign currency translation”. This Standard supersedes Bulletin B-15,
“Transactions in foreign currency and translation of financial statements of
foreign operations”. In addition:
 
 a)      the
classifications of integrated foreign operation and foreign entity disappear,
and the items recording currency, functional currency, and reporting currency
are incorporated;
 
 b)      the
translation of financial information of a foreign transaction refers to the
change from the recording currency to the functional
currency,  and  from the functional currency to the
reporting currency;
 
 c)      the
financial statements can be presented in a reporting currency other than its
functional currency; and
 
 d)      the
accounting changes derived from the initial application of the Standard should
be recognized prospectively, except for the effect of the change from reporting
currency that should be recognized retrospectively.
 
 At 2007 year end, the Group had not carried out
foreign transactions which require that the financial information be translated
in order to include it in the financial statements of the reporting entity.
However, this does not mean that the Group cannot realize them in the
future.
   17.   
Authorization to issue financial statements
 
 On April 24, 2008, the Board of Directors
authorized the accompanying financial statements and its notes to be issued.
Those financial statements will be submitted to the stockholders for approval at
the Stockholders’ Meeting that will be held on April 29, 2008.
   18.    Differences
between Mexican FRS and U.S. GAAP:
 
 The Group’s consolidated financial statements
are prepared based on Mexican FRS, which differ in certain material respects
from U.S. GAAP. A partial reconciliation of the reported net income and
stockholders’ equity from Mexican FRS to U.S. GAAP is presented in Note 19).
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 FRS, Bulletin B-10. 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 FRS 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 FRS and U.S. GAAP.
 
 a)      Statements
of Cash Flows
 
 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 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 FRS, 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.
 
 F-29
 Index
 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 loss on monetary position
were treated as a component of financing activities, resources provided by
operating activities would be Ps. 528,399, Ps. 248,146 and Ps. 514,352 and net
cash used in financing activities would be Ps. (187,109), Ps. (198,073) and Ps.
(241,067) in 2005, 2006 and 2007, 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 "asset and liability method".
 
 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 provision is virtually identical
to Mexican FRS, except that the recognition of the accumulated initial effect of
the asset and liability method as of January 1, 2000 was recorded to
stockholders’ equity for FRS Mexican purposes.
 
 ii)      Under
Mexican FRS, the impact of inflation on the deferred income tax balance
generated is recognized in the gain (loss) on monetary position. Under U.S.
GAAP, the deferred income tax balance is classified as a nonmonetary item. As a
result, the income statement differs regarding the presentation of the gain
(loss) on monetary position and deferred income tax provision.
 
 iii)     Under
U.S. GAAP, the deferred income tax effect should be classified as current and
noncurrent, based on the classification of the asset and liability items that
give rise to it. As of December 31, 2006 and 2007, the deferred income tax
effect under Mexican FRS and U.S. GAAP was classified as follows:
  
 CONSTANT
      MEXICAN PESOSMEXICAN
      GAAP
                
                
                U.S.
      GAAP2006
                
                
                2007
                
                
                2006
                
                2007Current
                
                Ps.
                
                
                
                Ps.
                
                
                
                Ps.
                (48,234
                )
                
                Ps.
                (22,994
                )Noncurrent
                
                
                747,251
                
                
                
                593,849
                
                
                
                795,485
                
                
                
                616,843Ps.
                747,251
                
                
                Ps.
                593,849
                
                
                Ps.
                747,251
                
                
                Ps.
                593,849
  iv)      The
Group is obligated to pay profit sharing to its employees. Profit sharing is
calculated by applying a 10% annual rate to taxable income determined for each
Group’s 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.
 
 For U.S. GAAP purposes, in fiscal 2005, 2006,
the deferred employee profit sharing amounted to Ps.(5,429) and Ps. 1,030,
respectively. In fiscal 2007, there was no effect. Employee profit sharing is
classified as an operating expense for U.S. GAAP purposes. For Mexican FRS,
effective January 1, 2007, employee profit sharing is classified as an ordinary
expense in “other revenues and expenses”, instead of being presented as tax on
earnings. Adoption of this Standard had no material effect on the Group’s
consolidated statement of income (see Note 3 p) “Accounting
changes”.
 
 Under U.S. GAAP, the deferred employee profit
sharing effect should be classified as current and non-current.The components of
the U.S. GAAP employee profit sharing as of December 31, 2005, 2006 and 2007,
were as follows:
 
   F-30
 Index
  
 DEFERRED
      EMPLOYEE PROFIT SHARINGCONSTANT
      MEXICAN PESOS2005
                
                2006
                
                2007CurrentCumulative
      inventory
                
                Ps.
                9,276
                
                
                Ps.
                
                
                
                Ps.Non-deductible
      reserves
                
                
                (6,240
                )
                
                
                (176
                )3,036
                
                
                
                (176
                )Non-currentCumulative
      inventory
                
                
                
                
                
                
                3,922Property
      and equipment
                
                
                82
                
                
                
                282
                
                
                
                19782
                
                
                
                4,204
                
                
                
                197Ps.
                3,118
                
                
                Ps.
                4,028
                
                
                Ps.
                197
   c)      Additional
employee retirement liability and unrecognized net transition
obligation
 
 i)       At
fiscal 2006 and 2007 year end, the additional employee retirement liability
exceeded the limit amount for recording an intangible asset as an offsetting
entry. Intangible asset referred is only recorded up to the algebraic sum of the
unrecognized net transition obligation plus prior services and amendments of
plan, under Mexican FRS. Therefore, the excess of additional employee retirement
liability over the intangible asset was recognized in stockholders’ equity as a
debit item in the amount of Ps. 28,076 and Ps. 19,127.
 
 For U.S. GAAP reconciliation, the additional
employee retirement liability along with its offseting intangible asset for
retirement pensions, seniority premium and severance benefits were reversed in
the amount of Ps. 33,137.
 
 For U.S. GAAP, in September 2006, the FASB
issued SFAS No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans: an amendment of FASB Statements
No. 87, 88, 106, and 132R”. This statement requires employers to recognize,
on a prospective basis, the funded status of their defined benefit pension and
other postretirement plans on their consolidated balance sheet and recognize as
a component of other comprehensive income, net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not
recognized as components of net periodic benefit costs. SFAS 158 is effective
for fiscal years ending after December 15, 2006 for employers with publicly
traded equity securities. Therefore, the funded status of the defined pension
benefit and other postretirement plans which considers the gain or losses and
prior service cost arose during the period amounting to Ps. 25,348, was
recorded. This amount was recognized in other comprehensive income and net
periodic cost of the year net of income tax in the amounts of Ps. 13,288 and Ps.
12,060, respectively. Therefore a reconciliation line item is shown in Note
19).
 
 ii)      Effective
January 1, 2005, the revised Bulletin D-3 required that the severance benefits
referred in Note 3 j) be assessed upon termination of the employer/employee
relationship. Accordingly, severance benefits granted to employees due to causes
other than restructuring were valued by using the projected unit credit method.
The same recognition criteria under U.S. GAAP are established in SFAS No. 112,
“Employers’ Accounting for Postemployment Benefits” which has been effective
since 1994. Under Mexican FRS, the recognition of the accumulated initial effect
of the net transition obligation amounting to Ps. 4,268 was fully amortized in
income in 2006 fiscal year. Under U.S. GAAP this effect was included in income
in 2005 fiscal year.
 
 For 2007 U.S. GAAP reconciliation, additional
severance benefits liability along with its offseting entry intangible asset was
reversed in the amount of Ps. 2,863. This amount was recognized in income.
Therefore a reconciliation line item is shown in Note 19).
 
   F-31
 Index
   19.    Reconciliation
from Mexican FRS to U.S. GAAP:
 
 Net income and stockholder’s equity, adjusted
to take into account the significant differences between Mexican FRS and U.S.
GAAP, except for the comprehensive effect of price-level changes as required by
Mexican FRS, were as follows:
 
 
 Thousands
      of Mexican pesos (Ps.) and thousands of U.S. dollars
      ($),
                  except
      per shareNET
      INCOME
                
                Year
                
                Convenience
                  Translation2005
                
                2006
                
                
                2007
                
                2007Net income
      under Mexican FRS
                
                Ps.
                786,226
                
                
                Ps.
                916,563
                
                
                Ps.
                905,087
                
                
                $
                82,916Additional
      employee retirement liability (Note 18.c)
                
                
                (30,563
                )
                
                
                30,563
                
                
                
                (12,060
                )
                
                
                (1,105
                )
  Thousands
      of Mexican pesos (Ps.) and thousands of U.S. dollars
      ($),
                    except
      per shareNET
      INCOME
                  
                  Year
                  
                  Convenience
                    Translation2005
                  
                  2006
                  
                  
                  2007
                  
                  2007Unrecognized
      net transition obligation (Note 18.c)
                  
                  
                  (4,428
                  )
                  
                  
                  4,428
                  
                  
                  
                  (2,863
                  )
                  
                  
                  (262
                  )(34,991
                  )
                  
                  
                  34,991
                  
                  
                  
                  (14,923
                  )
                  
                  
                  (1,367
                  )Net income
      under U.S. GAAP
                  
                  Ps.
                  751,235
                  
                  
                  Ps.
                  951,554
                  
                  
                  Ps.
                  890,164
                  
                  
                  $
                  81,549Weighted
      average common shares outstanding (thousands)
                  
                  
                  265,419
                  
                  
                  
                  265,419
                  
                  
                  
                  265,419Basic and
      diluted earnings per share under U.S. GAAP
                  
                  Ps.
                  2.83
                  
                  
                  Ps.
                  3.59
                  
                  
                  Ps.
                  3.35
   Because Mexican FRS 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
                
                
                
                
                
                
                
                
                
                
                Convenience
                  Translation2005
                
                2006
                
                
                2007
                
                2007Stockholders’
      equity underMexican
    FRS
                
                Ps.
                4,981,794
                
                
                Ps.
                5,544,017
                
                
                Ps.
                6,092,720
                
                
                $
                558,161Additional
      employee retirement Liability (Note
18.c)
                
                
                (30,563
                )
                
                
                
                
                
                
                (25,348
                )
                
                
                (2,322
                )Unrecognized
      net transitionObligation
                
                
                (4,428
                )
                
                
                
                
                
                
                (2,863
                )
                
                
                (262
                )Amortization
      of goodwill
                
                
                26,928
                
                
                
                26,928
                
                
                
                26,928
                
                
                
                2,467(8,063
                )
                
                
                26,928
                
                
                
                (1,283
                )
                
                
                2,205Stockholders’
      equity under U.S. GAAP
                
                Ps.
                4,973,731
                
                
                Ps.
                5,570,945
                
                
                Ps.
                6,091,437
                
                
                $
                560,366
   F-32
 Index
    Changes in stockholders' equity under U.S.
      GAAP
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Convenience
                    Translation2005
                  
                  2006
                  
                  
                  2007
                  
                  2007Stockholders’
      equity underU.S. GAAP as
      of beginning of the
      year
                  
                  Ps.
                  4,526,329
                  
                  
                  Ps.
                  4,973,731
                  
                  
                  Ps.
                  5,570,945
                  
                  
                  $
                  510,361Comprehensive
      income under U.S. GAAP
                  
                  
                  587,717
                  
                  
                  
                  757,534
                  
                  
                  
                  695,864
                  
                  
                  
                  63,749Dividends
      paid
                  
                  
                  (140,315
                  )
                  
                  
                  (160,320
                  )
                  
                  
                  (175,372
                  )
                  
                  
                  (16,066
                  )Stockholders’
      equity under U.S. GAAP at year end
                  
                  Ps.
                  4,973,731
                  
                  
                  Ps.
                  5,570,945
                  
                  
                  Ps.
                  6,091,437
                  
                  
                  $
                  558,044
  Comprehensive income under U.S.
      GAAP
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Convenience
                      Translation2005
                    
                    2006
                    
                    
                    2007
                    
                    2007Net
      income under U.S. GAAP
                    
                    Ps.
                    751,235
                    
                    
                    Ps.
                    951,554
                    
                    
                    Ps.
                    890,164
                    
                    
                    $
                    81,549Deficit on
      restatement
                    
                    
                    (132,955
                    )
                    
                    
                    (196,507
                    )
                    
                    
                    (189,961
                    )
                    
                    
                    (17,403
                    )Additional
      employee retirement Liability
                    
                    
                    (30,563
                    )
                    
                    
                    2,487
                    
                    
                    
                    (4,339
                    )
                    
                    
                    (398
                    )Comprehensive
      income under U.S. GAAP
                    
                    Ps.
                    587,717
                    
                    
                    Ps.
                    757,534
                    
                    
                    Ps.
                    695,864
                    
                    
                    $
                    63,748
 20.    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 2005, 2006 and 2007, 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 liquidity, capital
expenditures or capital resources that are material to investors.
  b)      Accounts
receivable
 
 The majority of the Group’s accounts receivable
is 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 30-90 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 income.
    F-33
 Index
 
 c)      Impairment
of long-lived assets
 
 Under U.S. GAAP, an impairment occurs when the
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 assets. The impairment of a long-lived asset
that must be charged to the income is the amount by which the net book value
exceeds its recovery value. At fiscal 2005, 2006 and 2007 year end, there were
no indications that the net book value of long-lived asset may not be
recoverable. Bulletin C-15, "Impairment of the value of long-lived assets and
their related disposal” of Mexican FRS is virtually identical to U.S. GAAP,
except that the reversal of the recognition of impairment is pemitted under
Mexican FRS.
 
 SFAS 144, "Accounting for the impairment or
disposal of long-lived assets" sets forth: (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 of (a) net book value or
(b) their realization value. In addition, SFAS 144 specifies the criteria that
would have to be met to classify an asset as held-for-sale and new rules 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 2005, 2006 and
2007 year end, the Group did not hold any long-lived assets held-for-sale or
discontinued operations.
 
 d)      Quantitative
and qualitative disclosures about 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 considering the available financing rates, in connection with bank
loans with similar terms and due dates.
 
 e)      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.
 
 f)       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, 2005, 2006 and 2007, is mentioned in Note
14).
 
 g)      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 fiscal 2005, 2006, and 2007 year end.
  
 F-34
 Index
  h)      Recently
Issued Accounting Pronouncements
 
 FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes”
  In July 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement
No. 109”. FIN 48 establishes the criterion that an individual tax position
has to meet for some or all of the benefits of that position to be recognized in
the Group’s consolidated financial statements. On initial application, FIN 48 is
applied to all tax position for which the statute of limitations remains open.
Only tax positions that meet the more-likely than-not recognition threshold at
the adoption date are recognized or continue to be recognized. The cumulative
effect of applying FIN 48 will be reported as an adjustment to retained earnigs
at the beginning of the period in which it is adopted.
 
 Interpretation 48 is effective for fiscal years
beginning after December 15, 2006, and was adopted by the Group on January 1,
2007. The adoption of FIN 48 did not have a significant effect on its financial
statements.
  FASB 157, “Fair Value
Measurements”
 
 In September 2006, the FASB issued
Statement 157, “Fair Value Measurements” (FASB 157). The Statement does not change existing
accounting rules governing what can or what must be recognized and reported at
fair value in the Group’s financial statements, or disclosed at fair value.
Additionally, FASB 157 does not eliminate practicability exceptions that exist
in accounting pronouncements amended by this Statement when measuring fair
value.As a
result,the Group was not
required to recognize any new instruments at fair value.
 
 The Statement requires the Group to
apply valuation techniques that (1) place greater reliance on observable inputs
and less reliance on unobservable inputs and (2) are consistent with the market
approach, the income approach, and/or the cost approach. The Statement also
requires the Group to include enhanced disclosures of fair value measurements in
its financial statements.
 
 FASB 157 is effective for financial
statements issued for fiscal years beginning afterNovember 15, 2007, and for interim periods that fall
within those fiscal years.The adoption of Statement 157 did not have a
significant effect on its consolidated financial statements.
 
 EITF Issue 06-9, “Reporting a Change in (or the
Elimination of) a Previously Existing Difference between the Fiscal Year-End of
a Parent Company and That of a Consolidated Entity or between the Reporting
Period of an Investor and That of an Equity Method Investee,”
 
 In November 2006, a consensus was reached on
EITF Issue 06-9. The guidance in EITF Issue 06-9 addresses how the reporting
entity should recognize the effect of a change to (or elimination of) an
existing difference between its reporting period and the reporting period of a
consolidated subsidiary or an equity method investee. A reporting entity should
recognize the effect of a change to (or elimination of) an existing difference
between its reporting period and the reporting period of a consolidated
subsidiary or an equity method investee as a change in accounting principle in
accordance with the provisions of Statement 154.
 
 The consensus is effective for changes to, or
eliminations of, previously existing differences in the reporting periods of a
parent and a subsidiary (or investor and equity method investee) that occur in
interim or annual reporting periods beginning after November 29, 2006 (January
1, 2007 for a calendar-year entity). The Group’s adoption of these provisions
had no impact on its consolidated results and financial position.
 
 FASB 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”
 
 In February 2007, the FASB issued Statement
159, “The Fair Value Option for Financial Assets and Financial Liabilities:
Including an amendment of FASB Statement No. 115”, to reduce earnings volatility
caused by related assets and liabilities measured differently under U.S. GAAP.
Statement 159 allows making an irrevocable
instrument-by-instrument election to measure eligible items at fair value in
their entirety. In addition, unrealized gains and losses will be reported in
earnings at each reporting date.
 
 F-35
 Index
  Statement 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007 (January
1, 2008 for a calendar-year entity). Earlier application is permitted for
existing eligible items as of the beginning of a fiscal year that begins on or
before November 15, 2007, but requires concurrent adoption of Statement
157.
 
 In the year in which Statement 159 is initially
applied, the cumulative-effect adjustment is (1) measured as the difference
between the carrying amounts and the fair values of financial instruments at the
date of application and (2) recorded in the opening balance of retained earnings
or in other appropriate components of equity or net assets in the statement of
financial position. The differences may include unamortized deferred fees,
costs, premiums, and discounts; valuation allowances such as the allowance for
loan losses; and accrued interest. Any changes in fair value due to the
concurrent adoption of Statement 157 will be included in the cumulative-effect
adjustment if the fair value option (FVO) is also elected for that
item.
 
 The Company is currently evaluating the impact
of adopting SFAS 159 on its financial position and results of
operations.
  Statement 141R, “Business
combinations”
 
 In December 2007, the Financial Accounting
Standards Board (FASB) issued Statement 141 (revised 2007),“Business Combinations”(Statement 141R) to change how an entity
accounts for the acquisition of a business. When effective, Statement 141R will
replace existing Statement141 inits entirety.
 
 Statement 141R carries forward the
existing requirements to account for all business combinations using the
acquisition method (formerly called the purchase method). In general, Statement
141R will require acquisition-date fair value measurement of identifiable assets
acquired, liabilities assumed, and noncontrolling interests in the acquiree.
Statement 141R will eliminate the current cost–based purchase method under
Statement 141.
 
 The new measurement requirements will
result in the recognition of the full amount of acquisition-date goodwill, which
includes amounts attributable to noncontrolling interests. The acquirer will
recognize in income any gain or loss on the remeasurement to acquisition-date
fair value of consideration transferred or of previously acquired equity
interests in the acquiree. Neither the direct costs incurred to effect a
business combination nor the costs the acquirer expects to incur under a plan to
restructure an acquired business will be included as part of the business
combination accounting. As a result, those costs will be charged to expense when
incurred, except for debt or equity issuance costs, which will be accounted for
in accordance with other generally accepted accounting
principles.
 
 Statement 141R will also change the
accounting for contingent consideration, in process research and development,
contingencies, and restructuring costs. In addition, changes in deferred tax
asset valuation allowances and acquired income tax uncertainties in a business
combination that occur after the measurement period will impact income taxes
under Statement 141R.
 
 Statement 141R is effective for fiscal
years and interim periods within those fiscal years beginning on or afterDecember 15,
2008. Early adoption is
prohibited. The Company intends to adopt Statement 141R effectiveJanuary 1, 2009and apply its provisions prospectively.
The Company is going to evaluate the impact that the adoption of Statement 141R
will have on its consolidated results and financial
position.
 
 141R effect on income taxes in a business
combination
 
 The Company currently records all
changes to a valuation allowance for acquired deferred tax assets or the effect
of changes in an acquired tax position that occur after the acquisition date by
initially reducing the related goodwill to zero, next by reducing other
noncurrent intangible assets related to the acquisition to zero, and lastly by reducing income tax
expense. However, Statement 141R amends Statement 109 and Interpretation 48 to
require the Company to recognize changes to the valuation allowance for an
acquired deferred tax asset or the effect of changes to an acquired tax position
as adjustments to income tax expense or contributed capital, as appropriate, and
not as adjustments to goodwill. This accounting will be required when Statement
141R becomes effective (January 1, 2009 for the Company) and applies to
valuation allowances and tax positions related to acquisitions accounted for
originally under Statement 141 as well as those accounted for under Statement
141R.
 
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 Index
 The Company does not have a valuation
allowance atDecember 31,
2007related to deferred
tax assets acquired in a business combination. Any change in the valuation
allowance subsequent toDecember 31, 2008will be recorded as a reduction of
income tax expense rather than as a reduction of goodwill.
 
 141R effect on goodwill impairment
testing
 
 Statement 141R amends the goodwill impairment
test requirements in Statement 142. For a goodwill impairment test as of a date
after the effective date of Statement 141R, the value of the reporting unit and
the amount of implied goodwill, calculated in the second step of the test, will
be determined in accordance with the measurement and recognition guidance on
accounting for business combinations under Statement 141R. This change could
effect the determination of what amount, if any, should be recognized as an
impairment loss for goodwill recorded before the effective date of Statement
141R. This accounting will be required when Statement 141R becomes effective
(January 1, 2009 for the Company) and applies to goodwill related to
acquisitions accounted for originally under Statement 141 as well as those
accounted for under Statement 141R.
 The Company has Ps. 217,214 of goodwill at
December 31, 2007 related to previous business combinations. The Company has not
determined what effect, if any, Statement 141R will have on the results of its
impairment testing subsequent to December 31, 2008.
 
 Statement 160, “Noncontrolling
interests”
 
 In December 2007, the FASB issued
Statement 160, “Noncontrolling Interests in Consolidated
Financial Statements: an amendment of ARBNo.51”. The new Statement changes the
accounting for, and the financial statement presentation of, noncontrolling
equity interests in a consolidated subsidiary. Statement 160 replaces the
existing minority-interest provisions of Accounting Research Bulletin (ARB) 51,Consolidated Financial
Statements, by defining a
new term—noncontrolling
interests—to replace what
were previously calledminorityinterests. The new standard establishesnoncontrolling
interestsas a component of the equity of a
consolidated entity.
 
 The underlying principle of the new
standard is that both the controlling interest and the noncontrolling interests
are part of the equity of a single economic entity: the consolidated reporting
entity. Classifying noncontrolling interests as a component of consolidated
equity is a change from the current practice of treating minority interests as a
mezzanine item between liabilities and equity or as a liability. The change
affects both the accounting and financial reporting for noncontrolling interests
in a consolidated subsidiary.
 
 Statement 160 includes reporting
requirements intended to clearly identify and differentiate the interests of the
parent and the interests of the noncontrolling owners. The reporting
requirements are required to be applied retrospectively. Statement 160 is
effective for fiscal years and interim periods within those fiscal years
beginning on or afterDecember 15, 2008. Early adoption is
prohibited.
 
 The Company intends to adopt Statement
160 effectiveJanuary 1,
2009and apply its
provisions prospectively.
 
 The Company currently does not believe
that the adoption of Statement 160 will have a significant effect on its
financial statements.
 
 EITF Issue 07-6, “Accounting for the
sale of real estate that includes a buy-sell clause”
 
  F-37
 Index
  In December 2007, the FASB ratified a
consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue
07-6, “Accounting for the Sale of Real Estate Subject to the Requirements of
FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause,” to clarify
whether a buy-sell clause is a prohibited form of continuing involvement that
would preclude partial sales treatment under FASB Statement 66,Accounting for Sales of Real
Estate. EITF Issue 07-6
applies to real estate sales transactions that include a buy-sell clause and are
subject to the requirements of Statement 66. The scope of this Issue includes
the sale of real estate to an entity that is both (a) partially owned by the
seller and (b) subject to a buy-sell clause included in the arrangement between
the seller and the other investor (the buyer) of the jointly owned
entity.
 
 According to the guidance in EITF Issue
07-6, abuy-sell clause, in and of itself, does
not constitute a prohibited form of continuing involvement that would preclude
partial sales treatment under Statement 66. However, all of the relevant facts
and circumstances of the arrangement containing the buy-sell clause should be
evaluated to determine if the clause either gives the buyer an in-substance
option to put to the seller its interest in the jointly owned entity or gives
the seller an in-substance option to reacquire the real estate by acquiring the
buyer’s interest in the jointly owned entity.
 
 The consensus in EITF Issue 07-6 is
effective for new agreements entered into in fiscal years, and interim periods
within those fiscal years, beginning afterDecember 15, 2007. Early adoption is not
permitted.
 
 The Company adopted EITF Issue 07-6
effective January 1, 2008. The adoption of this consensus did not have a
significant effect on its financial statements.The impactof applying this consensus will depend
on the terms of the contractual arrangements in real estate transactions that
are entered into by the Company on or after January 1, 2008 that may include
buy-sell clauses or other similar arrangements.
  EITF Issue 07-1, “Accounting for collaborative
arrangements”
 
 In December 2007, the FASB ratified a
consensus opinion reached by the EITF on EITF Issue 07-1, “Accounting for
Collaborative Arrangements.” The guidance in EITF Issue 07-1 defines
collaborative arrangements and establishes presentation and disclosure
requirements for transactions within a collaborative arrangement (both with
third parties and between participants in the arrangement).
 
 The consensus in EITF Issue 07-1 is
effective for fiscal years, and interim periods within those fiscal years,
beginning afterDecember
15, 2008. The consensus
requires retrospective application to all collaborative arrangements existing as
of the effective date, unless retrospective application is impracticable. The
impracticability evaluation and exception should be performed on an
arrangement-by-arrangement basis.
 
 The Company intends to adopt EITF Issue
07-1 effective January 1, 2009 and retrospectively apply the requirements of
this consensus to its collaborative arrangements in existence on that
date.
 
 The Company is evaluating the impact
EITF Issue 07-1 will have on its financial statements. The Company currently
does not believe that the adoption of EITF Issue 07-1 will have a significant
effect on its financial statements.
 
 Staff Accounting Bulletin (SAB) 110,
“Share-Based Payment”
 
 In December 2007, the SEC staff issued Staff
Accounting Bulletin (SAB) 110, “Share-Based Payment,” which amends SAB 107,
Share-Based Payment, to permit publiccompanies, under
certain circumstances, to use the simplified method in SAB 107 foremployee option grants
after December 31, 2007. Use of the simplified method afterDecember 2007 is
permitted only for companies whose historical data about theiremployees’ exercise
behavior does not provide a reasonable basis for estimating theexpected term of the
options.
 SAB 110 is effective for employee options
granted afterDecember 31, 2007. The
Company intends to adopt SAB 110 effective January 1, 2008.The Company currently does not believe
that the adoption of this Bulletin will have an effect on its financial
statements.
 SAB 109, “Written loan commitments recorded at
fair value”
 F-38
 Index
 In November 2007, the SEC issued SAB
109, “Written Loan
Commitments Recorded at Fair Value Through Earnings”, which supersedes SAB105, “Application of Accounting Principles to
Loan Commitments”. SAB 109
reflects thestaff’s current view that the fair value
measurement of derivative and other written loancommitments that are accounted for at
fair value through earnings should include theexpected net future cash flows related
to the associated servicing of the loan.
 
 The SEC staff expects registrants to
apply its views on including the expected net future cash flows from the
servicing of a loan in the measurement of fair value prospectively to derivative
loan commitments issued or modified in fiscal quarters beginning afterDecember 15,
2007.
 
 The Company intends to adopt SAB 109
effectiveJanuary 1,
2008.The Company currently does not believe
that the adoption of SAB 109 will have an effect on its financial
statements.
 
 
 21.    Subsequent
event
 
 Through a stock purchase agreement dated May
15, 2008, the Company acquired all of the issued and outstanding shares of the
capital stock of Drogasmil Medicamentos e Perfumeria, S.A. (Drogasmil) which is
incorporated in Brasil. The acquired Company distributes pharmaceutical
products. The agreed upon selling price amounted to $ 185 millions of Brasilian
real (U.S. $ 115 millions, approximately).
           F-39