**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, 2006**
  **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 Registered****American
                  Depositary Shares, each representing**
                **ten
                  Ordinary Shares, without par value**
              **New
                  York Stock Exchange**
  **Ordinary
                  Shares, without par value**
              **New
                  York Stock Exchange**
                **(for
                  listing purposes only)**
   
  **Securities
        registered or to be registered pursuant to Section 12(g) of the Act:
        None**
  **Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act:
        None**
  **The
        number of outstanding shares of each class of capital or common stock as
        of
        December 31,****2006********was:**
 **265,419,360
        Ordinary Shares, without par value.  Indicate by check mark if the
        registrant is a well-known seasoned issuer, as defined in Rule 405 of the
        Securities Act.**
  **Yes
                  __**
              
              **No****X**
 **If
        this report is an annual or transition report, indicate by check mark if
        the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of the Securities Exchange Act of 1934.**
  **Yes
                  __**
              
              **No****X**
 **Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the registrant
        was required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days.**
  **Yes
                  X**
              
              **No
                  __**
 **Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
        (Check one):**
  **Large
                  accelerated filer __**
              
              **Accelerated
                  Filer X**
              
              **Non-accelerated
                  filer __**
 **Indicate
        by check mark which financial statement item the registrant has elected to
        follow.**
  **Item
                  17 __**
              
              **Item
                  18 X**
 **If
        this is an annual report, indicate by check mark whether the registrant is
        a
        shell company (as defined in Rule 12b-2 of the Exchange
        Act).**
  **Yes
                  __**
              
              **No****X**
 
  
  **TABLE
        OF CONTENTS**
  **PART
                  I**Item
                  1.
              Identity
                  of Directors, Senior Management and Advisers
              1Item
                  2.
              Offer
                  Statistics and Expected Timetable
              1Item
                  3.
              Key
                  Information
              1Item
                  4.
              Information
                  on the Company
              10Item
                  5.
              Operating
                  and Financial Review and Prospects
              27Item
                  6.
              Directors,
                  Senior Management and Employees
              44Item
                  7.
              Major
                  Shareholders and Related Party Transactions
              48Item
                  8.
              Financial
                  Information
              51Item
                  9.
              Offer
                  and Listing Details
              51Item
                  10.
              Additional
                  Information
              54Item
                  11.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              68Item
                  12.
              Description
                  of Securities Other than Equity Securities
              69**PART
                  II**Item
                  13.
              Defaults,
                  Dividend Arrearages and Delinquencies
              70Item
                  14.
              Material
                  Modifications to the Rights of Security Holders and Use of
                  Proceeds
              70Item
                  15T.
              Controls
                  and Procedures
              70Item
                  16.
              Reserved
              71Item
                16A.
              Audit
                Committee Financial Expert
              71Item
                16B.
              Code
                of Ethics
              71Item
                16C.
              Principal
                Accountant Fees and Services
              71Item
                16D.
              Exemptions
                from the Listing Standards for Audit Committees
              71Item
                16E.
              Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
              71**PART
                  III**Item
                  17.
              Financial
                  Statements
              72Item
                  18.
              Financial
                  Statements
              72Item
                  19.
              Exhibits
              72INDEX
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              F-1
 
  i


**INTRODUCTION**
  Grupo
        Casa Saba, S.A.B. de C.V. is a
        limited liability stock corporation with variable capital, or *sociedad
        anónima**bursátil**de capital variable*, organized under the
        laws of the United Mexican States, or “Mexico”, and is a holding company that
        conducts substantially all of its operations through subsidiaries.  In
        this annual report, except when indicated or the context otherwise requires,
        the
        words “Grupo Casa Saba”, “the company”, “we”, “us”, “our” and “ours” refer to
        Grupo Casa Saba, S.A.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, 2006, 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. 10.8116 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,
        2006.  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;
  §
              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.
  Table
            of Contents
 
 **PART
        I**
  
 **Item
        1.Identity of Directors, Senior
        Management and Advisers**
  Not
        applicable.
  
 **Item
        2.Offer Statistics and
        Expected Timetable**
  Not
        applicable.
  
 **Item
        3.Key
        Information**
  ***(a)Selected
        Financial Data***
  We
        prepare our audited consolidated
        financial statements in accordance with Mexican GAAP or Financial Reporting
        Standards (Mexican FRS), which differs in some significant respects from
        U.S.
        GAAP.  Note 16 to our audited consolidated financial statements
        provides a description of the principal differences between Mexican GAAP
        and
        U.S. GAAP as they relate to us, and describes differences in presentation
        between the statement of changes in financial position under Mexican GAAP
        and
        the requirements under U.S. GAAP for a statement of cash flows.  Note
        17 to our audited consolidated financial statements provides a partial
        reconciliation to U.S. GAAP of net income and stockholders’ equity.
  Pursuant
        to Mexican GAAP, our audited
        consolidated financial statements and the selected financial information
        set
        forth in the following table reflect inventories at current replacement
        cost.  All other non-monetary assets are restated by using the Mexican
        National Consumer Price Index, or the NCPI.  Components of
        stockholders’ equity are also restated using the NCPI.  In addition,
        the statement of income recognizes the effect of gain or loss on the purchasing
        power from holding monetary assets and monetary liabilities.  Mexican
        GAAP also requires the restatement of all financial statements in constant
        Pesos
        as of the date of the last day of the period reported and, accordingly, all
        information in our audited consolidated financial statements and in the selected
        financial information set forth in the following table has been restated
        in
        constant Pesos as of December 31, 2006.  See Note 3 to our audited
        consolidated financial statements for significant accounting
        policies.  The impact of inflation accounting under Mexican GAAP has
        not been reversed in our reconciliation to U.S. GAAP.  See Notes 16
        and 17 to our audited consolidated financial statements.
  The
        information set forth in the
        following table has been selected from our audited consolidated financial
        statements for the periods indicated.  This information should be read
        together with, and it is qualified in its entirety by reference to, our audited
        consolidated financial statements, the notes to such financial statements
        and
        the information under the section entitled “Item 5.  Operating
        and Financial Review and Prospects.”
  **Year  ended
                      December 31,**
                  
                  **2002**
                  
                  
                  **2003**
                  
                  
                  **2004**
                  
                  
                  **2005**
                  
                  
                  **2006**
                  
                  
                  **2006**(1)(in
                      thousands of constant Pesos as of December 31, 2006 and U.S.
                      Dollars,
                      except share and per share data)**Income
                      Statement****Mexican
                      GAAP:**Net
                      sales
                  
                  Ps.21,410,495
                  
                  
                  Ps.22,088,834
                  
                  
                  Ps.22,117,980
                  
                  
                  Ps.22,760,356
                  
                  
                  Ps.23,599,383
                  
                  
                  U.S.$2,182,784Gross
                      profit
                  
                  
                  2,258,805
                  
                  
                  
                  2,195,946
                  
                  
                  
                  2,276,951
                  
                  
                  
                  2,348,649
                  
                  
                  
                  2,332,400
                  
                  
                  
                  215,732Operating
                      expenses
                  
                  
                  1,433,276
                  
                  
                  
                  1,361,380
                  
                  
                  
                  1,419,119
                  
                  
                  
                  1,417,122
                  
                  
                  
                  1,316,455
                  
                  
                  
                  121,764Operating
                      income, net
                  
                  
                  825,528
                  
                  
                  
                  834,567
                  
                  
                  
                  857,832
                  
                  
                  
                  931,527
                  
                  
                  
                  1,015,945
                  
                  
                  
                  93,968Comprehensive
                      cost of financing, net
                  
                  
                  18,257
                  
                  
                  
                  52,358
                  
                  
                  
                  16,983
                  
                  
                  
                  -1,631
                  
                  
                  
                  -4,193
                  
                  
                  
                  -388
  1
 Table
            of Contents
     **Year
                    ended December 31,**
                
                
                **2002**
                
                
                
                **2003**
                
                
                
                **2004**
                
                
                
                **2005**
                
                
                
                **2006**
                
                
                
                **2006**(1)(in
                  thousands of constant Pesos as of December 31, 2006 and U.S. Dollars,
                  except share and per share data)Other
                    (income) (2)
                
                
                -6,971
                
                
                
                -38,809
                
                
                
                -53,654
                
                
                
                -39,970
                
                
                
                -97,461
                
                
                
                -9,014Income
                    (loss) before taxes and employee profit sharing
                
                
                814,242
                
                
                
                821,017
                
                
                
                894,503
                
                
                
                973,128
                
                
                
                1,117,599
                
                
                
                103,370Net
                    income (loss)
                
                
                639,618
                
                
                
                651,367
                
                
                
                697,630
                
                
                
                757,742
                
                
                
                883,356
                
                
                
                81,704Net
                    income (loss) per Ordinary Share (3)
                
                
                2.41
                
                
                
                2.45
                
                
                
                2.63
                
                
                
                2.86
                
                
                
                3.33
                
                
                
                0.31Weighted
                    average Ordinary Shares outstanding (in thousands) (3)
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419**U.S.
                    GAAP** (4):Net
                    sales
                
                Ps.21,410,495
                
                
                Ps.22,088,834
                
                
                Ps.22,117,980
                
                
                Ps. 22,760,356
                
                
                Ps.23,599,383
                
                
                U.S.$2,182,784Gross
                    profit
                
                
                2,258,805
                
                
                
                2,195,946
                
                
                
                2,276,951
                
                
                
                2,348,649
                
                
                
                2,332,400
                
                
                
                215,732Operating
                    income
                
                
                794,636
                
                
                
                834,567
                
                
                
                857,832
                
                
                
                897,803
                
                
                
                1,049,069
                
                
                
                127,692Income
                    (loss) before taxes and employee profit sharing
                
                
                783,346
                
                
                
                821,017
                
                
                
                894,503
                
                
                
                973,128
                
                
                
                1,117,599
                
                
                
                103,370Net
                    income (4)
                
                
                608,707
                
                
                
                651,367
                
                
                
                697,630
                
                
                
                724,018
                
                
                
                917,080
                
                
                
                84,823Net
                    income (loss) per Ordinary share (3)
                
                
                2.29
                
                
                
                2.45
                
                
                
                2.63
                
                
                
                2.73
                
                
                
                3.34
                
                
                
                0.32Weighted
                    average Ordinary Shares outstanding (in thousands) (3)
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419
                
                
                
                265,419**Balance
                    Sheet Data****Mexican
                    GAAP:**Property
                    and equipment, net
                
                Ps.1,146,029
                
                
                Ps.1,112,726
                
                
                Ps.1,150,310
                
                
                Ps.1,108,433
                
                
                Ps.1,154,831
                
                
                U.S.$106,814Total
                    assets
                
                
                8,825,339
                
                
                
                9,353,899
                
                
                
                9,812,962
                
                
                
                10,231,537
                
                
                
                10,388,464
                
                
                
                960,863Short-term
                    debt
                
                
                417,457
                
                
                
                441,070
                
                
                
                -
                
                
                
                -
                
                
                
                16,427
                
                
                
                1,519Long-term
                    debt (5)
                
                
                50,560
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
                    stock
                
                
                1,082,980
                
                
                
                1,082,980
                
                
                
                1,083,018
                
                
                
                1,083,052
                
                
                
                1,083,052
                
                
                
                100,175Total
                    stockholders’ equity (4)
                
                
                3,505,390
                
                
                
                3,778,442
                
                
                
                4,336,260
                
                
                
                4,801,312
                
                
                
                5,343,165
                
                
                
                494,207**U.S.
                    GAAP**(4):Property
                    and equipment, net
                
                Ps.1,146,029
                
                
                Ps.1,112,726
                
                
                Ps.1,150,310
                
                
                Ps.1,108,433
                
                
                Ps.1,154,831
                
                
                U.S.$106,814Total
                    assets
                
                
                8,825,339
                
                
                
                9,353,899
                
                
                
                9,812,962
                
                
                
                10,231,537
                
                
                
                10,388,464
                
                
                
                960,863Short-term
                    debt
                
                
                417,457
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16,427
                
                
                
                1,519Long-term
                    debt
                
                
                50,560
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
                    stock
                
                
                1,082,980
                
                
                
                1,082,980
                
                
                
                1,083,018
                
                
                
                1,083,052
                
                
                
                1,083,052
                
                
                
                100,175Total
                    stockholders’ equity (4)
                
                
                3,505,390
                
                
                
                3,778,442
                
                
                
                4,362,348
                
                
                
                4,793,540
                
                
                
                5,369,117
                
                
                
                496,604
  (1)  Peso
          amounts have been translated into U.S. Dollars solely for the reader’s
          convenience, at the rate of Ps. 10.8116 per U.S. $1.00, which was the Peso
          /U.S.
          Dollar exchange rate as of December 31, 2006, as reported by the Mexican
          Central
          Bank in the Official Gazette of the Federation.
  (2)  Other
          income consists of fees on returned checks, miscellaneous articles and
          non-taxable items adjustments and services.
  (3)  Based
          on the weighted average number of Ordinary Shares outstanding during each
          year.
  (4)  For
          a discussion of the principal differences between U.S. GAAP and Mexican
          GAAP
          concerning net income and total stockholders’ equity as well as a partial
          reconciliation to U.S. GAAP of net income and total stockholders’ equity, see
          Notes 16 and 17 to our audited consolidated financial statements.
  2
 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, 2006, we had a legal reserve of approximately Ps. 99.89 million,
        which represented approximately 9.22% of our capital stock as of that
        date.  See Note 11 to our audited consolidated financial
        statements.  Five percent of our net income for the year ended
        December 31, 2002 was applied to the legal reserve, and thus our annual
        shareholders’ meeting, held on April 22, 2003, approved the payment of a
        dividend in the amount of Ps. 100.0 million (Ps. 107.5 million at fiscal
        year
        end constant Pesos), equivalent to Ps. 0.38 per Ordinary Share.  Five
        percent of our net income for the year ended December 31, 2003 was applied
        to the legal reserve, and thus our annual shareholders’ meeting, held on
        April 27, 2004, approved the payment of a dividend in the amount of Ps.
        110.0 million (Ps. 122.3 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. 127.6 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. 154.5 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, equivalent to
        Ps. 0.6405 per Ordinary Share, payable on June 8th 2007.
  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—Taxation—Mexican Taxes—Dividends.”
  3
 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 15, 2007, was Ps.
        10.81 per U.S. Dollar.
 **Exchange
                    Rate(1)****Year
                  ended December 31,**
                
                **High**
                
                
                **Low**
                
                
                **Average(2)**
                
                
                **Period
                    End**2001
                
                Ps. 
                    9.97
                
                
                Ps.  8.95
                
                
                Ps. 
                    9.34
                
                
                Ps.  9.172002
                
                
                10.43
                
                
                
                9.00
                
                
                
                9.66
                
                
                
                10.432003
                
                
                11.41
                
                
                
                10.11
                
                
                
                10.79
                
                
                
                11.242004
                
                
                11.64
                
                
                
                10.81
                
                
                
                11.30
                
                
                
                11.152005
                
                
                11.41
                
                
                
                10.41
                
                
                
                10.89
                
                
                
                10.632006
                
                
                11.49
                
                
                
                10.44
                
                
                
                10.91
                
                
                
                10.81**Month
                  ended**December
                    31, 2006
                
                Ps.10.99
                
                
                Ps.10.77
                
                
                Ps.10.85
                
                
                Ps.10.80January
                    30, 2007
                
                
                11.09
                
                
                
                10.77
                
                
                
                10.96
                
                
                
                11.04February
                    28, 2007
                
                
                11.16
                
                
                
                10.92
                
                
                
                11.00
                
                
                
                11.12March
                    31, 2007
                
                
                11.18
                
                
                
                11.01
                
                
                
                11.11
                
                
                
                11.04April
                    30, 2007
                
                
                11.03
                
                
                
                10.92
                
                
                
                10.98
                
                
                
                10.93May
                    31, 2007
                
                
                10.93
                
                
                
                10.74
                
                
                
                10.82
                
                
                
                10.74June
                    15, 2007
                
                
                10.98
                
                
                
                10.71
                
                
                
                10.86
                
                
                
                10.81
 ___________________
 (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.”*
  **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, office and other products.  In our Pharmaceutical
        Products business division, we face competition primarily from Mexico’s only
        other national distributor, Nacional de Drogas, S.A. de C.V., or Nadro, and
        several regional distributors.  In our Health, Beauty Aids and
        Consumer Goods, Publications and General Merchandise
        and Other Products and Office Products business divisions, we compete with
        many
        manufacturers, wholesalers and distributors that target the same markets
        that we
        do.  Loss of existing or future market share to competitors may
        adversely affect our performance and, to the extent that one or more of our
        competitors becomes more successful than us with respect to any key competitive
        factor, our operating margins and profitability could be adversely
        affected.
  4
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            of Contents
 ***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 issuers of securities listed in the United States
        than
        is regularly published by or about domestic issuers of listed
        securities.  In addition, we prepare our financial statements in
        accordance with Mexican GAAP, which differs from U.S. GAAP and accounting
        procedures in certain significant respects.  For example, most Mexican
        companies, including us, have incorporated the impact of inflation directly
        in
        accounting records and in their published financial statements.  Thus,
        Mexican financial statements and reported earnings may differ from those
        of
        companies in other countries in this and other respects.  Notes 16 and
        17 to our Audited Annual Financial Statements describe the principal differences
        between Mexican GAAP and U.S. GAAP as they relate to us and provide
        reconciliation to U.S. GAAP of net income and total stockholders’
equity.
  ***We
        Are Controlled by One
        Controlling Shareholder.***  Eighty-five percent of our
        outstanding Ordinary Shares are directly owned by one shareholder, our
        controlling shareholder.  See “Item 7. Major Shareholders and Related
        Party Transactions—Principal Shareholders.”  Our controlling
        shareholder controls our business and has the power to elect the majority
        of our
        Board of Directors, as well as to determine the outcome of all actions that
        require shareholder approval, including the determination to declare and
        pay
        dividends, in cash or otherwise.
  **Risk
        Factors Related to our Securities**
  ***Our
        Controlling Shareholder
        Has the Ability to Restrict the Payment and Amount of
        Dividends.***  By law, decisions regarding the payment and
        amount of dividends are subject to approval of our shareholders, generally,
        but
        not necessarily, 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.***  This means that,
        in the event that we issue new Ordinary Shares for cash, our shareholders
        will
        have the right to purchase the number of Ordinary Shares necessary to maintain
        their existing share participation.  U.S. holders of our ADSs cannot
        exercise their preemptive rights unless we register newly issued Ordinary
        Shares
        under the Securities Act of 1933 or qualify for an exemption from
        registration.  If U.S. holders of our ADSs cannot exercise their
        preemptive rights, the interests of these holders would be diluted in the
        event
        that we issue new Ordinary Shares for cash.  We intend to evaluate, at
        the time of any offering of preemptive rights, the costs and potential
        liabilities associated with registering any additional Ordinary Shares under
        the
        Securities Act of 1933.  We cannot assure you that we will register
        any new Ordinary Shares that we issue for cash.  In addition, although
        the deposit agreement provides that the Depositary may, after consulting
        with
        us, sell preemptive rights in Mexico or elsewhere outside the United States
        and
        distribute the proceeds to holders of ADSs, under current Mexican law, these
        sales are not possible.
  ***The
        Protections Afforded to
        Minority Shareholders in Mexico are Different From Those in the United
        States.***  Under Mexican law, the protections afforded to
        minority shareholders are different from those in the United
        States.  In particular, the law concerning fiduciary duties of
        directors is not appropriately developed, there is no procedure for class
        actions or shareholder derivative action, and there are different procedural
        requirements for bringing shareholder lawsuits.  As a result, in
        practice, it may be more difficult for our minority shareholders to enforce
        their rights against us or our directors or controlling shareholder than
        it
        would be for shareholders of a U.S. company.  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”.
  5
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  The new Mexican Securities Market Law provides additional protection to minority
        shareholders, such as (i) providing shareholders of a public company
        representing 5% or more of its capital stock, an action for liability against
        the members and secretary of its Board and its relevant managers, and
        (ii) establishing additional responsibilities on the audit committee in all
        matters that have or may have an effect on the minority shareholders and
        their
        interests in an issuer or its operations.  However, they may not be
        sufficient to protect minority shareholders.
  ***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***
  Throughout
        December 1994 and continuing
        through 1995, Mexico experienced an economic crisis characterized by a sharp
        devaluation of the Peso, high inflation, foreign currency exchange rate
        instability, high domestic interest rates, a strong contraction in consumer
        demand for many products and services, reduced availability of credit, high
        unemployment and diminished international investor confidence in
        Mexico.  Mexico’s GDP, which grew at a real annual rate of 4.4% during
        1994, declined by 6.2% in real terms during 1995.
  In
        response to these developments,
        beginning in February 1995, the Mexican government implemented a variety
        of
        economic programs designed to promote economic recovery, stabilize foreign
        currency exchange rates and reduce inflation.  Economic conditions in
        Mexico improved moderately in 1996 and 1997.  However, a combination
        of factors led to a slowdown in Mexico’s economic growth in
        1998.  Notably, the decline in the international price of oil resulted
        in a reduction of federal revenues, approximately one-third of which are
        derived
        from petroleum taxes and related duties.  In addition, the economic
        crises in Asia and Russia, as well as the financial turmoil in Brazil, Venezuela
        and elsewhere, produced greater volatility in the international financial
        markets, which further slowed Mexico’s economic growth.  In 1998, the
        inflation rate in Mexico was 18.6%, interest rates on 28-day Mexican government
        treasury securities, which we refer to as “CETES,” averaged 24.7% and the Peso
        lost approximately 22.7% of its value relative to the U.S. Dollar.
  During
        1999, conditions improved with
        inflation in Mexico dropping to 12.3%, interest rates on 28-day CETES averaging
        21.4% and the Peso appreciating approximately 4.2% in value relative to the
        U.S.
        Dollar.  Throughout 2000, the improvement shown in 1999
        continued.  In 2000 the inflation rate was 9.0%, interest rates on
        28-day CETES averaged 15.3% and the Peso lost approximately 1.5% of its value
        relative to the U.S. Dollar.  The Mexican government estimated that
        Mexico’s real GDP grew by 4.8% in 1998, 3.7% in 1999 and 6.6% in
        2000.
  Beginning
        in January 2001, however, and
        increasing in the fourth quarter of 2001, amid concerns of a global economic
        slowdown and a recession in the United States, Mexico began to experience
        an
        economic slowdown marked by a decline in GDP.  In 2001, Mexico’s GDP
        shrank by 0.2% in real terms while the inflation rate was 4.4%, interest
        rates
        on 28 day CETES averaged 11.3% and the Peso appreciated approximately 5.0%
        in value relative to the U.S. Dollar. During 2002 and 2003, as the United
        States
        and global economic slowdown continued, the Mexican real GDP growth rate
        was
        0.8% and 1.4% respectively, the annual inflation rate was 5.7% and 4.0%
        respectively, interest rates on 28-day CETES averaged 7.1% and 6.2%
        respectively, and the Peso lost approximately 13.7% and 7.8%, respectively,
        of
        its value relative to the U.S. Dollar.  In 2004, several factors
        helped boost the Mexican economy including: the recuperation of the U.S.
        economy, higher revenues generated from petroleum sales and an increase in
        remittances. During this period, Mexico’s GDP grew 4.2%, while inflation reached
        5.2% and the interest rates on 28-day CETES averaged 6.8%.  Even after
        a significant drop in exports, in particular, relating to the auto industry
        and
        lower public and private investments, during 2005, the economy benefited
        from
        sharp increases in oil prices and global economic recovery.  As a
        result, the country’s annual GDP grew by 3.0%, inflation reached a low of 3.3%
        and the interest rate on 28-day CETES averaged 9.2%. During 2006, presidential,
        congressional and state elections took place in Mexico, enhancing with
        extraordinary spending the growth of the several sectors such as services.
        Oil
        Prices continued at high levels, averaging U.S.$ 56.5 per barrel, which
        contributed to the country’s annual GDP growth of 4.8%. Inflation reached 4.1%
        and the interest rate on 28-day CETES averaged 7.2%. During the first quarter
        of
        2007, Mexico’s GDP grew 2.6% and inflation reached 1.0%.
  6
 Table
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 Although
        recent economic activity seems
        to be increasing in Mexico and the United States, 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 possibility that the economic slowdown described above
        may
        return.  Should this happen, it would negatively impact both our
        business and our results of operations.
  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, 2004, 2005 and 2006, 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 2002, and
        according to the Noon Buying Rate for Mexican Pesos as reported by the Board
        of
        Governors of the U.S. Federal Reserve Bank of New York, the Peso depreciated
        by
        approximately 13.7% due to pressures from an international environment wrought
        with volatility and geopolitical concerns.  In 2003, the war in Iraq,
        the uncertainty regarding the recovery of the U.S. economy and few advances
        in
        the expected legal structural reforms in Mexico also adversely 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 1.62% with respect to the US Dollar. This depreciation
        was
        due to higher GDP growth and higher inflation levels in
        Mexico.  During the first quarter of 2007, the Peso depreciated 2.1%
        against the US Dollar.  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.
  7
 Table
            of Contents
  ***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 1.0% during the first quarter of 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 real and nominal interest rates.  The interest rates on
        28-day CETES averaged approximately 6.8%, 9.1% and 7.1% for 2004, 2005 and
        2006,
        respectively, and 7.0% for the first quarter of 2007.  Accordingly, if
        we need to incur Peso-denominated debt in the future, it could be at high
        interest rates.
  ***The
        Political Situation in
        Mexico Could Negatively Affect our Operating
        Results.***  Mexico has experienced political changes in
        recent years. This instability affects Mexico’s business and investment climate
        as well as the performance of Mexican securities, including our
        securities.  As a Mexican company with substantially all of our assets
        and operations in Mexico, the domestic political environment has a significant
        impact on our financial condition and results of operations.
  In
        July 2000, presidential and
        congressional elections took place and Vicente Fox Quesada, a member of the
        *Partido Acción Nacional (“PAN”*), was elected President.  His
        victory ended more than 70 years of presidential rule by the *Partido
        Revolucionario Institucional (“PRI”)*.  President Fox assumed
        office on December 1, 2000.  While the transition from the
        previous administration was smooth, President Fox faced many economic and
        political challenges derived mainly from the large opposition in Congress
        as
        well as by the constant political struggles among the main political parties
        who
        have failed to approve important reforms.  In July 2003, congressional
        elections took place in Mexico and President Fox continued facing a substantial
        opposition in Congress.  This legislative gridlock slowed the progress
        of key legal reforms that the Fox administration was promoting, which has
        affected us, including our business, financial condition and results of
        operations.  In 2004 and 2005, in general, the political situation
        remained largely the same, with the differences between the Legislative and
        Executive branches continuing to obstruct reforms.  In the second half
        of 2006, Mexico had presidential, congressional and certain state elections.
        The
        presidential election was very intense and competitive and ended with a victory
        for Mr. Felipe Calderón Hinojosa, the candidate of the PAN, albeit by a very
        narrow margin.  Since the difference in the number of votes in favor
        of Mr. Calderón versus his opponent was minimal, several demonstrations were
        staged by the *Partido de la Revolución Democrática (“PRD”*) and its
        presidential candidate Mr. Andrés Lopez, primarily in Mexico City, to protest
        the results. Nevertheless, a vote recount by the *Instituto Federal Electoral*(*“IFE”*) demonstrated the victory for Mr. Calderón and, in December
        2006, Mr. Felipe Calderón assumed office.
  The
        political environment in Mexico had
        made the approval of much needed structural reforms difficult. However, an
        important reform in the government pension system occurred in the first months
        of 2007. This approval represents a significant step towards the economic
        reforms that Mexico needs.
  Nevertheless,
        it is possible that
        further political uncertainty could adversely affect financial markets or
        the
        performance of Mexican securities, including our securities.
  ***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.
  8
 Table
            of Contents
  ***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
        Mexican Stock Exchange Index 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 Mexican Stock Exchange Index. During the
        first quarter of 2007, the Mexican Stock Exchange Index increased by 8.7%,
        mainly due to expectations that Mexican politicians would be successful in
        passing the much needed structural and economic reforms, increased confidence
        in
        the new administration and the solid financial results demonstrated by several
        companies listed on the Mexican Stock Market.
  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.  Such
        changes could materially and adversely affect our operations and our
        revenue.  The new Mexican Securities Market Law, as amended in 2005,
        which amendment became effective on June 28, 2006, enhances the disclosure
        requirements and corporate governance standards for Mexican listed companies
        through the refinement of existing concepts (such as the functions, duties
        and
        liabilities of management, directors and audit committees) and the introduction
        of new concepts, such as corporate practice committees (in the case of companies
        like ours, comprised of independent directors), institutional investors and
        safe
        harbors from public offering requirements.  The new law also provides
        minority shareholders of Mexican listed companies with improved information
        rights and legal remedies.  In accordance with the new 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.  These changes, the implementation of the new
        regulations or any other future laws or regulations may have a material adverse
        effect on our operations and revenue.
  ***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.
  9
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  ***Any
        Value-Added Tax Imposed on Prescription Drugs May Adversely Affect Our Business,
        Financial Condition and Results of Operations.***  Unlike
        the HBA/other products, entertainment products, general merchandise and other
        products and office products that we distribute, the prescription 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 from 0% to 15%.  Although that bill was not passed
        by the Mexican Congress, the current Government has filed similar
        proposals.  If prescription drugs become subject to a value-added tax
        in excess of the currently applicable 0% rate, the prices paid by consumers
        for
        prescription drugs would likely increase by the percentage amount of the
        value-added tax rate.  While any price increases resulting from the
        imposition of a higher value-added tax would be non-recurring, we still believe
        that these price increases would 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, 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 anónima**bursátil**de capital variable*, or
        stock corporation with variable capital, which was organized under the laws
        of
        the United Mexican States on November 16, 1982.  Our deed of
        incorporation was registered with the Public Registry of Commerce in Mexico
        City
        on January 10, 1983 under Commercial Folio Number 55,635.  Pursuant to
        the terms of our *estatutos sociales*, or bylaws, our corporate existence
        shall 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.
  Grupo
        Casa Saba was founded as a
        pharmacy in 1892, and is currently one of the leading multi-channel,
        multi-product national wholesale distributors in Mexico, operating through
        one
        of Mexico’s largest nationwide distribution networks of its type.  We
        distribute pharmaceutical products, health, beauty aids and consumer goods,
        general merchandise, publications, office and other products.  The
        majority of these products are distributed by us on a non-exclusive
        basis.  With over 110 years of experience, we serve the majority of
        Mexico’s pharmacies, mass merchandisers, retail and convenience stores,
        supermarkets and other specialized channels.
  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. -517 million.  See “Item 5. Operating and Financial Review and
        Prospects—Indebtedness” and Note 8 to our audited, consolidated financial
        statements. During 2005, we did not incur in any additional debt, so that
        our
        net debt figure by year-end amounted to Ps. -743 million. In 2006, our
        cost-bearing liabilities were Ps. 16 million and our net debt figure by year-end
        amounted to Ps. -600 million.
  10
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 Our
        consolidated net sales for the year
        ended on December 31, 2006 totaled Ps. 23,599 million, 99% of which were
        made in
        Mexico.  At the end of 2006, our total assets were Ps. 10,388 million
        and we had 20 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,” (83.8% of our
        total net sales in 2006); the Government Pharmaceutical business division,
        which
        we refer to as “Government Pharma” (3.4% of our total net sales in 2006); the
        Health, Beauty Aids, Consumer Goods, General Merchandise and Other Products
        business division,  which we refer to as the “HBCG/Other Products”
business division (9.1% of our total net sales in 2006); and the Publications
        business division (3.7% of our consolidated net sales in 2006).
  **Organizational
        Structure**
  The
        following table sets forth our
        significant subsidiaries and our direct or indirect percentage equity ownership
        in such subsidiaries as of May 31, 2007:
 **Economic
                      Interest**
                    **(Direct
                      or indirect)** (2)**Name
                    of Subsidiary** (1)
                  
                  **2005**
                  **2006**Casa
                      Saba, S.A de C.V.(3)
                  (Casa
                      Saba)
                  99.9%
                  99.9%Drogueros,
                      S.A. de C.V. (4)
                  (Drogueros)
                  99.9%
                  99.9%Grupo
                      Mexatar, S.A. de C.V. (5)
                  (Mexatar)
                  99.9%
                  99.9%Centennial,
                      S.A. de C.V.  (6)
                  (Centennial)
                  99.9%
                  99.9%Inmuebles
                      Visosil, S.A. de C.V. (7)
                  (Visosil)
                  99.9%
                  99.9%Publicaciones
                      Citem, S.A. de C.V. (8)
                  (Citem)
                  99.9%
                  99.9%Transportes
                      Marproa, S.A. de C.V. (9)
                  (Marproa)
                  99.9%
                  99.9%Servicios
                      Corporativos Saba, S.A. de  C.V. (10)
                  (Servicios
                      Corporativos Saba)
                  99.9%
                  99.9%Distribuidora
                      Casa Saba, S.A. de C.V.  (11)
                  (Distribuidora
                      Saba)
                  99.9%
                  99.9%Distribuidora
                      Solis Garza, S.A. de C.V. (12)
                  (Distribuidora
                      Solis)
                  -
                  99.9%Farmacias
                      Solis Hospitalarias y Oncologicas, S.A. de C.V. (13)
                  (Farmacias
                      Solis)
                  -
                  99.9%Other
                      companies (real estate and service
                      companies)  (14)
                  
                  99.9%
                  99.9%
 ____________________
 (1)  With
            the exception of Casa Saba, S.A. de C.V., none of our operating subsidiaries
            is
            a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X
            of the Securities Act of 1933.
  (2)  Percentage
            of equity owned by us directly or indirectly through subsidiaries or
            affiliates.
  (3)  Direct
            subsidiary through which we distribute pharmaceutical products to private
            and
            government clients.
  (4)  Indirect
            subsidiary through which we distribute pharmaceutical products to private
            and
            government clients.
  (5)  Indirect
            subsidiary through which we distribute office and electronic products,
            including
            keyboards, audio and television equipment and related accessories.
  (6)  Indirect
            subsidiary through which we distribute general merchandise and other
            products.
  (7)  Indirect
            subsidiary through which we lease real property to our other
            subsidiaries.  Inmuebles Visosil, S.A. de C.V. owns substantially all
            of the capital stock of Drogueros, S.A. de C.V., an indirect subsidiary
            of Grupo
            Casa Saba.
  (8)  Direct
            subsidiary through which we distribute publications.
  (9)  Direct
            subsidiary through which we deliver products to our distribution centers
            throughout Mexico.  We place centralized purchase orders for all of
            our distribution centers directly with suppliers, who deliver these centralized
            purchase orders to Transportes Marproa, S.A. de C.V., or
            Marproa.  Marproa then distributes customized orders to each of our 20
            distribution centers throughout Mexico.  Marproa also provides freight
            services to third parties at market rates.
  (10)  Indirect
            subsidiary that provides administrative, legal, accounting, tax planning,
            financial counseling and other professional services to Casa Saba, S.A
            de
            C.V.
  (11)  Direct
            subsidiary that provides logistical and transportation services to Casa
            Saba,
            S.A de C.V.
  (12)  Indirect
            subsidiary through which we distribute pharmaceutical products to private
            and
            government clients.
  (13)  Indirect
            subsidiary through which we sell pharmaceutical products.
  (14)  Real
            estate and Service companies.
 
 11
 Table
            of Contents
 **Capital
        Expenditures**
  The
        table below sets forth our capital
        expenditures, investments and acquisitions for the years ended December 31,
        2004, 2005 and 2006.  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 2006, 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**,**2004**
                
                
                **2005**
                
                
                **2006****(Millions
                    of constant Pesos as of December 31, 2006)**Distribution
                    fleet
                
                Ps.38.4
                
                
                Ps.47.7
                
                
                Ps.46.4Technology
                    and computerequipment
                
                10.3
                
                
                39.5
                
                
                80.8Acquisitions
                
                0.0
                
                
                4.2
                
                
                0.0Other
                    general capitalexpenditures
                
                1.0
                
                
                0.4
                
                
                32.9**Total
                    capital expenditures**
                
                Ps.49.7
                
                
                Ps.91.8
                
                
                Ps.160.1
 In
        2007, we expect that our main
        capital expenditures will be related to IT investments and developments as
        well
        as the renewal of our distribution fleet. In fact, in March of 2006 we signed
        a
        strategic alliance with IBM and SAP to attain state-of-the-art technology
        that
        will allow us to increase our competitive advantages and improve the efficiency
        of our execution 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, office and other products.  We distribute the
        majority of these products on a non-exclusive basis.  With over 110
        years of experience, we supply the majority of Mexico’s pharmacies, mass
        merchandisers, retail and convenience stores, supermarkets and other specialized
        channels nationwide.
  We
        currently distribute over 15,000
        different products, including approximately:
  §
              5,000
                  pharmaceutical products;
  §
              4,400
                  health and beauty products;
  §
              800
                  general merchandise and other products, such as food, toiletries
                  and
                  electronics; and
  §
              4,900
                  publications.
  We
        distribute these products throughout
        Mexico through our nationwide distribution network to clients in the following
        segments:
  §
              more
                  than 15,400 pharmacies owned by private
                  individuals;
  §
              approximately
                  4,700 privately-owned pharmacy chains and over 380 government
                  pharmacies;
  §
              approximately
                  2,250 regional and national
                  supermarkets;
  §
              approximately
                  250 racks and 149 nationwide
                  agents;
   12
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  §
              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,****2004**
                
                **2005**
                
                **2006**Private
                    Pharmaceuticals(1)
                
                
                83.6%
                
                
                82.9%
                
                
                83.8%Government
                    Pharmaceuticals
                
                
                3.0%
                
                
                3.7%
                
                
                3.5%HBCG/Other
                    Products
                
                
                9.9%
                
                
                9.8%
                
                
                9.1%Publications
                
                
                3.5%
                
                
                3.6%
                
                
                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.
  As
        of December 31, 2006, we distributed
        products to our clients nationwide through a distribution network consisting
        of
        20 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 2006, 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;
   13
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   §
              Developing
                  ambitious internal savings and operating efficiencies programs
                  to maximize
                  our operations’ profitability;
  §
              Raising
                  participation with government institutions and state health
                  institutions;
  §
              Implementing
                  route reengineering programs and satellite tracking systems for
                  our
                  distribution fleet in order to improve our client service response
                  while
                  simultaneously reducing our operating
                  expenses;
  §
              Analyzing
                  the geographic location and efficiency of our distribution centers
                  to
                  determine if there is a need to consolidate existing warehouses
                  and,
                  subsequently, reduce operating
                  expenses;
  §
              Offering
                  our clients Internet solutions as well as electronic information
                  for
                  commercial decisions;
  §
              Investing
                  in robotics and state-of-the-art technology for our distribution
                  centers
                  in order to improve client services as well as the company’s profitability
                  levels;
  §
              Initiating
                  operations in new areas and businesses in which the administration
                  believes there may be an attractive growth potential and high
                  profitability levels;
  §
              Implementing
                  IT solutions and renovating our transportation fleet;
                  and
  §
              Capitalizing
                  on our favorable capital structure.
  As
        a result of these measures, as of
        December 31, 2006, we:
  §
              Had
                  commercial operations with almost all of the clients and suppliers
                  of the
                  private pharmaceutical market in
                  Mexico;
  §
              Sales
                  in our Private Pharma division increased 4.8% in real terms (excluding
                  inflation), with respect to the year
                  2005;
  §
              Made
                  several of our distribution routes more efficient, thereby obtaining
                  savings which, combined with improved logistic processes in our
                  warehouses, enabled us to reduce the Group’s operating
                  expenses;
  §
              Consolidated
                  two distribution centers into two warehouses with state-of-the-art
                  technology and that offer better service at lower costs to our
                  clients;
  §
              Canceled,
                  created and reduced some of the distribution routes thereby increasing
                  their profitability;
  §
              Reviewed
                  and, in some cases, changed the commercial terms of several of
                  our clients
                  and suppliers and, when required, discontinued unprofitable
                  operations;
  §
              Continued
                  operating under cost savings
                  schemes;
  §
              Reduced
                  our expenses-to-sales ratio from 6.23% in 2005 to 5.58% in
                  2006;
  §
              Invested
                  in and entered into the vaccine distribution
                  business;
  §
              Acquired
                  “Distribuidora Solis,” a company located in northern Mexico that
                  distributes specialized pharmaceutical products. As part of this
                  purchase,
                  we also acquired a pharmaceutical chain called “Farmacias Solis,” which
                  had eight points-of-sale;
  §
              Negotiated
                  a franchise agreement with Teavana with exclusive rights for opening
                  tea
                  lounges and stores in Mexico; and
  §
              Maintained
                  a sound financial structure, which enabled us to close out the
                  year with a
                  solid cash balance of Ps. 743
                  million.
   14
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  During
        2006, we continued implementing
        strict cost and expense controls to achieve greater efficiencies in our
        distribution network and increases in our profitability levels.
  ***Maintaining
        Continuous Contact with Clients and Suppliers***
  We are well aware that 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
        2006, we focused 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.
  ***Developing
        Internal Savings and Operating Efficiencies Programs to Maximize our Operations’
Profitability***
  During
        2006, 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 the reengineering of routes and the
        optimization of distribution centers, among others.
  The
        strategies and actions implemented
        have yielded good results. Operating expenses registered a 7.01% decline
        during
        this fiscal year with respect to 2005 and, as a percentage of sales, decreased
        from 6.23% in 2005 to 5.58 % in 2006, a reduction of 65 basis points.
        Consequently, our operating margin increased from 4.09% in 2005 to 4.3% in
        2006.
 
 ***Implementing
        Route Reengineering Programs and Satellite Tracking Systems for our Distribution
        Fleet in order to Improve our Client Service and Reduce our Operating
        Expenses.***
  Through
        an ongoing routes reengineering
        program that responds to our clients’ needs as well as to the demand of private
        pharmaceutical market customers, we have been able to optimize our delivery
        routes.  Having more efficient delivery routes enables the company not
        only to improve its profitability levels, but also offers our clients a more
        reliable service.  Also, more efficient delivery routes enable us to
        obtain savings in both fuel and vehicle spending.
  The
        implementation of satellite
        tracking systems has enabled us to reduce driver-related inefficiencies and
        minimize merchandise theft.
 
 ***Offering
        our Clients Internet Solutions as well as Electronic Information to Enhance
        commercial Decision-Making***
  We
        continued to use an online
        distribution and information website, *www.farmaservicios.com*, which we
        currently make available to our clients free of charge.  Clients that
        log on to *www.farmaservicios.com*are able to communicate and/or
        negotiate the terms of their distributorship arrangements directly with us,
        as
        well as place and track their orders and shipments 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.com*is 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.
  ***Investing
        in Robotics and State-of-the-Art Technology for our Distribution Centers
        in
        order to Improve Client Service as well as the Company’s Profitability
        Levels.***
  As
        of December 2006, we inaugurated one
        of the most sophisticated automatic picking systems in Latin
        America.  This system reduces picking mistakes, delivers online
        information and improves the overall efficiency of the distribution center,
        which translates in a better service to our clients.
  15
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  ***Initiating
        Operations in New Areas and Businesses in which our Management Believes There
        Can Be a Potential for Attractive Growth and High Profitability
        Levels.***
  We
        began distributing vaccines,
        primarily to private physicians and private clinics in Mexico City. Although
        this is still a small business with respect to the traditional distribution
        of
        pharmaceutical products, it is expected that the prevention of illnesses
        will be
        a growing trend and, thus, will contribute to the development of our business
        in
        the long-term.  Therefore, at Grupo Casa Saba we want to be a leading
        player in this area and will continue to invest, as the demand for these
        types
        of products grows in Mexico and as long as its profitable and in line with
        our
        business strategy.
  In
        addition, during the fourth quarter
        of 2006 we acquired “Distribidora Solis,” a specialized pharmaceutical products
        distributor located in northern Mexico.  This company also had a
        pharmaceutical chain consisting of eight pharmacies.  Through this
        acquisition, the Group has now operations in a division (specialized
        pharmaceutical products) that we foresee as profitable and with a high growth
        potential in the long-term.
  In
        the second half of 2006, we
        negotiated an agreement with a tea shop and tea lounge franchise named
*Teavana*, whereby we will have the exclusive rights for opening tea
        lounges and stores in Mexico.  As of today, we are finalizing the
        franchise agreements as well as registering the contracts with the Mexican
        Institute of Intellectual Property (IMPI). We will start expanding its
        operations this year, as soon as the legal requirements are
        met.  *Teavana*’s business plan for Mexico includes a small
        number of new stores per year. Given that this is a new concept in this market,
        we will study its acceptance rate in Mexico City before committing relevant
        capital expenditures to the chain’s expansion.
  ***Implementing
        IT solutions and Renovating our Transportation Fleet***
  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 the upgrading and modernization of its logistics and information
        systems.
  In
        March of 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.
 
 With
        this
        investment in technology, Grupo Casa Saba will obtain a system with
        state-of-the-art technology that is flexible, tolerant to failures and that
        boasts the latest in systems back-up procedures and disaster
        recovery.  Together, all of these features will ensure the continuous
        processing of client transactions nationwide.
 
 ***Capitalizing
        on our Favorable Capital Structure***
  Our
        healthy financial structure, which
        has been free of cost-bearing liabilities since 2004, 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 reduce interest expense and to increase our dividend payment by 25%
        during
        2006.  We intend to preserve our improved financial position and to
        capitalize on our ability to react quickly to market opportunities, as well
        as
        to support our growth strategy.
  **Operations**
  Our
        operations are currently organized
        into four operating business divisions:  the Private Pharma business
        division, the Government Pharma business division, the HBCG/Other Products
        Division and the Publications business division. Please see “Item
        5.  Operating and Financial Review and Prospects—Results of
        Operations” and Note 13  of our financial statements, included
        elsewhere in this annual report, for a breakdown of our consolidated net
        sales
        by business division for the three year period ended on December 31,
        2006.
  16
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 **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.
  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)**2004**
                
                
                **2005**
                
                
                **2006**Sales
                    in millions(2)
                
                U.S.$ 7,721.3
                
                
                U.S.$
                    9,009.7
                
                
                U.S.$9,582.8Sales
                    in millions of units(3)
                
                972.6
                
                
                992.9
                
                
                983.6Average
                    unit price(3)
                
                U.S.$ 7.94
                
                
                U.S.$ 9.07
                
                
                U.S.$ 9.74Growth
                    in average unit
                    price
                
                
                12.9%
                
                
                
                14.2%
                
                
                
                7.4%
 ____________________
 (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.  However, in 2002 the price per unit decreased by 1.7% “in
        dollar terms” compared with 2001, reflecting in part the devaluation of
        approximately 13.7% that the Peso suffered in 2002.  In 2003, the
        average price per unit increased 2.6% “in dollar terms” versus 2002, affected by
        the 5.7% devaluation of the Peso and the low GDP growth rate of 1.3% 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 versus 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%.
  17
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  The
        devaluation of the Peso may affect
        our ability to increase the prices of some of our products.  See “Item
        3. Key Information—Risk Factors—Risk Factors Relating to Political and Economic
        Developments in Mexico.”
  The
        government institutions that
        purchase products from us include:
  *·*     *ISSSTE
        – The* Instituto de Seguridad y Servicios Sociales para los Trabajadores del
        Estado, *the health and social security institution for Mexican federal
        government employees;*
  *·      PEMEX
        – The hospitals and pharmacies operated by Petróleos Mexicanos, the Mexican
        national oil company.  Our sales to PEMEX in 2000 accounted for 4.8%
        of our total net sales and we had 100% of the PEMEX contracts. Due to new
        conditions in our PEMEX contract, sales to PEMEX during 2001 accounted for
        3.5%
        of our total net sales and we were awarded approximately 60% of the total
        PEMEX
        contracts to serve different hospitals in four specific regions of Mexico.
        During 2002, sales to PEMEX represented approximately 4.0% of our total sales,
        19.4% higher than in 2001.  In 2003, 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 %, mainly due to modifications
        that
        PEMEX made to its purchase scheme of pharmaceutical products. In light of
        these
        new parameters, operations with PEMEX were not sufficiently profitable for
        us
        and, therefore, we decided not to participate in the auction 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.*
  *·      IMSS–
        The hospitals and pharmacies of the Instituto Mexicano del Seguro Social,
        the
        health and social security institution for Mexican employees of private
        companies.*
  *·      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.*
  ***Private
        Sector Pharmaceutical Distribution (Private Pharma)***
  Our
        private sector customers consist
        primarily of over 15,400 privately owned pharmacies, as well as national
        and
        regional pharmaceutical and supermarket chains (comprising approximately
        6,950
        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.
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 According
        to IMS Health, A.G. and our
        estimates, in 2004, 2005 and 2006, 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 more than 110
        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.
  ***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 as well as Office Products
        within
        the Group’s sales, which together accounted for less than 1% of the Group’s
        total net sales.
  19
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 We
        distribute health and beauty aids
        (HBA), various consumer products and electronic products that are typically
        sold
        through supermarkets, convenience stores, specialty stores and pharmacies
        in
        Mexico.  The products distributed in this division consist principally
        of basic toiletries, food products, consumer goods and electronics, some
        of
        which are distributed on an exclusive basis, such as:
  §
              Mexsana
                  talcum powders from Schering Plough (since
                  1999);
  §
              Coppertone
                  suntan lotions (since 1999);
  §
              Brunswick
                  Sea Food products (since 1994);
  §
              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)
  As
        of May 2006, we stopped distributing
        Veet waxing products and General Mills products, and added Chapstick lip
        balm
        and Sin Agua liquid hand sanitizer to our distribution list.  Both are
        distributed on an exclusive basis.
  During
        the first quarter of 2007, we
        stopped distributing Canderel and Planet Pop products and in January 2007,
        we
        incorporated Mustela products into our catalog.
  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, toiletries, Casio electronic products and
        Disney
        licensed products.  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.
  20
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  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 will continue only until our existing
        inventory of such products lasts. There can be no assurance that we will
        enter
        into a distribution agreement with Casio or any other supplier of similar
        products or, if we do, that the terms will be favorable for us.
  **Publications**
  We
        distribute books and magazines, a
        large majority of which we distribute on an exclusive basis through our
        publishing subsidiary, Publicaciones Citem, S.A. de C.V., or Citem, which
        is 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 2004, 2005, nor
        2006.  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
        149 nationwide agents and three firms affiliated with the *Union de
        Voceadores*, or Union of Newspaper Boys, in Mexico City.  Citem
        also distributes entertainment products through other establishments, including
        supermarkets, convenience stores, racks and magazine newsstands in airports,
        libraries and 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 54%, 17%, 20% and 9% of our total export
        sales in 2001, respectively.  In 2002 and 2003, we continued to export
        to the United States, Central America, South America and the
        Caribbean.  These areas represented 54%, 11%, 7%, and 28%,
        respectively, of our total publication export sales in 2002, while in 2003
        these
        sales accounted for 68%, 5%, 17%, and 10% of our total publication export
        sales,
        respectively.  By the end of 2004, exports to the United States
        accounted for 62% of our annual publication export sales while Central America
        represented 13%, South America represented 22% and the Caribbean represented
        3%.
        During 2005, 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%.
  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%. Higher sales of political and sports magazines, stemming
        from
        consumer’s interest in the Mexican presidential elections and the Soccer World
        Cup, were the main factors behind this growth.
  **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.
  21
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  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.
  **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 20 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 180 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 Distriphar, Glaxosmithkline, Pfizer 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 140 suppliers located primarily in Mexico
        City.  We purchased our catalog of over 800 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.  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 will distribute keyboards
        and
        some electronics products, such as watches, only until we run out of our
        existing inventory.  There can be no assurance that we will enter into
        a different distribution agreement with Casio or any other supplier, or that,
        if
        we do, that it will be under favorable terms for us.
  22
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  ***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. 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 2004, 2005 and 2006, 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.
  We
        continue to distribute office and
        electronic products from Casio, and face competition from regional and other
        wholesalers.  We only expect to continue distributing these products
        while inventories last, given that we do not see this as a core strategic
        business.
  23
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  ***Publications***
  In
        Mexico, where the majority of
        Citem’s sales are made, our principal competitors in our publications product
        line include:
  §
              Intermex,
                  a company owned by Televisa, which primarily distributes its own
                  publications;
  §
              Codyplirsa,
                  which primarily distributes popular magazines nationwide;
                  and
  §
              DIMSA,
                  which distributes primarily English-language
                  publications.
  **Payments
        and
        Collections**
  Most
        of our sales are made on credit,
        with customers signing promissory notes for each invoice indicating the delivery
        of a product.  Cash-on-delivery terms are mainly used with new clients
        or those whose credit has been temporarily suspended.  We negotiate
        the number of days of credit that we will extend to our clients on a
        case-by-case basis.  The determination of the number of days that we
        will extend credit to a particular client depends on a number of factors,
        including the client’s creditworthiness, as well as the length and nature of the
        client’s relationship with us.  The determination of the number of
        days that we will extend credit to a particular client also depends on our
        current business strategy.  For example, in connection with our
        efforts to increase sales to particular sectors of the market, in 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 63 in 2004, 68 days in 2005 and 68 days in
        2006.
  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.  See “Item 4.”
  The
        following chart sets forth the
        average contracted maturity of accounts receivable due from various market
        sectors.
 **Credit
                    terms**
                **Days**Pharmacies
                35Supermarkets
                    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 is developing jointly with IBM and SAP will allow
        the
        Company to offer the best product distribution to its clients and suppliers
        nationwide.
  24
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  With
        this investment in technology,
        Grupo Casa Saba will obtain 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.  Together, all of these features
        will ensure the continuous processing of client transactions
        nationwide.
 
 ***Retail
        Order Computers***
  A
        substantial part of our sales
        representatives use portable hand-held computer terminals to take and process
        orders.  These orders are transmitted via telephone lines to a central
        computer at each distribution center.  The orders are then printed and
        separated by route and filled according to a departure schedule.  We
        continually: upgrade our systems to increase the effectiveness of our order
        system; install individual workstations in a greater number of locations;
        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.  *www.farmaservicios.pdv* 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, 2006, more than
        2,800 *www.farmaservicios.pdv* systems were operating at customer
        locations.
  ***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, 2006, 6 of our 20 distribution centers had automated pickers.  The
        installation of additional automated pickers in our remaining 14 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 2006, we continued to update all of our
        back-office information systems in order to improve our internal as well
        as our
        administrative reporting processes.
  25
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  ***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, 2007, our principal
        properties consisted of 20 distribution centers, complete with all of the
        equipment necessary to operate these centers, and approximately 17 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, 2007, we have
        distribution centers that represent approximately 100,000 square meters of
        warehouse space.  From these centers, we filled more than 5 million
        orders in 2006, averaging more than 400,000 orders per month.  All of
        our distribution centers are strategically located near Mexico’s major
        population centers.
  The
        following table shows our current
        distribution centers and their locations in alphabetical order, as of May
        31,
        2007:
 **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,
                    Veracruz
 In
        conjunction with our cost-cutting
        program and our efforts to consolidate our operations and improve our
        profitability, during 2006 we closed the distribution centers located in
        Puebla
        and Morelia.
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  **Item
        5.Operating and Financial Review and
        Prospects**
  The
        following discussion should be read
        in conjunction with our audited consolidated financial statements and the
        accompanying notes included elsewhere in this annual report.  Our
        audited consolidated financial statements have been prepared in accordance
        with
        Mexican GAAP, which differ in some significant respects from U.S.
        GAAP.  Note 16 to our audited consolidated financial statements
        provides a description of the primary differences between Mexican GAAP and
        U.S.
        GAAP, and describes the differences in presentation between the statement
        of
        changes in the financial position under Mexican GAAP and the requirements
        under
        U.S. GAAP for a statement of cash flows.  Note 16 also provides a
        description of our profit sharing and income tax obligations.  Note 17
        to our audited consolidated financial statements provides a partial
        reconciliation to U.S. GAAP for net income and total stockholders’
equity.
  Mexican
        GAAP requires that our audited
        consolidated financial statements recognize certain effects of
        inflation.  In accordance with Mexican GAAP, except as otherwise
        indicated, financial data for all periods presented in our audited consolidated
        financial statements in this annual report have been restated in constant
        Pesos
        as of December 31, 2006.
  **Overview**
  The
        year ended December 31, 2006 was a
        year full of challenges in a highly competitive industry, where operating
        efficiency and service excellence were the key variables in ensuring permanence
        and good results.
  Under
        those circumstances, and in order
        to position Grupo Casa Saba as a leader in its markets, a series of strategies
        were implemented that were aimed at widening our presence in the various
        markets
        where we operate as well as at increasing the efficiency of both our
        administrative and logistic operations as well as our distribution
        centers.
  We
        continued with the reengineering of
        our routes and the satellite positioning of our distribution fleet, thus
        gaining
        enhanced efficiency in terms of both profitability and client
        service.
  At
        our distribution centers, we
        performed operational feasibility studies that led to two centers being
        consolidated into our existing network. We concluded that, thanks to our
        technical innovations and highly efficient routing, their operations could
        be
        absorbed by other distribution centers with a higher level of automation.
        This
        translated into lower operating expenses and better client service.
  In
        December 2006, at our Taxqueña
        distribution center in Mexico City, a state-of-the-art automated warehousing
        supply and handling system began operations, which generated not only operating
        efficiency but also greater sorting precision and quality for our clients.
        This
        system is currently one of the most sophisticated of its kind in Latin America,
        placing our group at the forefront in terms of technology.
  We
        continued to maintain strict
        controls throughout the year over our administrative and corporate operations,
        generating savings in administration expenses and boosting the Group’s
        productivity.
  In
        our principal market, which is the
        distribution of private pharmaceutical products, 2006 was a year of dynamic
        growth, which, along with the Group’s competitive positioning in the market,
        helped it to register a real annual sales increase of 3.7%. However, in
        commercial terms, 2006 was a year of high competition in almost all of the
        markets in which the Group participates. This generated higher discounts
        for our
        clients, which in turn affected the Group’s gross profit.
  Although
        gross profit decrease slightly
        in 2006 compared to 2005, improved operating efficiency allowed us to register
        a
        real annual reduction of more than five percent in our operating expenses.
        This
        offset the lower gross profit and resulted in real annual growth in our
        consolidated operating earnings of 9.1%. In order to offer better and more
        competitive service to clients, additional investments in working capital
        were
        made in 2006, all of which were completely covered by the cash flow generated
        by
        the Group’s operations.
  Grupo
        Casa Saba registered a 16.6%
        increase in net income in 2006, the result of improved operating efficiency
        and
        a solid financial structure, which showed a cash position net of cost-bearing
        liabilities of Ps. 600 million at the end of 2006.
  27
 Table
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  For
        the fourth consecutive year and in
        order to comply with the commitment that the Group’s administration has with its
        shareholders, a cash dividend of Ps. 154 million was paid in June
        2006.  This figure is equivalent to Ps. 0.5651 per share and is
        25% higher than the dividend that was paid out in 2005.
  At
        Grupo Casa Saba, we will maintain
        our policies of strict cost controls, financial strength and sound corporate
        governance, and will continue to focus on enhancing our service standards.
        Consequently, we will continue our efforts to increase our profitability
        and
        strengthen our growth.
  **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
        2001 due to a slowdown in the
        international economic environment, Mexico’s GDP decreased by 0.2% and inflation
        declined to 4.4%. This economic slowdown continued in 2002 and Mexico’s GDP
        increased by 0.8% and annual inflation reached 5.7%. In 2003, concerns about
        the
        recovery of the U.S. economy continued, the war with Iraq began and there
        were
        no major advances in the structural reforms expected in Mexico. The combination
        of these factors affected Mexico’s GDP, which grew during the period by 1.4%
        while inflation declined to 4.0% and the interest rate on 28-day CETES averaged
        6.2%. Finally, in 2004 several factors helped to boost the Mexican economy,
        including: the recuperation of the U.S. economy; higher revenues generated
        from
        petroleum sales and an increase in remittances. During this period, Mexico’s GDP
        grew by 4.2%, while inflation reached 5.2% and the interest rate on 28-day
        CETES
        averaged 6.8%. In 2005, the economy further 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, presidential,
        congressional and state elections took place in Mexico, enhancing with
        extraordinary spending the growth of the several sectors, including services.
        Oil prices continued to be high, averaging U.S.$ 56.5 per barrel, which
        helped the country’s GDP to grow 4.8% during the year. Inflation reached 4.1%
        and the interest rate on 28-day CETES averaged 7.2%. During the first quarter
        of
        2007, Mexico’s GDP grew 2.6% and inflation reached 1.0%.
  For
        each of the years ended on December
        31, 2004, 2005 and 2006, 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 2006, 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 1.5% against the U.S.
        Dollar.  In the first quarter of 2007, the Peso depreciated by
        approximately 2.6% against the U.S. Dollar.  Any future depreciation
        or devaluation of the Peso will likely result in price increases from our
        suppliers which could impact the purchasing capacity of the final consumers,
        causing a reduction in our net sales.
  28
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  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 5.2%, 3.3% and 4.1% for 2004,
        2005
        and 2006, 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 real and nominal interest rates.  The interest
        rates on 28-day Mexican government treasury bonds averaged approximately
        6.8%,
        9.1% and 7.2% for 2004, 2005 and 2006, respectively.  In the first
        quarter of 2007, the 28-day Mexican CETES averaged 7.0%.  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,**2004**
                
                ****
                **2005**
                ****
                ****
                **2006****Total
                    Private Pharmaceuticals**
                  **Market:**Real
                    Unit Price
                    Increases
                
                6.6%
                
                
                6.2%
                
                
                5.2%Growth
                    in Units
                
                -3.2%
                
                
                2.1%
                
                
                -0.9%**Grupo
                    Casa Saba Private**
                  **Pharmaceutical
                    Products:**Real
                    Unit Price
                    Increases
                
                7.2%
                
                
                7.4%
                
                
                11.4%Growth
                    in Units
                
                -6.8%
                
                
                -5.0%
                
                
                -5.9%**Market
                    Share of Grupo Casa Saba(1):**
                
                26.0%
                
                
                24.0%
                
                
                23.1%**Inflation****(2)**
                
                5.2%
                
                
                3.3%
                
                
                4.1%
 _________________
 (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.”
  29
 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, 2006.
  **Year
                      Ended December 31,****2004**
                
                
                **2005**
                
                
                **2006****(Millions
                    of constant Pesos as of December 31,
                    2006)****Pharmaceuticals:****Private
                    sector**
                
                Ps.18,477.6
                
                
                Ps.18,856.5
                
                
                Ps.19,763.4%
                    Growth
                
                0.1
                %
                
                2.1
                %
                
                4.8
                %**Government**
                
                663.9
                
                
                848.4
                
                
                814.9%
                    Growth
                
                10.1
                %
                
                27.8
                %
                
                -4.0
                %**Health,
                    Beauty, Consumer Goods, General Merchandise and Other
                    Products**
                
                2,208.8
                
                
                2,228.8
                
                
                2,150.4%
                    Growth
                
                -4.6
                %
                
                0.9
                %
                
                -3.5
                %**Publications**
                
                766.1
                
                
                826.7
                
                
                870.7%
                    Growth
                
                6.2
                %
                
                7.8
                %
                
                5.3
                %**Total**
                
                Ps.22,116.4
                
                
                Ps.22,760.4
                
                
                Ps.23,599.4Total
                    %
                    Growth
                
                0.1
                %
                
                2.9
                %
                
                3.7
                %
  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,**2004**
                
                
                **2005**
                
                
                **2006****Pharmaceuticals:**Private
                
                
                83.6
                %
                
                
                82.9
                %
                
                
                83.8
                %Government
                
                
                3.0
                %
                
                
                3.7
                %
                
                
                3.5
                %**Health,
                    Beauty, Consumer Goods, General Merchandise and Other
                    Products**
                
                
                9.9
                %
                
                
                9.8
                %
                
                
                9.1
                %**Publications**
                
                
                3.5
                %
                
                
                3.6
                %
                
                
                3.7
                %100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %**Cost
                    of Sales**
                
                
                89.7
                %
                
                
                89.7
                %
                
                
                90.1
                %**Gross
                    Profit**
                
                
                10.3
                %
                
                
                10.3
                %
                
                
                9.9
                %**Operating
                    expenses**:Selling
                    expenses
                
                
                2.7
                %
                
                
                2.5
                %
                
                
                2.2
                %Administrative
                    expenses
                
                
                3.7
                %
                
                
                3.7
                %
                
                
                3.3
                %6.4
                %
                
                
                6.2
                %
                
                
                5.5
                %**Operating
                    income**
                
                
                3.9
                %
                
                
                4.1
                %
                
                
                4.3
                %**Comprehensive
                    cost of financing, net**
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %**Other
                    income**
                
                
                (0.2
                )%
                
                
                (0.2
                )%
                
                
                (0.4
                )%**Income
                    tax and employee profit sharing**
                
                
                0.9
                %
                
                
                0.9
                %
                
                
                1.0.
                %**Net
                    income**
                
                
                3.2
                %
                
                
                3.3
                %
                
                
                3.7
                %100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
  30
 Table
            of Contents
   **Results
        of
        Operations**
  *In
        accordance with Mexican GAAP, Peso
        amounts presented below for 2004, 2005 and 2006 are reflected in constant
        Pesos
        as of December 31, 2006.*
  ***Year
        Ended December 31, 2006 Compared to Year Ended December 31,
        2005***
  Total
        Net Sales.  Net sales
        increased by 3.7% to Ps. 23,599.4 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. 18,856.5 million for the year ended December 31, 2005 to Ps.
        19,763.4 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. 848.4 million for the year
        ended December 31, 2005, totaling Ps. 814.9 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
        Products******business division decreased by 3.5%, to
        Ps. 2,150.4 for the year ended December 31, 2006 compared to Ps. 2,228.8
        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.
  ***Net
        Publications
        Sales.***  Net sales in our Publications business division
        increased by 5.33% to Ps. 870.7 million for the year ended December 31, 2006
        from Ps. 826.7 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. 21,267.0 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. 2,332 million for the year ended December 31, 2006,
        down by 0.69% from Ps. 2,348.6 million for the same period in
        2005.
  31
 Table
            of Contents
   ***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. 1,316.4
        million for the year ended December 31, 2006 from Ps. 1,417.1 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. 1,015.9 million, an increase of 9.06% from Ps. 931.5 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.***  Pursuant to Mexican GAAP, 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.
  Our
        comprehensive financing cost, net
        for the year ended December 31, 2006 registered a gain of Ps. 4.2 million,
        due
        primarily to increased interest income, lower interest expense and an exchange
        gain of Ps. 1.7 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. 234.2 million, an increase of 8.75% from
        Ps. 215.4 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. 353.8 million, which added to a recovery of
        asset tax paid in prior years of Ps. (59.0) million and a deferred income
        tax of
        Ps. (64.8) million resulted in provisions for taxes in an amount of Ps. 229.9
        million compared to Ps. 216.3 million for the same period in 2005. Employee
        profit-sharing for the year ended December 31, 2006 decreased to Ps. 3.4
        million
        from Ps. 4.4 million for the same period in 2005, and deferred employee
        profit-sharing resulted in a cost of approximately Ps. 1.0 million for the
        year
        ended December 31, 2006 compared with a gain of Ps. 5.2 million for the same
        period in 2005.
   32
 Table
            of Contents
  ***Net
        Income.*** Net income for the year ended December 31, 2006 was
        Ps. 883.4 million, an increase of 16.6% from the Ps. 757.7 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.
  ***Year
        Ended December 31, 2005 Compared to Year Ended December 31,
        2004***
  ***Total
        Net
        Sales.***  Net sales increased by 2.9% to Ps. 22,760.4
        million for the year ended December 31, 2005 compared to the same period
        for
        2004, mainly due to the vitality of the private pharmaceutical market, our
        increased participation in government institutions, and the growth in our
        publications division. Net sales in our HBCG/Other Products business division
        increased slightly, by 0.9%, to Ps. 2,228.8 million as compared to Ps. 2,208.8
        million for the year ended December 31, 2004, primarily due to the decision
        of
        some clients to not acquire this type of products through Grupo Casa
        Saba.
  During the first half of the year, our strategy of focusing on profitability
        affected our sales performance, given that we did not operate with clients
        that
        did not meet our minimum profitability requirements.  During the
        second half of the year, however, we incorporated some of these product lines
        back into our catalog under better commercial conditions. Overall, we believe
        that this strategy delivered positive results, since our 2005 operating income
        grew by 8.6% with respect to 2004.
  ***Net
        Private Pharma Sales.***Net sales from our Private Pharma business division increased
        by
        2.1%, from Ps. 18,477.6 million for the year ended December 31, 2004 to Ps.
        18,855.8 million for the year ended December 31, 2005.
  This
        increase reflects the vitality of
        the private pharmaceutical market as well as the impact of not distributing,
        during the first half of the year, products from suppliers that did not meet
        our
        new minimum profitability requirements. As the private pharmaceutical market
        posted better results than our Private Pharma business division for the year
        ended December 31, 2005, we experienced a decrease in our market
        share.
  Our
        Private Pharma business division
        continued to account for most of our sales, in spite of a slight decrease
        as a
        percentage of total sales, from 83.6% for the year ended December 31, 2004
        to
        82.9% for the same period in 2005.
  ***Net
        Government Pharma
        Sales.***  Net sales from our Government Pharma business
        division increased considerably, by 27.8% as compared to Ps. 663.9 million
        for
        the year ended December 31, 2004, totaling Ps. 848.4 million for the same
        period
        in 2005. This increase resulted primarily from our efforts in raising our
        participation with government institutions, including PEMEX and state health
        institutions.  As a result of this increase, net sales in our
        Government Pharma business division for the year ended December 31, 2005
        represented 3.7% of total net sales, compared to 3.0% for the same period
        in
        2004.  Since sales to PEMEX and other government institutions depend
        on bidding processes, there can be no assurance that we will be awarded similar
        contracts in the future. See “Item 4.  Information on the
        Company—Business Overview—Pharmaceutical Industry—Industry Prices.”
  ***Net
        Health, Beauty,
        Consumer Goods, General Merchandise and Other Products
        Sales.***  Net sales from our Health, Beauty, Consumer
        Goods, General Merchandise and Other
        Products******business division increased slightly, by
        0.9%, to Ps. 2,228.8 for the year ended December 31, 2005 compared to Ps.
        2,208.8 million for the same period in 2004. This increase was mainly due
        to
        other product lines, such as food products, which registered increases in
        sales
        as a result of solid commercial efforts, both of new and traditional products,
        which was partially offset by the decision of some clients not to acquire
        some
        products through Grupo Casa Saba.  Net sales for this division
        decreased as a percentage of total net sales to 9.8% for the year ended December
        31, 2005 compared to 9.9% for the same period in 2004.
  ***Net
        Publications
        Sales.***  Net sales in our Publications business division
        increased by 7.8% to Ps. 826.7 million for the year ended December 31, 2005
        from
        Ps. 766.1 million for the year ended December 31, 2004. This result is the
        outcome of the strong market positioning of this division, a solid editorial
        base, the inclusion of new titles and penetration into new markets. Net sales
        from our Publications division represented 3.6% of our total net sales for
        the
        year ended December 31, 2005, increasing slightly from 3.5% for the year
        ended
        December 31, 2004.
  33
 Table
            of Contents
  ***Gross
        Profit.***  Cost of sales for the year ended December 31,
        2005 amounted to Ps. 20,411.1 million, a 2.9% increase from the Ps. 19,841.0
        million for the same period for 2004. This was mainly the result of the 2.9%
        increase in sales. As a result, our gross margin for fiscal year 2005 improved
        slightly, by 3 basis points, to 10.3%, and our gross profit increased by
        3.2%,
        to Ps. 2,348.6 million for the year ended December 31, 2005, from Ps. 2,276.8
        million for the same period in 2004.
  ***Operating
        Expenses.***  Operating expenses for the year ended
        December 31, 2005 amounted to Ps. 1,417.1 million, registering a decrease
        of
        0.14% as compared to Ps. 1,419.1 million for the same period in
        2004.  This was the result of improved operations efficiency and
        continuous cost-savings programs, such as route reengineering and the
        optimization of distribution centers, among others.  Consequently,
        operating expenses as a percentage of total net sales represented 6.2% for
        the
        year ended December 31, 2005, vis-à-vis 6.4% in the same period of
        2004.
  ***Operating
        Income.***  Operating income for the year ended December
        31, 2005 was Ps. 931.5 million, reflecting an 8.6% increase from Ps. 857.8
        million for the same period in 2004. Our operating margin for the year ended
        December 31, 2005 increased 21 basis points to 4.1%, from the 3.9% figure
        for
        the year ended December 31, 2004. The increase was primarily due to the increase
        in sales and the reduction in operating expenses.
  ***Comprehensive
        Cost of
        Financing, Net.***  Pursuant to Mexican GAAP, we report
        four items within this line item: interest expense, interest income, foreign
        exchange (gain) loss and 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 a determination that money market conditions
        generated a favorable cost-benefit tradeoff in comparison to borrowing in
        Pesos.  The gain or loss on the net monetary position incorporates the
        effect of inflation on monetary assets and liabilities.  Monetary
        gains arise from holding a net monetary liability position during periods
        of
        inflation, while monetary losses arise from holding a net monetary asset
        position during periods of inflation.
  Our
        comprehensive cost of financing,
        net for the year ended December 31, 2005 registered a gain of Ps. 1.7 million.
        This gain is primarily the result of a higher interest income and a lower
        interest expense. It is worth noting that interests paid mainly represent
        banking fees.
  ***Income
        Tax, Asset Tax and
        Employees’ 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, 2005 were Ps. 215.4 million, an increase of 9.4% compared to Ps. 196.9
        million for the year ended December 31, 2004.  This was mainly due to
        a higher income tax provision.  With respect to pre-tax income,
        provision for taxes and employee profit-sharing was 22.1% of pre-tax income
        for
        the year ended December 31, 2005, compared to 22.0% for the year ended December
        31, 2004.  Income tax for the year ended December 31, 2005 was Ps.
        320.2 million and income tax offset by prior year tax loss carry forwards
        was
        Ps. (195.9) million.  For the year ended December 31, 2005, we did not
        pay any asset tax and deferred income tax was Ps. 92.0 million. Employee
        profit-sharing and deferred employee profit sharing for the year ended December
        31, 2005 accounted for Ps. (0.8) million.
  ***Net
        Income.***  Net income for the year ended December 31, 2005
        was Ps. 757.7 million, an increase of 8.6% compared to the Ps. 697.6 million
        registered for the year ended December 31, 2004.  Net profit as a
        percentage of sales, or net margin, for the year ended December 31, 2005
        was
        3.3%, 18 basis points higher than the margin for the same period in
        2004.
  34
 Table
            of Contents
  **Aggregate
        Contractual
        Obligations**
  Below
        is a table containing a
        description of Casa Saba’s aggregate contractual obligations.
  **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)
                  1,882
                  1,882
                  –
                  –
                  –Operating
                      Leases (3)
                  –
                  –
                  –
                  –
                  –Purchase
                      Obligations (4)
                  –
                  –
                  –
                  –
                  –Other
                      Long-Term Liabilities reflected on our Balance Sheet Under
                      Mexican GAAP
                      (5)
                  724,061
                  –
                  –
                  –
                  724,061Total
                  725,943
                  1,882
                  –
                  –
                  724,061
 ____________________________
 (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 Hewlett Packard, Capital and Paragon.
 (3)  Not
          applicable.
 (4)  Not
          applicable.
 (5)  Includes
          reserve for retirement pensions and seniority premiums.  The maturity
          of this obligation will occur in accordance with the disclosure in Note
          3(j) to
          our audited consolidated financial statements.
  **Non-Exchange
        Traded Contracts Accounted
        for at Fair Value**
  All
        financial assets and financial
        liabilities derived from any type of financial instrument are recognized
        in our
        balance sheet at fair value. The valuation effect is recognized as income
        for
        the year. Revenues and expenses generated by financial instruments are
        recognized in the income statement when accrued.
  In
        accordance with Bulletin C-2
“Financial Instruments” issued by the MIPA, Casa Saba’s financial instruments
        are comprised mainly of cash and cash equivalents, accounts receivable and
        payable not related to its commercial activities, bank loans, and long-term
        debt. We are not party to any derivative or other similar instruments at
        this
        time. As of December 31, 2004, 2005 and 2006, the carrying value of financial
        instruments shown in the balance sheet approximates their fair value due
        to
        their short-term nature.
  **Off-
        Balance Sheet
        Agreements**
  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:
  35
 Table
            of Contents
  ***(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 National Consumer Price Index to value those
        assets, as permitted by Mexican GAAP. We believe that this method more
        accurately presents the fair value of the assets than historical cost or
        other
        methods accepted by Mexican GAAP.
  As
        we discuss in Note 3(g) to our
        audited consolidated financial statements, effective 2004, in accordance
        with
        Bulletin C-15, “Impairment of the value of long-lived assets and their related
        disposal” (Bulletin C-15) issued by the IMCP, we periodically assess the
        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. Bulletin C-15 contemplates the reversal
        of
        the recognition of impairment. Property and equipment to be disposed of are
        recorded as the lesser 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
        2005 and 2006 fiscal year end, the
        Group completed the fair value based impairment test on its property and
        equipment.  As a result the fair value of those long-lived assets was
        equivalent to or greater than the carrying value thereof recorded on those
        dates. Accordingly, no impairment charges resulted from the assessment performed
        on the carrying value of property and equipment.
  While
        we believe that our estimates are
        reasonable, different assumptions could materially affect our evaluations.
        Our
        evaluations throughout the year and up to the date of this annual report
        did not
        lead to any impairment
        of long-lived assets. We can give no assurance that our expectations will
        not
        change as a result of new information or developments.
  36
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  The
        provisions of Bulletin C-15 are
        virtually identical to SFAS 144, “Accounting for the impairment or disposal of
        long-lived assets” adopted by us on January 1, 2002 under U.S.
        GAAP.
  ***(d)
        Intangible assets and goodwill***
  As
        we discuss in Note 3(h) to our
        audited consolidated financial statement, we apply Bulletin C-8, “Intangible
        Assets” (Bulletin C-8) issued by the MIPA. Accordingly, our intangible assets
        refer to costs incurred and/or rights or privileges acquired that generate
        specific future economic benefits over which the Group has control.
        Consequently: (i) development costs are capitalized as intangible assets
        under
        certain circumstances; (ii) pre-operating costs are expensed when incurred;
        (iii) intangible assets acquired through a business combination are accounted
        for individually at the fair value as of the acquisition date and reported
        separately, unless their cost cannot be reasonably determined. In that event,
        they are accounted for collectively as goodwill. The Group’s goodwill arises
        from acquiring shares of capital stock of subsidiary companies at a price
        exceeding the fair value of the net assets acquired at the acquisition
        date.
  Intangible
        assets with a defined
        economic useful life are amortized over their useful life by using the
        straight-line method, unless there is no market for those assets. In that
        event,
        they are reduced to the amount of goodwill or to zero. In addition, intangible
        assets with an undefined economic useful life including goodwill are subject
        to
        a periodic impairment valuation, by following the provisions referred to
        in
        paragraph (g) below.
  At
        2005 and 2006 fiscal year end, the
        Group completed the fair value based impairment test on its goodwill. In
        2005,
        the Group recorded an operating expense for goodwill impairment in the amount
        of
        Ps. 46,742 (Ps. 44,921 historical Mexican pesos), whereas in 2006 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***
  Our
        labor obligations are comprised of
        retirement pensions and seniority premiums derived from defined benefit plans
        for all our employees and, beginning in 2005, certain severance benefits
        to
        employees upon termination of the employer/employee relationship when they
        complete that employment relationship prior to retirement age. The determination
        of our obligations and the net periodic cost is dependent on our selection
        of
        certain assumptions used by independent actuaries in calculating such amounts.
        Projected benefit obligations, unamortized items and the net periodic cost
        applicable to labor obligations are determined by using the "projected unit
        credit method." We evaluate our assumptions at least annually. We describe
        our
        labor obligations in Note 3(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 GAAP, actual
        results that differ from our assumptions (actuarial gains or losses) are
        accumulated and amortized over future periods by considering probable labor
        lives of our employees and, therefore, generally affect our recognized expenses
        and recorded obligations in such future periods. While we believe that our
        assumptions are appropriate, significant differences in our actual experience
        or
        significant changes in our assumptions may materially affect our retirement
        pensions, seniority premiums and certain severance benefits to
        employees.
  37
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 ***(f)  Income
        taxes***
  We
        record the provision for both income
        tax and employee profit sharing based on the determined amount payable based
        on
        taxable income, which is obtained as provided for in the applicable provisions
        of the Income Tax Law in effect.
  The
        deferred income tax effect is
        determined by applying the “comprehensive asset and liability method” in
        accordance with Mexican GAAP and U.S. GAAP. The income tax rate in effect
        is
        applied to the temporary differences between the accounting and tax values
        of
        assets and liabilities as of the date of the relevant financial statements,
        as
        well as the amount of the tax loss carry forwards. In the event of any change
        in
        the effective income tax rate subsequent to the fiscal year end, the income
        tax
        rate that will be affected at the time it is estimated that the temporary
        differences are realized will be applied. Asset tax paid in the current year
        and
        in prior years that may be recoverable is recognized as a deferred income
        tax
        asset under certain circumstances. The deferred employee profit sharing effect
        is determined under same method.
  We
        periodically perform a valuation
        allowance to determine the amount of the deferred income tax/employee profit
        sharing asset that will be recorded, in the event that it is likely that
        a
        certain portion or the entire deferred income tax/employee profit sharing
        asset
        may not be realized. The valuation allowance is determined based on historical
        taxable income, projected future taxable income and the expected timing of
        the
        reversal of existing temporary differences. Any reduction in the deferred
        income
        tax asset amount is recorded in the income statement and/or the stockholders’
equity by considering the nature of the temporary item. If our estimates
        and
        related assumptions change in the future, we may be required to record
        additional valuation allowance against our deferred tax assets, resulting
        in 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.
  On
        December 1, 2004, an amendment to
        the Mexican Income Tax Law was published and became effective as of January
        1,
        2005. Under this amendment:
  (i)
                The
                  statutory income tax rate was of 30% for 2005 and was reduced gradually
                  by
                  one percentage point per year through 2007 to reach 28%.  This
                  rate will be applicable thereon.(ii)
                The
                  tax deduction for inventories will be made through cost of sales,
                  and the
                  inventory balance as of December 31, 2004, was taxable effective
                  2005, but
                  will not exceed 2012, based on specific criteria provided for in
                  the
                  Income Tax Law.(iii)
                Paid
                  employee profit sharing may be reduced from the income tax base,
                  and(iv)
                The
                  limit on stockholders’ participation in taxable income or loss from
                  Mexican subsidiaries was eliminated for tax consolidation
                  purposes.
  ***(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.
  38
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  ***(h)  
        Tax and legal contingencies***
  We
        are subject to various claims and
        contingencies related to tax and legal proceedings as described in Note 14
        to
        our consolidated financial statements. Due to their nature, such legal
        proceedings involve inherent uncertainties including, but not limited to,
        court
        rulings, negotiations between affected parties and governmental actions.
        Management periodically assesses the probability of loss for such contingencies
        and accounts for a liability and/or discloses the relevant circumstances,
        as
        appropriate. If the potential loss from any claim or legal proceeding is
        considered probable and the amount can be reasonably estimated, we account
        for a
        liability for the estimated loss.
  **Indebtedness**
  As
        of December 31, 2006 we had an
        outstanding short-term bank debt of Ps. 16 million.
  As
        of June 15, 2007, we had arranged
        for short-term loan revolving credit lines for a total aggregate principal
        amount of Ps. 1,357 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
        4 percentage points. The basis points which will be added to TIIE depend
        on
        negotiations and prevailing market conditions. As of this date, and despite
        the
        payout of a Ps. 170 million dividend payment on June 08, 2007, we do not
        have
        any cost-bearing liabilities.
  **Liquidity
        and Capital
        Resources**
  ***Overview***
  Historically,
        our cash and capital
        requirements have been satisfied through cash from operations and bank loans.
        We
        plan to continue to satisfy our cash and capital expenditure requirements
        primarily through cash from our operations. If deemed necessary, we can access
        our revolving credit facilities totaling an aggregate principal amount of
        up to
        Ps. 1.4 billion. Net working capital (current assets minus current liabilities)
        as of December 31, 2006 was Ps. 4,670.8 million compared to Ps. 4,390.7 million
        as of December 31, 2005.
 
 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,
        2006, were Ps. 3,823.2 million or 2.35% higher than the Ps. 3,735.6 million
        they
        amounted to on December 31, 2005. 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. As of December 31, 2005, our inventory days were 65.9
        days,
        6.2 days lower than the 72.1 days registered for the year ended December
        31,
        2004.  Accounts Receivable for the year ended December 31, 2006
        registered 67.6 days while accounts payable accounted for 67.5 days for the
        same
        period. Accounts Receivable for the year ended December 31, 2005 registered
        68.5
        days while accounts payable accounted for 74.0 days for the same period.
        For the
        year ended December 31, 2004, inventory days were 72.1, account receivable
        days
        reached 62.7 and accounts payable days were at 79.6.
 
 ***Accounts
        Receivable***
  As
        of December 31, 2006, due to higher
        sales, a different sales mix, a highly competitive environment and commercial
        negotiations with clients, accounts receivable net increased to Ps. 4,433.7
        million or 2.4% compared to Ps. 4,330.5 million as of December 31, 2005.
        Accounts receivable days as of December 31, 2006 decreased 0.85 days to 67.6
        days from 68.5 days for 2005. As of December 31, 2004, accounts receivable
        days
        were 62.7.
 
 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.
  39
 Table
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  ***Trade
        Accounts Payable***
  As
        of December 31, 2006, trade accounts
        payable decreased to Ps. 3,986.1 million or 5.0% compared to Ps. 4,193.7
        million
        as of December 31, 2005. As a result, our trade accounts payable days decreased
        to 67.5 in 2006 compared to 74.0 days for the year ended December 31, 2005.
        As
        of December 31, 2004, our trade accounts payable days were 79.6.
 
 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 2006
        were approximately Ps. 160.1 million, which consisted of Ps. 46.4 million
        for
        the purchase of transport and delivery equipment, Ps. 80.8 million for
        technology and computer equipment, particularly the acquisition of new software
        licenses and Ps. 32.9 million for other general expenditures. These expenditures
        were mainly funded with internal resources. For 2007 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 2005 were approximately Ps. 91.8 million, which
        consisted of Ps. 47.7 million for the purchase of transport and delivering
        equipment, Ps. 39.5 million for technology and computer
        equipment, particularly the acquisition of new software licenses, Ps. 4.2
        for acquisitions and Ps. 0.4 million for other general expenditures. These
        expenditures were mainly funded with internal resources.
 
 Our
        capital expenditures during 2004 were
        approximately Ps. 49.7 million, which consisted of Ps. 38.4 million for the
        purchase of transport and delivering equipment, Ps. 10.3 million for technology
        and computer equipment and Ps. 1.0 million for other general
        expenditures.
  40
 Table
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  ***Trend
        Information***
  During
        2006, we continued with our
        strategy of profitable growth and successfully implemented a number of operating
        efficiencies programs to maximize the profitability of our operations. We
        applied profitability requirements to our clients and suppliers, even when
        this
        meant discontinuing operations with certain clients and suppliers that did
        not
        meet the minimum parameters that we requested from them. In terms of our
        cost-saving programs, we successfully reengineered routes and optimized our
        distribution centers. These measures allowed for a 9.1% growth in operating
        income and a 21-basis point improvement in our operating margin.
  We
        believe that our profitability
        strategy will allow us to continue growing our divisions with acceptable
        margin
        levels and will continue to focus our efforts on increasing profitability
        in the
        different markets in which we operate. In addition to these measures, we
        continue to be committed to operating under strict expense
        controls.
  The
        Mexican private pharmaceutical
        market has solid growth fundamentals which lead us to expect sustained annual
        growth over the coming years. The main factors supporting this expected growth
        are Mexico’s demographic 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.
  **Accounting
        Pronouncements and
        Related Effects**
  **Under
        Mexican
        GAAP**
  ***(a)  Research and Development Board of Financial Information
        Standards (CINIF-Spanish acronym)*** 
 Effective
          June 2004,
          the CINIF replaced the Accounting Principles Board (APB) of the IMCP in
          the duty
          of developing and issuing financial reporting standards (Mexican FRS),
          and
          reaching their convergence with International Financial Reporting Standards
          (Note 2).
 
 For
          this purpose,
          the CINIF rename from Mexican GAAP to Mexican FRS.  CINIF established
          a conceptual framework to develop additional FRS that solves matters arising
          from accounting practices.  The conceptual framework is formed by
          eight Series A FRS.  These FRS, along with FRS B-1, both effective as
          of January 1, 2006, superseded some bulletins of Mexican
          GAAP.  Accordingly, Mexican FRS was integrated as
          follows:
 
 §
                Bulletins
                    issued under the new duty and its
                    Interpretations
 
 §
                APB
                    Bulletins transferred to the CINIF on May 31, 2004, that would
                    not have
                    been amended, substituted, or repealed by the new Mexican FRS;
                    and
 
 §
                International
                    FRS applicable to Mexican FRS
                    suppletorily.
 
 The
          most significant
          change applies to FRS B-1, “Accounting changes and correction of
          errors”.  This standard sets forth that changes in particular
          standards, reclassifications, and corrections of errors should be recognized
          retrospectively.  Therefore, the financial statements affected by the
          change presented on a comparative basis with the current year should be
          adjusted
          from the beginning of the oldest period presented comparatively.
 
 Adoption
          of
          these provisions had no significant effect on the consolidated financial
          position and operating income of Grupo Casa Saba.
   41
 
 ***(b) 
          Recently Issued Accounting Pronouncements***
 
 In
          December
          2006, the CINIF issued the following Mexican FRS, effective January 1,
          2007:
 
 FRS
          B-3, “Income
          statement”.  This standard requires income, costs and expenses should
          be classified as ordinary and unordinary (nonrecurrent). The income statement
          should show ordinary items first and identify the main levels of income/loss
          (before taxes, before discontinued operations, and net
          income/loss).  Costs and expenses should be classified based on their
          function, nature or combination of both.  Special items set in some
          Mexican FRS should be classified as ordinary in the caption “Other income and
          expenses”, whereas extraordinary items should be classified as unordinary
          items.  Employee Profit Sharing should be shown as an ordinary expense
          in the caption “Other income and expenses”.  Moreover, the caption
“accumulated effect of accounting changes at beginning of year” is eliminated
          since any effect due to the change should be shown in retained
          earnings.  Adoption of this Mexican FRS will have no significant
          effect on the consolidated financial position and operating income of Grupo
          Casa
          Saba.
  FRS
          B-13,
“Events subsequent to the date of the financial statements”.  This
          standard requires that subsequent events derived from nonperforming portfolio
          and due dates of liabilities restructurings, as well as agreements to defer
          payments of liabilities should be recognized in the financial statements
          when
          entered into.  These events are only disclosed in the notes to the
          financial statements.  Financial statements should not be prepared on
          a going concern basis if subsequent events indicate that this base is not
          applicable.  In addition, Grupo Casa Saba should disclose the
          authorized issue date of the financial statements and the name of the officers
          or governing body with power to do so.  Adoption of this Mexican FRS
          will have no significant effect on the consolidated financial statements
          of
          Grupo Casa Saba.
  FRS
          C-13,
“Related parties”.  This standard expands the concept of related
          parties and includes:  (a) the joint venture that Grupo Casa Saba
          participates in;  (b) close relatives of stockholders, members of the
          board of directors, and key management personnel; and  (c)
          remuneration plan fund for employee benefits.  This standard requires
          disclosing if considerations among related parties are equivalent to
          considerations of similar transactions carried out with other independent
          parties, and in the case of public companies, the amount of benefits granted
          to
          key management personnel (direct short and long-term benefits, payments
          based on
          shares, and postretirement benefits).  The prior year comparative
          financial statements should be adjusted retrospectively to disclose this
          provision in their applicable notes. Adoptions of this Mexican FRS had
          no
          significant effect on the consolidated financial statements of Grupo Casa
          Saba.
  FRS
          D-6,
“Capitalization of the comprehensive gain or loss on financing”.  This
          standard sets forth that the comprehensive gain or loss on financing
          (RIF-Spanish acronym) attributable to qualifying assets should be capitalized
          as
          follows:
 
 §
                The
                    value of the qualifying asset that is capitalized by the RIF
                    should not
                    exceed the future economic benefit of the
                    asset.
 
 §
                The
                    yield on temporary investments (marketable securities) made while
                    waiting
                    to acquire qualifying assets does not form part of the capitalized
                    RIF, in
                    the event of financing in local
                    currency.
 
 §
                Losses
                    and gains on financing should be considered net of the valuation
                    of
                    financial hedging instruments associated to financing, in the
                    event of
                    financing in foreign currency.
 
 §
                The
                    specific indexation sets forth in Bulletin B-10 issued by CINIF
                    is not
                    admissible in the period of capitalizing the
                    RIF.
 
 §
                The
                    Holding Company of investments in unconsolidated associated or
                    subsidiary
                    companies should not recognize the capitalization of the RIF
                    on those
                    investments.
 
 Capitalization starts at the time when activities for preparing the asset
          for
          use or sale are carried out, the investment to acquire the asset has started
          and
          interest is accrued.  Capitalization ends at the time when financing
          is liquidated.  The option of applying this standard for assets in the
          process of being acquired in prior periods to the effectiveness of FRS
          should be
          recognized as an accounting change, in accordance with FRS B-1 “Accounting
          changes and corrections of errors”.  At 2006 year end, Grupo Casa Saba
          had not acquired qualifying assets in those circumstances. However, that
          does
          not mean that Grupo Casa Saba can not be made in the future such
          acquisitions.
  42
 Table
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  **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 June
        2005, the FASB published SFAS No. 154, “Accounting changes and Error Corrections
        a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No. 154),
        which changes the requirements for the accounting for and reporting of a
        change
        in accounting principle and redefines restatement as the revising of previously
        issued financial statement to reflect the correction of an error. SFAS No.
        154
        requires retrospective application to prior period financial statements of
        changes in accounting principles, unless it is impracticable to determine
        the
        period-specific effects of the cumulative effect of the change. This Statement
        also carries forward without change the guidance contained in Opinion 20
        for
        reporting the correction of an error in previously issued financial statement
        and a change in accounting estimate. This statement does not change the
        transition provisions of any existing accounting pronouncement. SFAS No.
        154 is
        effective for accounting changes and corrections of errors made in fiscal
        years
        beginning after December 15, 2005. Grupo Casa Saba deems that adoption of
        these
        provisions had no impact on its consolidated results and financial
        position. 
 FRS
          B-1 “Accounting
          Changes and Error Corrections” issued by Mexican FRS which is similar to SFAS
          No. 154, is effective for accounting changes and corrections of errors
          made in
          fiscal years beginning after January 1, 2006.
 
 In
          September 2005,
          the Board ratified the consensus reached by the Emerging Issues Task Force
          (EITF) Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with
          the Same Counterparty”. This guidance addresses the circumstances under which
          two or more inventory transactions with the same counterparty should be
          considered as a single non-monetary transaction with the scope of APB Opinion
          29, “Accounting for Non-monetary Transactions”. The Task Force reached a
          consensus that non-monetary exchange whereby an entity transfers finished
          goods
          inventory in exchange for the receipt of raw materials or work-in-progress
          inventory within the same line of business is not considered as an exchange
          transaction to facilitate sales customers as described in APB Opinion 29
          paragraph 20(b) and therefore should be recognized by the entity at fair
          value
          if it is determinable within reasonable limits and the transaction has
          commercial substance. All other non-monetary exchanges of inventory within
          the
          same line of business should be recognized at the carrying amount of the
          inventory transferred. The Task Force agreed that this consensus should
          be
          applied to transactions completed in reporting periods beginning after
          March
          2006. Grupo Casa Saba deems the adoption of these provisions had no impact
          on
          its consolidated results and financial position.
  In
          February 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          155, “Accounting for Certain Hybrid Financial Instruments” (SFAS 155). SFAS 155
          amends Statement 133 to provide an irrevocable option to account for hybrid
          financial instruments at fair value. This option applies to all hybrid
          financial
          instruments, not just interests in securitized financial assets that contain
          embedded derivatives. The option can be applied on a contract-by-contract
          basis
          and must be documented concurrently or be subject to a pre-existing documented
          policy. Under this election, Grupo Casa Saba would measure the entire hybrid
          financial instrument at fair value with changes in fair value recognized
          in
          earnings. The hybrid financial instrument subject to this election can
          be an
          asset or liability, but cannot be recognized as equity. The option is not
          available for financial instruments designated as hedging
          instruments.
  FASB
          155
          is effective for all financial instruments acquired or issued for fiscal
          years
          beginning after September 15, 2006. On adoption, the fair value election
          may be
          applied to hybrid financial instruments that had previously been bifurcated.
          Grupo Casa Saba deems the adoption of these provisions had no impact on
          its
          consolidated results and financial position.
  In
          July
          2006, the 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
          consolidated financial statements of Grupo Casa Saba. On initial application,
          FIN 48 will be 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 will be recognized or continue to be recognized.
          The cumulative effect of applying FIN 48 will be reported as an adjustment
          to
          retained earnings at the beginning of the period in which it is
          adopted.
  Interpretation
          48 is effective for fiscal years beginning after December 15, 2006, and
          will be
          adopted by Grupo Casa Saba on January 1, 2007. The Company
          currently****does not believe that the adoption of FIN 48
          will have a significant effect on its financial statements or its ability
          to
          comply with its current debt covenants.
  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 financial
          statements of Grupo Casa Saba, 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, Grupo Casa Saba will not be required to recognize any new
          instruments at fair value.
 
 FASB
          157
          creates a single definition of fair value, along with a conceptual framework
          to
          measure fair value. FASB 157 defines fair value as “the price that would be
          received to sell an asset or paid to transfer a liability in an orderly
          transaction between market participants at the measurement date.” The Statement
          will require Grupo Casa Saba 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 will also require Grupo Casa Saba 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.
          Early adoption is permitted; however, Grupo Casa Saba does not intend to
          adopt
          Statement 157 prior to the required effective date of January 1, 2008.
          Grupo
          Casa Saba is evaluating the impact Statement 157 will have on its financial
          statements.
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   In
        September 2006, the SEC released Staff Accounting Bulletin 108, Considering
        the
        Effects of Prior Year Misstatements when Quantifying Misstatements in Current
        Year Financial Statements. SAB 108 provides guidance on how the effects of
        the
        carryover or reversal of prior year misstatements should be considered in
        quantifying a current year misstatement. In some situations, companies will
        be
        required to record errors that occurred in prior years even though those
        errors
        were immaterial for each year in which they arose. Companies may choose to
        either restate all previously presented financial statements or record the
        cumulative effect of such errors as an adjustment to retained earnings at
        the
        beginning of the period in which SAB 108 is applied. 
 SAB
          108
          is effective for fiscal years ending after November 15, 2006. Adoption
          of SAB
          108 did not have a significant effect on its financial statements.
  In November
          2006, a consensus was reached on 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,” 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. EITF Issue 06-9 does not apply to a change in the parent company’s
          year-end.
  The
        consensus in EITF Issue 06-9 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). Grupo Casa Saba deems the adoption of these provisions
        will not impact on its consolidated results and financial
        position.
  In
        December 2006, the FASB issued FASB Staff Position (FSP) EITF 00-19-2,
“Accounting for Registration Payment Arrangements.” FSP EITF 00-19-2 requires an
        issuer of financial instruments, such as debt, convertible debt, equity shares
        or warrants, to account for a contingent obligation to transfer consideration
        under a registration payment arrangement in accordance with Statement 5,
        Accounting for Contingencies, and FASB Interpretation 14, Reasonable Estimation
        of the Amount of a Loss. That accounting applies regardless of whether the
        registration payment arrangement is a provision in a financial instrument
        or a
        separate agreement. The FSP requires issuers to make certain disclosures
        for
        each registration payment arrangement or group of similar
        arrangements.
  The
        FSP
        is effective for fiscal years beginning after December 15, 2006, for
        registration payment arrangements and financial instruments subject to those
        arrangements that are entered into prior to December 21, 2006. Grupo Casa
        Saba
        does not believe that the adoption will have a significant effect on its
        financial statements.
  In
        June
        2006, the FASB ratified a consensus opinion reached by the EITF Issue 06-3,
“How
        Taxes Collected from Customers and Remitted to Governmental Authorities Should
        Be Presented in the Income Statement (That Is, Gross versus Net Presentation).”
The guidance in EITF Issue 06-3 requires disclosure in interim and annual
        financial statements of the amount of taxes on a gross basis, if significant,
        that are assessed by a governmental authority that are imposed on and concurrent
        with a specific revenue producing transaction between a seller and customer
        such
        as sales, use, value added, and some excise taxes. Additionally, the income
        statement presentation (gross or net) of such taxes is an accounting policy
        decision that must be disclosed.
  The
        consensus in EITF Issue 06-3 is effective for interim and annual reporting
        periods beginning after December 15, 2006. Grupo Casa Saba intends to adopt
        EITF
        Issue 06-3 effective January 1, 2007, and does not believe that the adoption
        will have a significant effect on its financial statements as it does not
        intend
        to change its existing accounting policy which is to present taxes within
        the
        scope of EITF Issue 06-3 on a net basis.
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  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.
  
 **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 27, 2006.
 **Directors**
                    **Name
                      and Date of Birth**
                
                **Principal
                      Occupation**
                
                **Business
                      Experience**
                
                **First
                      Elected**Isaac
                    Saba Raffoul
                  (10/17/23)
                
                Chairman
                    of the Board
                
                President
                    and Director –
                  Xtra
                    Inmuebles, S.A. de C.V.
                
                February
                    2000Moisés
                    Saba Ades
                  (07/12/63)
                
                Vice
                    Chairman of the Board
                
                Director
                    – Xtra Inmuebles, S.A. de C.V.
                
                February
                    2000Alberto
                    Saba Ades
                  (07/09/65)
                
                Vice
                    Chairman of the Board
                
                Director
                    – Xtra Inmuebles, S.A. de C.V.
                
                February
                    2000Manuel
                    Saba Ades
                  (11/03/67)
                
                Vice
                    Chairman of the Board and Chief Executive Officer
                
                Director
                    – Xtra Inmuebles, S.A. de C.V.
                
                February
                    2000Gabriel
                    Saba D’Jamus
                  (07/27/69)
                
                Deputy
                    Chief Executive Officer
                
                Executive
                    Director – Grupo Comercial Hotelera, S.A. de C.V.
                
                February
                    2000Patricio
                    Alejandro Trad Cepeda
                  03/08/72
                
                Director
                
                Partner,
                    Mijares Angoitia, Cortes y Fuentes
                
                December
                    2006José
                    Ellstein Japchik
                  (12/08/34)
                
                Director
                
                Fariel,
                    S.A. de C.V.
                
                April
                    2006Gabriel
                    Alarcón Velázquez
                  (02/23/37)
                
                Director
                
                Banco
                    de Comercio.
                
                April
                    2006
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 On
        April 27, 2006, the Board and the
        Audit Committee accepted Agustín Rodríguez Legorreta’s and Raúl Fernández
        Diaque’s resignations and elected as Directors, José Ellstein Japchik
        (12/08/34), Chairman of the Board of Fariel, S.A. de C.V. and Gabriel Alarcón
        Velázquez (02/23/37), Member of the Board of Banco de Comercio.  In
        December 2006, the Board appointed Patricio Alejandro Trad Cepeda as an
        independent Director and member of the Audit Committee.
  Francisco
        Fuentes Ostos is the
        Secretary of our Board of Directors.  Moisés Saba Ades, Alberto Saba
        Ades and Manuel Saba Ades are sons of Isaac Saba Raffoul.  Gabriel
        Saba D’Jamus is the nephew of Isaac Saba Raffoul.  Manuel Saba Ades,
        Moisés Saba Ades and Alberto Saba Ades are cousins of Gabriel Saba
        D’Jamus.  Isaac Saba Raffoul, Alberto Saba Ades and Manuel Saba Ades
        are also members of the Board of Directors of Grupo Xtra, S.A. de C.V. and
        alternate members of the Board of Directors of Ixe Grupo Financiero, S.A.
        de
        C.V., and Finamex Casa de Bolsa, S.A. de C.V., Grupo Financiero Finamex.
        Our
        directors are not party to a service contract with us, and there are no
        arrangements pursuant to which any of them was elected as a director of the
        Company.
  Set
        forth below are the names of the
        alternate members of our board of directors. The alternate members of our
        board
        were elected for a one-year term by our shareholders at our annual shareholders’
meeting, which was held on April 27, 2006.
 **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 shareholder’s meeting, and each serves
        until a successor is elected and takes office.  In order to have a
        quorum for a meeting of the Board of Directors, a majority of the directors
        must
        be present.
  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
        as amended on June 1, 2001, we have amended our bylaws to reflect the changes
        in
        such law, and as a result of such amendments, 25% of the members of our Board
        of
        Directors qualify as “independent directors” in Mexico.  Under Mexican
        law, a person will not qualify as an “independent director” if he or she is,
        among other things:
  §
              one
                  of our employees or managers;
  §
              a
                  controlling shareholder;
  §
              a
                  director, executive officer or relative of a controlling shareholder,
                  or
                  entities controlled or managed by a controlling shareholder;
                  or
   46
 Table
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   §
              a
                  significant client, supplier, debtor or creditor, or member of
                  the board
                  of directors or executive officer of any of these
                  entities.
  Our
        bylaws, as amended, also provide
        that the Chairman of the Board of Directors shall have the casting vote in
        the
        event of a tie.  The Board of Directors is required to meet at least
        once a quarter.  The Chairman, 25% of the
        directorsor the Chairman of the Audit and Corporate
        Practices Committee may call for a meeting of the Board of
        Directors.  Also, our amended 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 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) 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.
  **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 26, 2007.
        Under our bylaws, the Executive Committee is permitted to act on matters
        that
        are not legally reserved for the Board of Directors.
 
 In
        accordance with Mexican Securities Market Law, as amended, we also have an
        Audit
        and Corporate Practices Committee. During 2005, the members of such Committee
        were Messrs. Agustín Rodríguez Legorreta, Raúl Fernández Diaque and Manuel Saba
        Ades. On July 7, 2005, Mr. Manuel Saba Ades announced his resignation as
        member
        of the Audit Committee in order to comply with the provisions of the securities
        statutes applicable to us. Until April of 2006, such Committee was formed
        by
        Messrs. Agustín Rodríguez Legorreta and Raúl Fernández Diaque who were members
        of the Board of Directors until April of 2006. Since April 27, 2006, the
        Audit
        Committee has been formed by Messrs. José Ellstein Japchik and Gabriel Alarcón
        Velázquez, independent members of the Board of Directors. In December 2006, in
        order to comply with the new Mexican Securities Market Law, Mr. Patricio
        Trad
        Cepeda was elected as member of the board of directors and member of the
        Audit
        Committee. Both the Chairman and a majority of the members of the Audit
        Committee are independent directors. Among other duties and responsibilities,
        the Audit and Corporate Practices Committee must:
  §
              supervising
                  our external auditors and analyzing their
                  report;
  §
              analyzing
                  and supervising the preparation of our financial
                  statements;
  §
              informing
                  the Board of Directors of our internal controls and their
                  adequacy;
  §
              requesting
                  reports of our Board of Directs and executive officers whenever
                  it deems
                  appropriate;
  §
              informing
                  the Board of any irregularities that it may
                  encounter;
  §
              receiving
                  and analyzing recommendations and observations made by the stockholders’
                  meetings;
  §
              supervising
                  the activities of our Chief Executive
                  Officer;
  §
              providing
                  an annual report to the Board of
                  Directors;
  §
              providing
                  opinions to our Board of Directors;
  §
              requesting
                  and obtaining opinions form independent third parties;
                  and
   47
 Table
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  ·
              assisting
                  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
                      Appointed**Manuel
                    Saba Ades
                  (11/03/67)
                
                Chief
                    Executive Officer  and Vice Chairman of the
                    Board
                
                President
                    and Director –Xtra Inmuebles, S.A. de C.V.
                
                February
                    2000Gabriel
                    Saba D’Jamus
                  (07/27/69)
                
                Deputy
                    Chief Executive Officer
                
                Executive
                    Director – Grupo Comercial Hotelera, S.A. de C.V.
                
                February
                    2000Alejandro
                    Sadurni Gomez
                  (10/08/59)
                
                Chief
                    Financial Officer
                
                Former
                    Chief Financial Officer of Administration – INMAS, S.A. de
                    C.V.
                
                February
                    2000Héctor
                    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, 2006, the aggregate
        compensation paid by us to our executive officers for services rendered in
        all
        capacities was approximately Ps. 30.0 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.
   48
 Table
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  **Employees**
  As
        of December 31, 2006, we had 5,295
        employees, 2,131 of which were sales representatives for our Pharmaceutical
        and
        HBCG/Other Products businesses and other divisions, 878 of which were
        administrative employees and 2,286 of which were operational
        employees.  A significant majority of our employees, 82.9% as of
        December 31, 2005 and 83.4% as of December 2006 are represented by
        unions.  We believe that our relations with our employees and the
        unions to which they are affiliated are good.  In 2006, the number of
        employees decreased by 0.5% compared to 2005.
  **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.
  Projected
        benefit obligations,
        unamortized items, and the net periodic cost applicable to retirement pensions
        and seniority premiums are determined by using the “projected unit credit
        method”, in conformity with Bulletin D-3, “Labor Obligations” issued by the
        MIPA. This method is virtually identical to the method used under U.S.
        GAAP.
  We
        have created a fund placed in
        irrevocable trusts at a financial institution to meet the labor obligations
        referred to above.  Contributions to these funds are determined
        annually by an actuarial calculation prepared by an accounting firm and approved
        by our Board of Directors.  We believe that obligations under these
        trusts are closely monitored by their trustee.
  During
        2004, 2005 and 2006,
        contributions to the fund based on actuarial computations amounted to Ps.
        11.2,
        Ps. 15.0 and Ps. 15.6 million, respectively (Ps. 10.4 and 14.5 million at
        fiscal
        year-end constant Pesos, respectively). As of December 31, 2004, 2005 and
        2006,
        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 Market.
  For information regarding the relevant information of the study performed
        by
        independent actuaries, with regard to our retirement pension and seniority
        premiums see Note 3(j)(ii) to our audited consolidated financial
        statements.
 
 
 **Item
        7.Major Shareholders and Related Party
        Transactions**
  We
        are not directly or indirectly owned
        or controlled by another corporation or by any foreign government.
  **Principal
        Shareholders**
  All
        information presented in this
        section regarding beneficial ownership of our capital stock is based on the
        number of Ordinary Shares outstanding as of May 31, 2007, 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, 2007, 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.
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 Table
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  As
        of May 31, 2007, our
        controlling shareholder directly and indirectly owned 225,606,456 Ordinary
        Shares, representing 85% of our issued and outstanding capital
        stock.  As of May 31, 2007, approximately 11.1% of our Ordinary Shares
        were held through ADSs by more than 67 recorded holders.
  The
        following table shows information,
        as of May 31, 2007, 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****Stake**Isaac
                    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.
  **Acquisition
        of Our
        Company**
  On
        January 19, 2000, Xtra Inmuebles, an
        entity beneficially owned and controlled by our controlling shareholder,
        commenced a tender offer for up to 85% of our then outstanding Ordinary Shares
        on the Mexican Stock Exchange.  Upon the completion of the tender
        offer on February 1, 2000, Xtra Inmuebles acquired 225,606,456 Ordinary Shares,
        representing 85% of our then outstanding capital stock.  Immediately
        thereafter, all of these Ordinary Shares were acquired from Xtra Inmuebles
        by
        our controlling shareholder.  The completion of this tender offer was
        subject to the completion of our financial restructuring, which is briefly
        described under “Item 4- Information on the Company – History and Development of
        the Company.”
  Following
        the completion of the tender
        offer, our controlling shareholder, by means of a shareholder vote, amended
        our
        bylaws, replaced our incumbent Board of Directors with nine of his appointees,
        appointed new management, including a new Chief Executive Officer and Chief
        Financial Officer, among others, and changed the name of our company from
        Grupo
        Casa Autrey, S.A. de C.V. to Grupo Casa Saba, S.A. de C.V.  As part of
        our financial restructuring, the net proceeds received by certain members
        of the
        Autrey family from the tender offer were deposited into a special purpose
        trust
        in benefit of our creditors in order to repay a substantial portion of our
        restructured indebtedness.  See “Item 4.  Information on the
        Company—History and Development of the Company” and “Item
        5.  Operating and Financial Review and
        Prospects—Indebtedness.”
  **Related
        Party
        Transactions**
  In
        2006, 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.
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  ***Transactions
        and Arrangements with Affiliates and Related Parties of Our Directors, Officers
        and Principal Shareholders Effective during 2006***
  **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 2006,
        we
        maintained our lease for office space with Xtra Inmuebles and do not have
        plans
        to terminate this agreement. In 2006, we expensed Ps. 4.8 versus Ps. 5.0
        million
        in 2005 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 2004, 2005 and 2006. During 2006, we
        expensed a total amount of  Ps.
        10.5  million  versus Ps.
        11.8  million  in 2005 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.
 
 **Legal
        and Advisory
        Services**. During 2006, Mijares, Angoitia, Cortés y Fuentes, S.C., a
        Mexican law firm, provided us with legal and advisory services, and we expect
        that this will continue to be the case in the future. Francisco Fuentes Ostos,
        a
        partner from the law firm of Mijares, Angoitia, Cortés y Fuentes, S.C., is the
        secretary of our Board of Directors. We believe that the fees we paid for
        these
        services were comparable to those that we would have had to pay a third party
        law firm for similar services.
 
 **Tax
        Advisory Services**. During 2006, Chevez, Ruiz, Zamarripa y Cia, S.C., a
        tax advisory firm, provided us with tax advisory services, and we expect
        that
        this will continue to be the case in the future. Ivan Moguel Kuri, a partner
        from the tax advisory firm of Chevez, Ruiz, Zamarripa y Cia, S.C., is one
        of our
        directors. We believe that the fees we paid for these services were comparable
        to those that we would have had to pay a third party for similar
        services.
 
 As
        of
        December 31, 2005 and 2006, 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. 1.9
        million
        and Ps. 2.0 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
        the last quarter of 2006 La Nueva Leona S.A. de C.V., a company controlled
        by
        one of our shareholders obtained financing from Grupo Casa Saba, bearing
        interest at the market rate.  The ending receivable balance of this
        financing at the end of 2006 was 13.3 million. During the first half of 2007,
        La
        Nueva Leona was acquired by Grupo Casa Saba for 13.0 million Pesos. The
        acquisition was made at market prices and is supported by a study conducted
        by
        an independent public accounting firm.
 
 During
        2006, Grupo Casa Saba made sales amounting to
        Ps. 30.3 million to Farmacias ABC the Mexico, S.A. de C.V., a company controlled
        by one of our shareholders.  At the end of 2006, the receivable
        balances form Farmacias ABC de Mexico, S.A. de C.V., which represented
        buy-and-sell transactions for pharmaceutical products was 12.4 million. Sales
        to
        Farmacias ABC de Mexico, S.A. de C.V., were made at market
        conditions.
 
 During
        2005 and 2006, 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
  51
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  **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, 2006, 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.
  The
        table below shows the reported
        annual highest and lowest market prices in nominal Pesos for our Ordinary
        Shares
        on the Mexican Stock Exchange for the five most recent full financial years
        ending December 31, 2006 and each month in the six month period ending May
        31,
        2007.
  **Pesos
                        per Ordinary Share(1)****High**
                  
                  
                  **Low****Year****2002**
                  
                  Ps.12.40
                  
                  
                  Ps.6.52**2003**
                  
                  Ps.13.30
                  
                  
                  Ps.10.00**2004**
                  
                  Ps.16.60
                  
                  
                  Ps.12.70**2005**
                  
                  Ps.20.50
                  
                  
                  Ps.16.70First
                      Quarter
                  
                  
                  20.50
                  
                  
                  
                  17.00Second
                      Quarter
                  
                  
                  18.50
                  
                  
                  
                  16.70Third
                      Quarter
                  
                  
                  18.25
                  
                  
                  
                  16.80
  52
 Table
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  Fourth
                          Quarter
                      
                      
                      20.50
                      
                      
                      
                      18.00**2006**
                      
                      Ps.27.80
                      
                      
                      Ps.16.95First
                          Quarter
                      
                      
                      24.20
                      
                      
                      
                      16.95Second
                          Quarter
                      
                      
                      24.50
                      
                      
                      
                      23.95Third
                          Quarter
                      
                      
                      24.30
                      
                      
                      
                      22.50Fourth
                          Quarter
                      
                      
                      27.80
                      
                      
                      
                      23.00**2007**First
                          Quarter
                      
                      Ps.37.40
                      
                      
                      Ps.28.80**Month**December
                          2006
                      
                      
                      27.80
                      
                      
                      
                      24.25January
                          2007
                      
                      
                      29.55
                      
                      
                      
                      28.80February
                          2007
                      
                      
                      31.78
                      
                      
                      
                      30.65March
                          2007
                      
                      
                      37.40
                      
                      
                      
                      36.50April
                          2007
                      
                      
                      36.50
                      
                      
                      
                      36.00May
                          2007
                      
                      
                      36.20
                      
                      
                      
                      34.00June
                          (through June 15, 2007)
                      
                      
                      36.20
                      
                      
                      
                      36.20
 ____________________
 (1)  Source:  Infosel and
                Economática
 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, 2006 and each month in the six month
        period ending May 31, 2007.
 ****
                    ****
                    **U.S.
                          Dollars per ADS(1)******
                    ****
                    **High**
                    ****
                    ****
                    **Low****Year**
                    ****
                    ****
                    ****
                    ****
                    ******2002**
                    ****
                    U.S.$12.51
                    
                    
                    U.S.$6.60**2003**
                    
                    U.S.$12.50
                    
                    
                    U.S.$9.40**2004**
                    
                    U.S.$14.99
                    
                    
                    U.S.$10.70**2005**
                    
                    U.S.$18.50
                    
                    
                    U.S.$14.75First
                        Quarter
                    
                    
                    18.50
                    
                    
                    
                    14.75Second
                        Quarter
                    
                    
                    16.77
                    
                    
                    
                    14.80Third
                        Quarter
                    
                    
                    17.29
                    
                    
                    
                    15.30Fourth
                        Quarter
                    
                    
                    18.30
                    
                    
                    
                    17.10**2006**
                    
                    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
                    
                    
                    
                    21.26**2007**First
                        Quarter
                    
                    U.S.$35.24
                    
                    
                    U.S.$26.10**Month**December
                        2006
                    
                    
                    26.15
                    
                    
                    
                    21.55January
                        2007
                    
                    
                    27.50
                    
                    
                    
                    26.10February
                        2007
                    
                    
                    29.83
                    
                    
                    
                    26.30March
                        2007
                    
                    
                    35.24
                    
                    
                    
                    28.40April
                        2007
                    
                    
                    34.40
                    
                    
                    
                    32.50May
                        2007
                    
                    
                    34.57
                    
                    
                    
                    32.10June
                        (through June 15, 2007)
                    
                    U.S.$34.58
                    
                    
                    U.S.$31.50
 ____________________
 (1)  Source:  Bloomberg, Infosel and
              Economática
  Trading
        prices of our Ordinary Shares
        and our ADSs will be influenced by our results of operations, financial
        condition, cash requirements, future prospects and by economic, financial
        and
        other factors and market conditions.  See “Item 3.  Key
        Information—Risk Factors—Risk Factors Relating to Developments in
        Mexico— Economic
        and Political Developments in Mexico May Adversely Affect Our
        Business.”  There can be no assurance that prices of our Ordinary
        Shares and our ADSs will, in the future, be within the ranges set forth
        above.  As of December 31, 2006, there were 265,419,360 Ordinary
        Shares issued and outstanding. At the end of March 2007, approximately 11.1%
        of
        the outstanding shares were held in the form of ADSs .
  53
 Table
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  ***Trading
        on the Mexican Stock
        Exchange***
  ***Overview***
  The
        Mexican Stock Exchange, located in
        Mexico City, is the only stock exchange in Mexico.  Operating
        continuously since 1907, the Mexican Stock Exchange is organized as a
        corporation with variable capital, or *sociedad anónima**bursátil**de 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.
  Settlement
        is effected two trading days
        after a share transaction on the Mexican Stock Exchange.  Deferred
        settlement, even by mutual agreement, is not permitted without the approval
        of
        the CNBV.  Most securities traded on the Mexican Stock Exchange are on
        deposit with *S.D. Indeval,**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.
  ***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 March 2007, approximately
        11.1% 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. 316.5 million and Ps.
        588.1 million in constant Pesos as of December 31, 2006) 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 26, 2007, 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.
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  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, 2006, 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 —Bylaws—Other Provisions—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 new 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;
 
 §
              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;
   55
 Table
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 §
              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 new Mexican
        Securities Market Law does not substantially modify the reporting obligations
        of
        issuers of equity securities listed in the Mexican Stock Exchange. The new
        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 new Mexican Securities Market Law provides for a course
        of
        action available to anyone who trade (as a counterparty) with someone in
        possession of privileged information to seek the appropriate
        indemnification.
 
 Pursuant to both the current and the new Mexican
        Securities Market Law
  §
              members
                  of a listed issuer’s board of
                  directors;
  §
              shareholders
                  controlling 10% or more of a listed issuer’s outstanding share
                  capital;
  §
              advisors;
  §
              group
                  controlling 25% or more of a listed issuer’s outstanding share capital;
                  and
  §
              others
                  insiders
  §
              must
                  inform the CNBV of any transactions undertaken with securities
                  of a listed
                  issuer.
  In
        addition, under this new law
        insiders must abstain from purchasing or selling securities of the issuer
        within
        90 days form the last sale or purchase, respectively.
  The
        new 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 new 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 new 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.
  The
        new 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.
  56
 Table
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  **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 includes 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
        anónima****bursátil**de**capital
        variable*, or limited liability stock corporation with variable capital,
        which was organized under the laws of the United Mexican States in accordance
        with the Mexican Corporations Law on November 11, 1982. Our deed of
        incorporation was registered with the Public Registry of Commerce of Mexico
        City, D.F., under Commercial Page (*folio mercantil*) Number 55,635. We
        have a general corporate purpose, the specifics of which can be found in
        Article
        Four of our bylaws, which includes, among others, the following: (i) to promote,
        incorporate, organize, exploit and participate in the capital stock and assets
        of all type of commercial or civil companies, associations or industrial,
        commercial, service or other concerns, both domestic and foreign, and
        participate in the management or liquidation thereof; (ii) to manufacture,
        produce, purchase, sell, process, distribute, export and import all types
        of
        products permitted by law and, generally, all types of domestic or foreign
        goods
        or merchandise, whether in the form of raw materials, semi-finished or finished
        products and whether pre-assembled or unassembled, and to trade them in any
        manner whatsoever either for our account or the account of others; (iii)
        to
        acquire, transfer and, generally, negotiate with all types of shares of stock,
        partnership interests and securities; (iv) provide, contract and receive
        all
        types of technical, consulting and advisory services, and enter into contracts
        or agreements in connection therewith; (v) to enter into all types of agreements
        with the Federal Government or any local governments or public or private
        entities, individuals or corporations, whether domestic or foreign; (vi)
        to
        issue, subscribe, accept, endorse and guarantee credit instruments, securities
        and other instruments permitted by law; (vii) to acquire, transfer, lease,
        sublease and permit the use, enjoyment, disposition of generally, and
        exploitation of all types of personal and real property, including their
        parts
        or appurtenances; (viii) to provide or receive all types of technical and
        professional assistance and services; (ix) to obtain and grant all types
        of
        loans, providing and receiving specific guarantees thereof; issue debentures
        and
        notes; accept, draw, endorse or guarantee all types of credit instruments
        and
        other documents evidencing credit rights; and grant all types of bonds or
        guarantees with regard to the obligations assumed or the instruments issued
        or
        accepted by third parties; and (x) generally, to carry out all types of
        commercial transactions and enter into all types of contracts, agreements
        and
        transactions of any nature whatsoever, in accordance with the law.
 
 **Directors.**Under
        the Mexican
        Securities Market Law, any shareholder or director that votes on a transaction
        in which his 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 new 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.
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  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 *Official**Federal**Gazette* or in one major newspaper sold within our
        corporate domicile at least 15 days prior to the date in which the meeting
        is to
        be held. Extraordinary shareholders’ meetings may be called as described above,
        although calls for such meetings may be published with at least eight days
        prior
        to the meeting.
 
 In
        order for any shareholder to attend a
        shareholders’ meeting, a shareholder must demonstrate his title to the shares,
        and only such persons registered as shareholders in the 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.
 
 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.
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 **Dividend
        Rights**
 
 At
        our annual ordinary general shareholders’ meeting,
        our Board of Directors submits our financial statements from the previous
        year
        to the holders of our Ordinary Shares for their approval. Once our shareholders
        approve these financial statements, they must then allocate our net profits
        for
        the previous year. Under Mexican law, at least 5% of our net profits must
        be
        allocated to a legal reserve, until the amount of this reserve equals 20%
        of our
        paid-in capital stock. Thereafter, our shareholders may allocate our net
        profits
        to any special reserve. After this allocation, the remainder of our net profits
        will be available for distribution as dividends. Additionally and prior to
        the
        distribution of dividends, Mexican companies are required to contribute 10%
        of
        their yearly taxable profits to our employees. However, please note that
        the
        Company has no direct employees as of this date, only its subsidiaries. See
        “Item 10. Additional Information—Employee Profit Sharing.”
 
 Decisions
        regarding the payment and
        amount of dividends are subject to approval by the holders of our Ordinary
        Shares, generally, but not necessarily, on the recommendation of our Board
        of
        Directors. Our controlling shareholder owns 85% of the authorized, issued
        and
        outstanding Ordinary Shares, and as long as he continues to do so, he will
        have,
        as a result of such ownership, the ability to determine whether dividends
        are to
        be paid and the amount of such dividends. See “Item 3. Key
        Information—Dividends” and “Item 3. Key Information—Risk Factors—Risk Factors
        Relating to Our Securities—Our Controlling Shareholder Has the Ability to
        Restrict the Payment and Amount of Dividends.”
 
 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 shareholder’s
        meeting. When the increase is to the fixed portion of the capital stock,
        then
        the general extraordinary shareholders’ meeting must approve it. If the increase
        is to the variable portion of the capital stock, then the general ordinary
        shareholder’s meeting must approve it.
 
 ***Preemptive
        Rights***
  In
        the event of a capital increase, a
        holder of Ordinary Shares has a preferential right to subscribe to a sufficient
        number of Ordinary Shares in order to maintain his existing proportionate
        holdings of Ordinary Shares. Shareholders must exercise their preemptive
        rights
        within the time period 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.”
 
 ***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
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 §
              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. There
        is
        doubt as to the enforceability against these individuals in Mexico, whether
        in
        original actions or in actions to enforce judgments of U.S. courts, of
        liabilities predicated solely on U.S. federal securities laws. We have been
        advised by our Mexican counsel, Mijares, Angoitia, Cortés y Fuentes, S.C., that
        there is doubt as to the enforceability, in original actions in Mexican courts,
        of liabilities predicated solely on U.S. federal securities laws and as to
        the
        enforceability in Mexican courts of judgments of U.S. courts obtained in
        actions
        predicated upon the civil liability provisions of the U.S. federal securities
        laws.
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  ***Material
        Contracts***
 
 We
        are not a party to any material
        contract out of the ordinary course of business.
 
 ***Exchange
        Controls and Restrictions on
        Foreign Investment***
 
 In
        the past, the Mexican economy has
        experienced balance of payments deficits, shortages in foreign currency reserves
        and other problems that have affected the availability of foreign currencies
        in
        Mexico. The Mexican government does not currently restrict or regulate the
        ability of persons or entities to convert Pesos into U.S. Dollars or other
        currencies. However, it has done so in the past and could do so again in
        the
        future. We cannot assure you that the Mexican government will not institute
        a
        restrictive foreign currency exchange control policy in the future. For a
        description of exchange rate information, see “Item 3. Key Information—Exchange
        Rate Information.”
 
 Ownership
        by non-Mexicans of securities
        issued by Mexican Corporations is regulated by the *Ley de Inversión
        Extranjera*, or the Foreign Investment Law, and the *Reglamento de la Ley
        de Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras*,
        or the Foreign Investment Regulations. The *Comisión Nacional de Inversiones
        Extranjeras*, or the Foreign Investment Commission, is responsible for the
        administration of the Foreign Investment Law and the Foreign Investment
        Regulations. The Foreign Investment Law, as amended, provides that the Company
        may have up to 100% of foreign participation without requiring any government
        authorizations. The Foreign Investment Law also requires us to register any
        foreign owner of our Ordinary Shares, including the depositary for our ADSs,
        with the National Registry of Foreign Investment, or the NRFI. We have
        registered The Bank of New York, the depositary for our ADSs, for this
        purpose.
 
 In
        addition, as required by Mexican
        law, our bylaws provide that non-Mexican holders of our Ordinary Shares,
        including those held in the form of ADSs, formally agree with the Foreign
        Affairs Ministry:
 
 §
              to
                  be considered as Mexicans with respect to the Ordinary Shares that
                  they
                  acquire or hold, as well as to the property, rights, concessions,
                  participation or interests owned by us or to the rights and obligations
                  derived from any agreements we have with the Mexican government;
                  and
 
 §
              not
                  to invoke the protection of their own governments. If a holder
                  of our
                  Ordinary Shares invokes the protection of its own government, the
                  holder’s
                  Ordinary Shares will be forfeited to the Mexican
                  government.
 
 **Mexican
        Tax
        Considerations**
 
 ***General*****.**
        The following is a summary of the anticipated material Mexican tax consequences
        of the purchase, ownership and disposition of ADSs or Ordinary Shares by
        a
        person that is not a resident of Mexico, as defined below. The term “U.S.
        Holder” shall have the meaning ascribed below under the section “—U.S. Federal
        Income Tax Considerations”.
 
 U.S.
        Holders should consult with their own tax advisors to as to their entitlement
        to
        benefits afforded by the tax treaty between the United States and Mexico.
        Mexico
        has also entered into and is negotiating with various countries regarding
        other
        tax treaties that may have an effect on the tax treatment of ADSs or Ordinary
        Shares. Holders should consult with their tax advisors as to their entitlement
        to the benefits afforded by these treaties.
 
 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;
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 §
              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 29% in 2006, and 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:
 
 §
              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;
   64
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            of Contents
 
 §
              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
 
 This
        section applies only to holders who hold ADSs or Ordinary Shares as capital
        assets (generally, property held for investment) under the Internal Revenue
        Code
        of 1986, as amended (the “Code”). This section does not provide a complete
        analysis, listing or other description of all of the possible tax consequences
        of the purchase, ownership, sale or other disposition of ADSs or Ordinary
        Shares, as the case may be, and does not address tax consequences to persons
        with a special tax status such as dealers or traders in securities or
        currencies, U.S. Holders whose functional currency is not the U.S. Dollar,
        persons holding ADSs or Ordinary Shares as part of a hedge, straddle, conversion
        of other integrated transaction, certain U.S. expatriates, banks, insurance
        companies, real estate investment trust (REITs), regulated investment companies
        (RICs), tax-exempt entities, or persons owning at least 10% of the local
        combined voting power of our stock.
 
 If
        a
        partnership holds ADSs or Ordinary Shares, the tax treatment of a partner
        in
        such partnership will generally depend upon the status of the partner and
        the
        activities of the partnership. A partner of a partnership holding ADSs or
        Ordinary Shares should consult his, her or its own tax advisor.
 
 Investors
        should consult their tax advisors with
        respect to the tax consequences of the purchase, ownership, sale or other
        disposition of ADSs or Ordinary Shares, including consequences under foreign,
        state and local tax laws.
 
 For
        U.S. Federal income tax purposes, a
        U.S. Holder of an ADS generally will be treated as the beneficial owner of
        10
        Ordinary Shares.
 
 **Taxation
        of Cash Distributions and Distributions of Stock.** The gross amount of
        any distribution (other than in liquidation), including the fair market value
        of
        all distributions of ADSs or Ordinary Shares whenever a holder may elect
        to
        receive cash distributions in lieu of distributions of ADSs or Ordinary Shares,
        that you receive with respect to our ADSs or Ordinary Shares (before reduction
        for any Mexican tax, if any, withheld from such distributions) generally
        will be
        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 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.
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 Because
        we are not a U.S. corporation,
        dividends paid by us will not be eligible for the dividends received deduction
        generally allowable to corporations under the Code.
 
 To
        the extent that distributions by us exceed our
        E&P, such distributions will be treated as a tax-free return of capital, by
        both individual and corporate U.S. Holders, to the extent of each such U.S.
        Holder’s basis in their ADSs or Ordinary Shares, and will reduce such U.S.
        Holder’s basis in the ADSs or Ordinary Shares (thereby increasing any gain or
        decreasing any loss on a disposition of the ADSs or Ordinary
        Shares).
 
 To
        the
        extent that the distributions exceed the U.S. Holders’ basis in the ADSs or
        Ordinary Shares, each such individual or corporate U.S. Holder will be taxed
        as
        having recognized gain on the sale 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 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.
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 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.
 
 **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.
  67
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            of Contents
 
 We
        furnish The Bank of New York, the
        depositary for our ADSs, with annual reports in English. These reports contain
        audited consolidated financial statements that have been prepared in accordance
        with Mexican GAAP, and include reconciliations of net income and stockholders’
equity to U.S. GAAP. These reports have been examined and reported on, with
        an
        opinion expressed by, an independent auditor. The depositary is required
        to mail
        our annual reports to all holders of record of our ADSs. The deposit agreement
        for the ADSs also requires us to furnish
        the depositary with English translations of all notices of shareholders’
meetings and other reports and communications that we send to holders of
        our
        Ordinary Shares. The depositary is required to mail these notices, reports
        and
        communications to holders of record of our ADSs.
 
 As
        a foreign private issuer, we are not
        required to furnish proxy statements to holders of our ADSs in the United
        States.
 
 **Significant
        Differences in Corporate
        Governance Standards**
 
 Pursuant
        to Rule 303A.11 of the Listed Company Manual of the New York Stock Exchange
        (NYSE), we are required to provide a brief summary of the significant ways
        in
        which our corporate governance practices differ from those required for U.S.
        companies under the NYSE listing standards.
 
 Since
        we
        are Mexican corporation with shares listed on the Mexican Stock Exchange
        (*Bolsa Mexicana de Valores*), our corporate governance standards are
        governed by our corporate bylaws, the Mexican Securities Market Law (*Ley del
        Mercado de Valores*) and the regulations issued by the Mexican Banking and
        Securities Commission (*Comisión Nacional Bancaria y de Valores*). In
        order to comply with the above mentioned laws and regulations, as a public
        company listed on the Mexican Stock Exchange since January 2001, we are required
        by the Mexican Banking and Securities Commission to disclose annually the
        extent
        to which our corporate governance practices comply with those issued by the
        Mexican Banking and Securities Commission as general guidelines and which
        are
        collected in the Mexican Code of Enhanced Corporate Practices (*Código de
        Mejores Prácticas Corporativas*). This Code was originally created by a
        group of Mexican business leaders and was acknowledged by the Mexican Banking
        and Securities Commission in January 2001. Under Mexican legislation, we
        are not
        compelled to comply with the guidelines contained in the Code, although
        compliance is highly recommended by the authorities and disclosure as to
        the
        degree of our compliance therewith is mandatory.
 
 **NYSE
                  Standards**
              **Our
                  Corporate Governance Practice***A
                  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.
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            of Contents
 
 **NYSE
                  Standards**
              **Our
                  Corporate Governance Practice***Non-management
                  directors must meet at executive sessions without
                  management.*
              Our
                  non-management directors are not required to meet in executive
                  sessions.
                  Executive sessions are not recommended by the Mexican Code of Enhanced
                  Corporate Practices. Our Chief Executive Officer is a member of
                  our Board
                  of Directors.*Nominating/corporate
                  governance committee of independent directors required. Exception
                  for
                  “controlled companies,” which would include our Company if we were a U.S.
                  issuer.*
              We
                  are not required to have a nominating corporate governance committee,
                  and
                  such committee is not recommended by the Mexican Code of Enhanced
                  Corporate Practices.*Compensation
                  committee of independent directors required. Exception for “controlled
                  companies,” which would include our Company if we were a U.S.
                  issuer.*
              We
                  are not required to have a compensation committee, and currently
                  we do not
                  have one.*Audit
                  committee satisfying the independence and other requirements of
                  Rule 10A-3
                  under the Exchange Act and the NYSE independence
                  standards.*
              We
                  have a three member audit committee, which are independent under
                  applicable Mexican standards and for Rule 10A-. 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.
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  **Interest
        Rate
        Risk**
 
 We
        are
        subject to market risks due to interest fluctuations in Mexico. In addition,
        in
        the past, we have occasionally entered into swap arrangements and other hedge
        transactions, and will continue to consider doing so in the future to reduce
        our
        exposure to interest rate risks. Currently, we do not have any outstanding
        debt
        that is subject to interest rate risk, nor are we party to any arrangements
        to
        reduce our exposure to interest rate risk.
 
 **Foreign
        Exchange Rate
        Risk**
 
 As
        of December 31, 2006 and June 15,
        2007, we had no cost-bearing liabilities and, therefore, we are not currently
        subject to foreign exchange rate risk fluctuations. To the extent that we
        incur
        U.S. Dollar-denominated debt in the future, we would be subject to foreign
        exchange rate risk.
 
 
 **Item
        12.Description of Securities Other than Equity
        Securities**
  Not
        applicable.
 
 
 70
 Table
            of Contents
 
 
 **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
        15T. 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. Based on such evaluation, such
        officers have concluded that, as of the end of the period covered by this
        report, the Company’s disclosure controls and procedures are effective to
        provide reasonable assurance that information required to be disclosed by
        the
        Company (including its consolidated subsidiaries) in reports it files or
        submits
        under the Exchange Act is recorded, processed,
        summarized and reported within the time periods specified in the rules and
        forms
        of the SEC. During 2006, there were no significant changes in the Company’s
        internal controls or in other factors that could significantly affect such
        controls.
 
 ***(b)Management’s
        Annual Report on Internal Control Over Financial
        Reporting***
  The
        management of the Company is responsible for establishing and maintaining
        adequate internal control over financial reporting, as such term is defined
        in
        Exchange Rules 13a-15(f) and 15d-15(f).  This internal control system
        was designed to provide reasonable assurance to the Company’s management and
        Board of Directors regarding the preparation and fair presentation of published
        financial statements.
  The
        Company’s management assessed the effectiveness of the Company’s internal
        control over financial reporting as of the end of the period covered by this
        report.  In making this assessment, it used the criteria set forth by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
        in
        Internal Control—Integrated Framework.  Based on its assessment,
        management determined that, as of the end of the period covered by this report,
        the Company’s internal control over financial reporting is effective based on
        those criteria.
  This
        annual report does not include an
        attestation report of the Company’s registered public accounting firm regarding
        internal control over financial reporting.  Management’s report was
        not subject to attestation by the Company’s registered public accounting firm
        pursuant to temporary rules of the Securities and Exchange Commission that
        permit the Company, as a foreign private issuer that is an accelerated filer
        but
        not a large accelerated filer, to provide only management’s report in this
        annual report.
  ***(c)Changes
        in Internal Control Over Financial Reporting***
  There
        were no changes in our internal
        control over financial reporting during the year ended December 31, 2006
        that have materially affected, or are reasonably likely to materially affect,
        our internal control over financial reporting.
  71
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 **Item
        16. [Reserved]**
  
 **Item
        16A. Audit Committee Financial
        Expert**
 
 At
        our
        annual ordinary shareholders’ meeting held on April 26, 2007, our shareholders
        reelected the following individuals as members of the Audit Committee: Mr.
        Jose
        Ellstein Japchik, Mr. Gabriel Alarcón Velázquezand Patricio Trad Cepeda. Our
        Board of Directors has determined that the “audit committee financial expert”
within the meaning of this Item 16A, is Mr. Jose Ellstein Japchik.
 
 
 **Item
        16B. Code of Ethics**
 
 We
        have adopted a code of ethics that
        applies to our Chief Executive Officer, Chief Financial Officer, Chief
        Accounting Officer, and persons performing similar functions, as well as
        to our
        directors and other officers and employees. Our code of ethics is available
        on
        our web site at www.casasaba.com. Since its adoption, our code of ethics
        has not
        been amended and no waivers have been granted thereunder; however, any amendment
        to the code of ethics or waiver thereto shall be disclosed on our web site
        at
        the same address.
 
 
 **Item
        16C. Principal Accountant Fees and
        Services**
 **For
                      the year ended December 31,****2005**
                **2006****(Ps.
                    millions)**Audit
                    Fees
                Ps.5.8
                Ps.4.6Audit-Related
                    Fees
                2.2
                3.7Tax
                    Fees
                5.1
                6.2Other
                    Fees
                0.0
                0.0Total
                Ps.13.1
                Ps.14.5
 ***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.
  72
 Table
            of Contents
 
 **PART
        III**
  **Item
        17. Financial Statements**
  We
        are furnishing financial statements
        pursuant to the instructions to Item 18 of Form 20-F.
 
 
 **Item
        18. Financial Statements**
  The
        following financial statements,
        together with the report of Salles Sáinz-Grant Thornton, S.C. thereon, are filed
        as part of this Annual Report.
 
 PageIndex
                  to Consolidated Financial Statements
              F-1Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as of December 31, 2005 and 2006
              F-3Consolidated
                  Statements of Income for each of the years ended
                December
                  31, 2004, 2005 and 2006
              F-4Consolidated
                  Statements of Stockholders’ Equity for the years ended
                December
                  31, 2004, 2005 and 2006
              F-5Consolidated
                  Statements of Changes in Financial Position for the
                years
                  ended December 31, 2004, 2005 and 2006
              F-6Notes
                  to Consolidated Financial Statements
              F-8
 
 All
        supplementary schedules relating to
        the Company are omitted because they are not required or because the required
        information, where material, is contained in our audited consolidated financial
        statements or the notes thereto.
 
 
 **Item
        19. Exhibits**
  Documents
        filed as an exhibit to this
        annual report are as follows:
 
 Exhibit
                Number
              Description
                  of Exhibits1.1
              Amended
                  and Restated Bylaws (English translation).
                  *8.1
              List
                  of Subsidiaries of the Registrant.*12.1
              Certification
                  of the Principal Executive Officer of
                  Grupo Casa Saba, S.A.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.
  73
 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.
  **GRUPO
                CASA SABA, S.A.B.
                DE C.V.**Date: 
June
                  29, 2007
              By:
              /s/ Manuel
                Saba AdesName:  
Manuel
                Saba
                AdesTitle:    
                Chief Executive Officer




74






**INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Consolidated
                  Financial Statements of Grupo Casa Saba, S.A.B. de
                  C.V.**
                **Page**Report
                    of Independent Registered Public Accounting Firm
                F-2Consolidated
                    Balance Sheets as of December 31, 2005 and 2006
                F-3Consolidated Statements
                    of Income for each of the years ended December 31, 2004, 2005
                    and
                    2006
                F-4Consolidated
                    Statements of Stockholders’
                    Equity for
                    the years ended December 31, 2004, 2005 and 2006
                F-5Consolidated
                    Statements of Changes in Financial Position for the years ended
                    December
                    31, 2004, 2005 and 2006
                F-6Notes
                    to Consolidated Financial Statements
                F-8
    F-1
  **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, 2005
          and
          2006, 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, 2006, all stated in thousands of
          2006
          year end constant Mexican pesos. These financial statements are the
          responsibility of the Group's management. Our responsibility is to express
          an
          opinion on these financial statements based on our audits.
 
 We
          conducted our audits in accordance with the
          standards of the Public Company Accounting Oversight Board (United States
          of
          America) and with auditing standards generally accepted in Mexico. Those
          standards require that we plan and perform the audits to obtain reasonable
          assurance about whether the financial statements are free of material
          misstatement. The Group is not required to have, nor were we engaged to
          perform,
          an audit of its internal control over financial reporting. Our audits included
          consideration of internal control over financial reporting as a basis for
          designing audit procedures that are appropriate in the circumstances but
          not for
          the purpose of expressing an opinion on the effectiveness of the Group ́s
          internal control over financial reporting. Accordingly, we express no such
          opinion. An audit includes examining, on a test basis, evidence supporting
          the
          amounts and disclosures in the financial statements. An audit also includes
          assessing the 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, 2005 and 2006, 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, 2006, 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 information 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, 2006 and consolidated stockholders’ equity as of
          December 31, 2005 and 2006 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 16) and 17). That Form permits waiving the requirement
          to
          quantify the differences in the U.S. GAAP reconciliation attributable to
          the
          adjustments recorded locally to comprehensively recognize the effect of
          price
          level changes for each line item of the financial statements.
 
  /s/
                      Salles
                      Sainz – Grant Thornton, S.C.
 
 Mexico
          City,
          Mexico
 February
          28, 2007 (except for Notes 16 & 17,    as to which the
          date is June 8, 2007)
 
  F-2
  **Grupo
          Casa Saba, S.A.B. de C.V. and Subsidiaries**
  **Consolidated
            balance sheets**
 **as
          of December 31, 2005 and 2006**
 **(Amounts
            stated in thousands of 2006  year end constant Mexican pesos
            (Ps.)**
 **and
              thousands of U.S. dollars ($))**
  2005
                    
                    
                    
                    2006
                    
                    
                    Conveniencetranslation
                        2006CURRENT
                        ASSETS:Cash
                        and cash
                        equivalents (Note 3.d)
                    Ps.
                    743,447
                    
                    
                    Ps.
                    616,387
                    
                    
                    $
                    57,012Accounts
                        receivable, net (Notes 3.f and 4)
                    
                    4,330,449
                    
                    
                    
                    4,433,739
                    
                    
                    
                    410,091Inventories,
                        net (Notes 3.c and 5)
                    
                    3,735,621
                    
                    
                    
                    3,823,235
                    
                    
                    
                    353,623Prepaid
                        expenses
                    
                    11,113
                    
                    
                    
                    13,716
                    
                    
                    
                    1,269Total
                        current
                        assets
                    
                    8,820,630
                    
                    
                    
                    8,887,077
                    
                    
                    
                    821,995PROPERTY
                        AND
                        EQUIPMENT, net(Notes
                        3.c,
                        3.g and 6)
                    
                    1,108,433
                    
                    
                    
                    1,154,831
                    
                    
                    
                    106,814OTHER
                        ASSETS,
                        net
                    
                    124,813
                    
                    
                    
                    168,426
                    
                    
                    
                    15,578GOODWILL,
                        net
                        (Note 3.h)
                    
                    177,661
                    
                    
                    
                    178,130
                    
                    
                    
                    16,476Total
                        assets
                    Ps.
                    10,231,537
                    
                    
                    Ps.
                    10,388,464
                    
                    
                    $
                    960,863
 2005
                  
                  
                  
                  2006
                  
                  
                  Conveniencetranslation 2006CURRENT
                      LIABILITIES:Bank
                      loans
                      (Note 8)
                  Ps.
                  
                  
                  
                  Ps.
                  16,427
                  
                  
                  $
                  1,519Trade
                      accounts payable
                  
                  4,193,738
                  
                  
                  
                  3,986,057
                  
                  
                  
                  368,683Other
                      payables and accrued liabilities
                  
                  231,861
                  
                  
                  
                  208,061
                  
                  
                  
                  19,245Employee
                      profit sharing (Notes 3.k and 12.d)
                  
                  4,354
                  
                  
                  
                  5,744
                  
                  
                  
                  531Total
                      current
                      liabilities
                  
                  4,429,953
                  
                  
                  
                  4,216,289
                  
                  
                  
                  389,978RESERVE
                      FOR
                      RETIREMENT PENSIONSAND
                      SENIORITY
                      PREMIUM (Note 3.j)
                  
                  91,262
                  
                  
                  
                  104,949
                  
                  
                  
                  9,707DEFERRED
                      INCOME TAX (Notes 3.k and 9)
                  
                  906,005
                  
                  
                  
                  720,179
                  
                  
                  
                  66,612DEFERRED
                      EMPLOYEE PROFITSHARING
                      (Notes 3.k and 9)
                  
                  3,005
                  
                  
                  
                  3,882
                  
                  
                  
                  359Total
                      liabilities
                  
                  5,430,225
                  
                  
                  
                  5,045,299
                  
                  
                  
                  466,656**STOCKHOLDERS'
                      EQUITY**Capital
                      stock
                      (Note 11)
                  
                  1,083,052
                  
                  
                  
                  1,083,052
                  
                  
                  
                  100,175Premium
                      on
                      stock sold
                  
                  838,364
                  
                  
                  
                  838,364
                  
                  
                  
                  77,543Reserve
                      for
                      share repurchases (Note 11)
                  
                  1,023,719
                  
                  
                  
                  1,023,719
                  
                  
                  
                  94,687Retained
                      earnings
                  
                  4,030,957
                  
                  
                  
                  4,759,801
                  
                  
                  
                  440,250Deficit
                      on
                      restatement (Note 3.c)
                  
                  (2,106,103
                  )
                  
                  
                  (2,295,491
                  )
                  
                  
                  (212,317
                  )Accrued
                      deferred income tax effect
                  
                  (39,221
                  )
                  
                  
                  (39,221
                  )
                  
                  
                  (3,628
                  )Additional
                      employee retirement liability (Note 3.j)
                  
                  (29,456
                  )
                  
                  
                  (27,059
                  )
                  
                  
                  (2,503
                  )Total
                      stockholders' equity
                  
                  4,801,312
                  
                  
                  
                  5,343,165
                  
                  
                  
                  494,207Total
                      liabilities and stockholders' equity
                  Ps.
                  10,231,537
                  
                  
                  Ps.
                  10,388,464
                  
                  
                  $
                  960,863
  The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements
  F-3
   **Grupo
          Casa Saba, S.A.B. de C.V. and Subsidiaries**
 **Consolidated
                statements of income**
 **for
                the years ended December 31, 2004, 2005 and
                2006**
 **(Amounts
                stated in thousands of 2006 year end constant Mexican pesos
                (Ps.)**
 **and
                  thousands of U.S. dollars ($))**
 2004
                
                
                2005
                
                
                2006
                
                Conveniencetranslation 2006Net
                    sales
                    (Note 3.o)
                Ps.
                22,117,980
                
                Ps.
                22,760,356
                
                Ps.
                23,599,383
                
                $
                2,182,784Cost
                    of
                    sales
                
                19,841,029
                
                
                20,411,707
                
                
                21,266,983
                
                
                1,967,052Gross
                    profit
                
                2,276,951
                
                
                2,348,649
                
                
                2,332,400
                
                
                215,732Operating
                    expensesSelling
                
                606,556
                
                
                564,984
                
                
                529,040
                
                
                48,933Administrative
                
                812,563
                
                
                852,138
                
                
                787,415
                
                
                72,8311,419,119
                
                
                1,417,122
                
                
                1,316,455
                
                
                121,764Operating
                    income
                
                857,832
                
                
                931,527
                
                
                1,015,945
                
                
                93,968Comprehensive
                    cost of financing, netInterest
                    income
                
                (6,489
                )
                
                (28,319
                )
                
                (29,953
                )
                
                (2,770
                )Interest
                    expense
                
                32,055
                
                
                13,557
                
                
                10,224
                
                
                946Exchange
                    loss
                    (gain) (Note 3.l)
                
                2
                
                
                2,791
                
                
                (1,740
                )
                
                (161
                )(Gain)
                    loss
                    on monetary position (Note 3.c)
                
                (8,585
                )
                
                10,340
                
                
                17,276
                
                
                1,59716,983
                
                
                (1,631
                )
                
                (4,193
                )
                
                (388
                )Other
                    income,
                    net
                
                (53,654
                )
                
                (39,970
                )
                
                (97,461
                )
                
                (9,014
                )Income
                    before
                    provisions
                
                894,503
                
                
                973,128
                
                
                1,117,599
                
                
                103,370Provisions
                    for:Income
                    tax
                    (Notes 3.k, 12.a and 12 .e)
                
                62,240
                
                
                320,142
                
                
                353,756
                
                
                32,720Income
                    tax
                    offset by prior year tax losscarryforwards
                    (Note 12.c)
                
                (39,848
                )
                
                (195,978
                )
                
                
                
                
                -Recovery
                    of
                    asset tax paid in prior years (Note 12.b)
                11,121
                
                
                
                
                
                (59,026
                )
                
                (5,460
                )Deferred
                    income tax (Notes 3.k and 9)
                
                153,135
                
                
                92,022
                
                
                (64,840
                )
                
                (5,997
                )186,648
                
                
                216,186
                
                
                229,890
                
                
                21,263Employee
                    profit sharing (Notes 3.k and 12.d)
                
                1,712
                
                
                4,432
                
                
                3,360
                
                
                311Deferred
                    employee profit sharing (Notes 3.k and 9)
                8,513
                
                
                (5,232
                )
                
                993
                
                
                92196,873
                
                
                215,386
                
                
                234,243
                
                
                21,666Net
                    income
                Ps.
                697,630
                
                Ps.
                757,742
                
                Ps.
                883,356
                
                $
                81,704Net
                    income
                    per share (Note 3.n)
                Ps.
                2.628
                
                Ps.
                2.855
                
                Ps.
                3.328Weighted
                    average sharesoutstanding  (in
                    thousands)
                
                265,419
                
                
                265,419
                
                
                265,419The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements
   F-4
   **Grupo
          Casa Saba, S.A.B. de C.V. and Subsidiaries**
 **Consolidated
                statements of stockholders' equity**
 **for
                the years ended December 31, 2004, 2005 and
                2006**
 **(Amounts
                stated in thousands of 2006 year end constant Mexican pesos
                (Ps.))**
   Accrued
                
                AdditionalCapital
                    stock
                
                
                
                Reserve
                    for
                
                
                
                
                
                deferred
                
                employeePremium
                    on
                
                share
                
                Retained
                
                Deficit
                    on
                
                income
                    tax
                
                retirementHistorical
                
                Restatement
                
                stock
                    sold
                
                repurchases
                
                earnings
                
                restatement
                
                effect
                
                liability
                
                Total
 Balances
                    as of
                    January 1, 2004
                
                Ps.
                167,903
                
                Ps.
                915,149
                
                Ps.
                838,364
                
                Ps.
                1,023,719
                
                Ps.
                2,833,131
                
                Ps.
                (1,960,376
                )
                
                Ps.
                (39,221
                )
                
                Ps.
                
                
                
                Ps.
                3,778,669Dividends
                    paid
                
                
                
                
                
                
                
                
                
                
                
                (122,314
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (122,314
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                697,630
                
                
                (17,589
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                680,041Balances
                    as of
                    December 31, 2004
                
                
                167,903
                
                
                915,149
                
                
                838,364
                
                
                1,023,719
                
                
                3,408,447
                
                
                (1,977,965
                )
                
                
                (39,221
                )
                
                
                
                
                
                
                4,336,396Dividends
                    paid
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (135,232
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (135,232
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                757,742
                
                
                (128,138
                )
                
                
                
                
                
                
                (29,456
                )
                
                
                600,148Balances
                    as of
                    December 31, 2005
                
                
                167,903
                
                
                915,149
                
                
                838,364
                
                
                1,023,719
                
                
                4,030,957
                
                
                (2,106,103
                )
                
                
                (39,221
                )
                
                
                (29,456
                )
                
                
                4,801,312Dividends
                    paid
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (154,512
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (154,512
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                883,356
                
                
                (189,388
                )
                
                
                
                
                
                
                2,397
                
                
                
                696,365Balances
                    as of
                    December 31, 2006
                
                Ps.
                167,903
                
                Ps.
                915,149
                
                Ps.
                838,364
                
                Ps.
                1,023,719
                
                Ps.
                4,759,801
                
                Ps.
                (2,295,491
                )
                
                Ps.
                (39,221
                )
                
                Ps.
                (27,059
                )
                
                Ps.
                5,343,165
    F-5
 **Grupo
              Casa Saba, S.A.B. de C.V. and Subsidiaries**
 **Consolidated
                    statements of changes in financial position**
 **for
                    the years ended December 31, 2004, 2005 and
                    2006**
 **(Amounts
                    stated in thousands of 2006 year end constant Mexican pesos
                    (Ps.))**
 **and
                    thousands of U.S. dollars ($))**
   2004
                            
                            
                            2005
                            
                            
                            2006
                            
                            
                            Convenience
                                  translation 2006Operating
                                activities:Net
                                income
                            
                            Ps.
                            697,630
                            
                            
                            Ps.
                            757,742
                            
                            
                            Ps.
                            883,356
                            
                            
                            $
                            81,704Add
                                (less) -
                                Non cash items:Depreciation
                                and amortization
                            
                            
                            111,893
                            
                            
                            
                            135,282
                            
                            
                            
                            73,639
                            
                            
                            
                            6,811Allowance
                                for
                                doubtful accounts
                            
                            
                            94,513
                            
                            
                            
                            73,307Loss
                                on sale
                                of property and equipment
                            
                            
                            1,523
                            
                            
                            
                            4,624
                            
                            
                            
                            7,313
                            
                            
                            
                            677Provision
                                for
                                retirement pensions and seniority premium
                            
                            
                            14,642
                            
                            
                            
                            20,042
                            
                            
                            
                            19,970
                            
                            
                            
                            1,847Deferred
                                income tax
                            
                            
                            153,135
                            
                            
                            
                            92,022
                            
                            
                            
                            (64,840
                            )
                            
                            
                            (5,997
                            )Deferred
                                employee profit sharing
                            
                            
                            8,513
                            
                            
                            
                            (5,232
                            )
                            
                            
                            993
                            
                            
                            
                            921,081,849
                            
                            
                            
                            1,077,787
                            
                            
                            
                            920,431
                            
                            
                            
                            85,134Changes
                                in
                                assets and liabilities:(Increase)
                                decrease in:Accounts
                                receivable
                            
                            
                            295,282
                            
                            
                            
                            (553,515
                            )
                            
                            
                            (103,290
                            )
                            
                            
                            (9,554
                            )Inventories
                            
                            
                            (543,087
                            )
                            
                            
                            108,579
                            
                            
                            
                            (277,002
                            )
                            
                            
                            (25,621
                            )Prepaid
                                expenses
                            
                            
                            8,546
                            
                            
                            
                            (1,862
                            )
                            
                            
                            (2,603
                            )
                            
                            
                            (241
                            )Trade
                                accounts payable
                            
                            
                            347,666
                            
                            
                            
                            (194,394
                            )
                            
                            
                            (207,681
                            )
                            
                            
                            (19,209
                            )Other
                                payables and accrued liabilities
                            
                            
                            (67,656
                            )
                            
                            
                            60,939
                            
                            
                            
                            (23,800
                            )
                            
                            
                            (2,201
                            )Employee
                                profit sharing
                            
                            
                            1,351
                            
                            
                            
                            1,382
                            
                            
                            
                            1,390
                            
                            
                            
                            12942,102
                            
                            
                            
                            (578,871
                            )
                            
                            
                            (612,986
                            )
                            
                            
                            (56,697
                            )Net
                                cash
                                provided by operating activities
                            
                            
                            1,123,951
                            
                            
                            
                            498,916
                            
                            
                            
                            307,445
                            
                            
                            
                            28,437Investing
                                activities:Additions
                                of
                                property and equipment, net of retirements
                            
                            
                            121,313
                            
                            
                            
                            47,096
                            
                            
                            
                            115,795
                            
                            
                            
                            10,710Increase
                                in
                                other assets
                            
                            
                            2,600
                            
                            
                            
                            42,804
                            
                            
                            
                            57,137
                            
                            
                            
                            5,285Reserve
                                for
                                retirement pensions and seniority premium
                            
                            
                            12,597
                            
                            
                            
                            12,795
                            
                            
                            
                            2,386
                            
                            
                            
                            221Net
                                cash used
                                in investing activities
                            
                            
                            136,510
                            
                            
                            
                            102,695
                            
                            
                            
                            175,318
                            
                            
                            
                            16,216Financing
                                activities:Dividends
                                paid
                            
                            
                            (122,314
                            )
                            
                            
                            (135,232
                            )
                            
                            
                            (154,512
                            )
                            
                            
                            (14,291
                            )Bank
                                loans,
                                net of payments made
                            
                            
                            (419,350
                            )
                            
                            
                            
                            
                            
                            
                            16,427
                            
                            
                            
                            1,519Effect
                                in
                                change of bank loans due to the restatement
                            
                            
                            (21,768
                            )Deferred
                                income tax
                            
                            
                            (100,279
                            )
                            
                            
                            (34,482
                            )
                            
                            
                            (120,986
                            )
                            
                            
                            (11,190
                            )Deferred
                                employee profit sharing
                            
                            
                            –
                            
                            
                            
                            (276
                            )
                            
                            
                            (116
                            )
                            
                            
                            (11
                            )Net
                                cash used
                                in financing activities
                            
                            
                            (663,711
                            )
                            
                            
                            (169,990
                            )
                            
                            
                            (259,187
                            )
                            
                            
                            (23,973
                            )
   F-6
 
 2004
                            
                            
                            2005
                            
                            
                            2006
                            
                            
                            Convenience
                                  translation 2006
 Net
                                increase
                                (decrease) in cash and cash equivalents
                            
                            
                            323,730
                            
                            
                            
                            226,231
                            
                            
                            
                            (127,060
                            )
                            
                            
                            (11,752
                            )Cash and cash equivalentsat beginning of year
                            
                            
                            193,509
                            
                            
                            
                            517,216
                            
                            
                            
                            743,447
                            
                            
                            
                            68,764Cash and cash equivalentsat end of year
                            
                            Ps.
                            517,239
                            
                            
                            Ps.
                            743,447
                            
                            
                            Ps.
                            616,387
                            
                            
                            $
                            57,012Supplementary
                                information:Income
                                tax
                                and asset tax paid
                            
                            Ps.
                            104,236
                            
                            
                            Ps.
                            277,662
                            
                            
                            Ps.
                            400,455
                            
                            
                            $
                            37,039Employee
                                profit sharing paid
                            
                            Ps.
                            1,643
                            
                            
                            Ps.
                            2,688
                            
                            
                            Ps.
                            2,165
                            
                            
                            $
                            200Interest
                                paid
                            
                            Ps.
                            22,080
                            
                            
                            Ps.
                            4,273
                            
                            
                            Ps.
                            2,673
                            
                            
                            $
                            247
  The
        accompanying
        notes are an integral part of these consolidated financial
        statements.
    F-7
     GRUPO
            CASA SABA,
            S.A.B. DE C.V. AND SUBSIDIARIES
 
 NOTES
            TO THE
            CONSOLIDATED FINANCIAL STATEMENTS
 
 AS
            OF DECEMBER 31,
            2004, 2005 AND 2006
 
 (Amounts
            stated in
            thousands of 2006 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 13.
 
 The
            Company holds substantially all of the
            issued and outstanding capital stock of the following subsidiaries that
            are
            members of the Group:
 
 Economic
                      Interest(Direct
                      or
                      indirect)2005
                  
                  2006Casa
                      Saba,
                      S.A de C.V.
                  
                  (Casa
                      Saba)
                  
                  99.9%
                  
                  99.9%Drogueros,
                      S.A. de C.V.
                  
                  (Drogueros)
                  
                  99.9%
                  
                  99.9%Grupo
                      Mexatar, S.A. de C.V.
                  
                  (Mexatar)
                  
                  99.9%
                  
                  99.9%Centennial,
                      S.A. de C.V.
                  
                  (Centennial)
                  
                  99.9%
                  
                  99.9%Inmuebles
                      Visosil, S.A. de C.V.
                  
                  (Visosil)
                  
                  99.9%
                  
                  99.9%Publicaciones
                      Citem, S.A. de C.V.
                  
                  (Citem)
                  
                  99.9%
                  
                  99.9%Transportes
                      Marproa, S.A. de C.V.
                  
                  (Marproa)
                  
                  99.9%
                  
                  99.9%Servicios
                      Corporativos Saba, S.A.
                    de
                      C.V.
                  
                  (Servicios
                      Corporativos Saba)
                  
                  99.9%
                  
                  99.9%Distribuidora
                      Casa Saba, S.A. de C.V.
                  
                  (Distribuidora
                      Saba)
                  
                  99.9%
                  
                  99.9%Distribuidora
                      Solis Garza, S.A. de C.V.
                  
                  (Distribuidora
                      Solis)
                  
                  
                  
                  99.9%Farmacias
                      Solis Hospitalarias y Oncologicas, S.A. de C.V.
                  
                  (Farmacias
                      Solis)
                  
                  
                  
                  99.9%Other
                      companies (real estate and service companies)
                  
                  
                  
                  99.9%
                  
                  99.9%
 
 During
            2005 and
            2006, 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 August 31,
            and
            October 31, 2005, the Group ́s subsidiaries Casa Saba, Drogueros and Citem sold
            certain collection rights applicable to individuals and legal entities
            to the
            Company at a discount in the amount of Ps. 132,586, Ps. 38,786 and Ps.215,004,
            respectively (Ps. 124,930, Ps. 36,782 and Ps. 203,900 historical Mexican
            pesos).
            The selling price of the assignment agreed upon amounted to Ps. 91,434,
            Ps.
            17,151, and Ps. 91,221, respectively (Ps.86,153, Ps. 16,265 and Ps. 86,510
            historical Mexican pesos).
   F-8
 
 b)         Through
            an assignment of documents for collection agreement 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. 130,988 and Ps. 187,724, respectively
            (Ps.126,624 and Ps. 181,975 historical Mexican pesos). The selling price
            of the
            assignment agreed upon amounted to Ps. 63,450 and Ps. 137,376, respectively
            (Ps.
            61,336 and Ps. 133,169 historical Mexican pesos).
 
 The
            Company accrues a gain on the collection
            rights acquired as discussed in paragraphs a) and b) above, which is
            recognized
            in income when realized. At 2005 and 2006 fiscal year end, that gain
            amounted to
            Ps.65,557 (Ps. 63,003 historical Mexican pesos) and Ps. 42,605,
            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. The investment would approximate to Ps.
            74,000. At
            2005 and 2006 fiscal year end, the amounts incurred were Ps. 29,863 (Ps.
            28,700
            historical Mexican pesos) and Ps. 63,608, respectively, and were included
            in the
            line item “Other assets”.
 
 d)         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
            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 Distribuidora Solis and Ps. 5,322 for Farmacias Solis). Those acquisitions
            were accounted for by applying the purchase method, which requires the
            recognition and initial valuation of net assets of the subsidiaries acquired.
            Consequently, the cost of the acquired entities 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.
            5,114. That amount 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.
 
 e)         Through
            a stock purchase agreement dated April 5, 2006, the Company acquired
            practically
            all of the issued and outstanding shares of the capital stock of Servicios
            Administrativos Xtra, S. A. de C. V. On September 2006, this subsidiary
            changed
            its corporate name to Servicios Administrativos Grupo Casa Saba, S. A.
            de C. V.,
            which renders supplementary servicies 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. Consequently,
            an
            excess of fair value of the net assets acquired over the acquisition
            cost was
            determined in the amount of Ps. 53,238. This excess was partially applied
            as a
            write-down of the value of the fixed assets acquired, whereas the remaining
            amount was applied as an unordinary (nonrecurrent) item to income, in
            accordance
            with Mexican FRS. This provision is virtually identical to U.S.
            GAAP.
 
 f)          In
            March 2006, Alycom Saba, S.A. de C.V. was incorporated to rendering
            administrative, legal accounting, tax, treasury and electronic data processing
            services to the Group ́s subsidiaries.
 
 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.
   F-9
  
 **2.         Basis
            of presentation:**
 
 The
            accompanying
            financial statements have been prepared based on the Financial Reporting
            Standards issued by the Research and Development Board of Financial Reporting
            Standards (CINIF-Spanish acronym). CINIF replaced the Accounting Principles
            Board of Mexican Institute of Public Accountants (IMCP-Spanish acronym)
            in the
            duty of developing and issuing financial reporting standards. Consequently,
            CINIF renamed the accounting principles generally accepted (Mexican GAAP)
            as
            Financial Reporting Standards or Mexican FRS (See Note 15).
 
 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 16. A partial reconciliation of the consolidated
            net
            income and stockholders’ equity from Mexican FRS to U.S. GAAP is included in
            Note 17. The most significant Mexican FRS followed by the Group is described
            in
            Note 3).
 
 **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, 2006. 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. 10.8116
            (pesos) per U.S. dollar as quoted by Banco de Mexico in the Official
            Daily
            Gazette as of January 2, 2007. The convenience translation should not
            be
            construed as a representation that the Mexican peso amounts have been,
            could
            have been, or in the future could be translated into U.S. dollars at
            this or any
            other exchange rate.
 
 
 **3.         Significant
            accounting policies:**
 
 a)         Use
            of estimates
 
 Preparing
            the
            accompanying financial statements requires the Group’s management to make
            certain estimates and use certain assumptions to determine the valuation
            of some
            assets and liabilities and disclose contingent assets and liabilities
            at the
            date of the financial statements and the reported amount of revenues
            and
            expenses incurred during the periods. Those estimates and assumptions
            are made
            on a going concern basis.
 
 The
            most significant line items subject to the
            estimates and assumptions foregoing discussed, apply mainly to property
            and
            equipment and goodwill, allowance for doubtful accounts and slow-moving
            inventories, labor obligations derived from defined benefits, income
            tax and
            valuation of contingencies. Actual results may differ from these estimates
            and
            assumptions.
 
 b)         Basis
            of consolidation
 
 The
            accompanying financial statements are
            presented on a consolidated basis under Mexican FRS. Those financial
            statements
            include the results of operations of the Company and all of its subsidiaries
            (controlled directly or indirectly, acquired, newly incorporated or disposed
            of)
            from the date on which they are acquired and/or incorporated up to the
            date when
            they are sold and/or at the fiscal year end of the last year reported.
            The
            accounting consolidation was made based on the subsidiaries ́s audited financial
            statements, prepared in accordance with Mexican 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 recognizing
            the impact of inflation. Consequently, the amounts of the financial statements
            for the current year are comparable to one another and with those of
            prior
            years. Accordingly, all prior years financial statement amounts presented
            herein
            differ from those originally reported.
   F-10
 
 The
            impact of inflation on the financial
            information is recognized under Bulletin B-10, “Recognition of the Impact of
            Inflation on the Financial Information”, as amended (Bulletin B-10) 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, 2006, 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 cost of financing.
 
 iv)        
            Inventories are initially recorded at acquisition cost. Subsequently,
            they are
            restated to their replacement cost, which do not exceed their net realizable
            values. Cost of sales is restated by applying the same method.
 
 v)         Property
            and equipment are initially recorded at acquisition cost. Those fixed
            assets
            along with their depreciation are restated based on "adjustments due
            to changes
            in the general price level method" by applying the relevant NCPI factor
            to the
            value of those assets determined by an appraisal performed by independent
            experts as of December 31, 1996 (except for Drogueros, as discussed in
            Note 6),
            as well as to the historical cost of acquisitions made subsequent to
            that date.
            The carrying value of property and equipment is subject to periodic impairment
            valuation.
 
 Depreciation
            is calculated on the restated value of fixed assets by using the straight-line
            method based on the remaining economic useful lives thereof.
 
 vi)         Goodwill
            is restated by applying the relevant NCPI factor to the historical cost
            thereof.
            The carrying value of goodwill is subject to periodic impairment
            valuation.
 
 vii)        Stockholders’
            equity is restated based on the NCPI factor by considering the age of
            contributions and that of earnings or losses generated. The stockholders’ equity
            restatement represents the amount necessary to maintain shareholders’ investment
            in terms of the purchasing power of the currency at fiscal year end of
            the last
            year reported.
 
 viii)       The
            deficit on restatement represents the accumulated monetary effect at
            the date on
            which the financial statements were restated for the first time, plus
            (less) the
            deficit (surplus) generated by the valuation of nonmonetary assets
            (inventories), based on the replacement cost above or below inflation
            by
            considering the NCPI factor. The resulting deficit is included in stockholders'
            equity as a component of comprehensive income of the year.
 
 d)         Cash
            and cash equivalents
 
 Cash
            consists of non-interest bearing bank
            deposits. Cash equivalents are comprised mainly of highly liquid investments
            which when acquired have maturity dates of ninety days or less, payable
            on
            demand at market variable interest rates. Investments are made in banking
            institution and valued at market value (cost plus accrued interest).
            Interests
            and exchange fluctuation are included in income as a component of comprehensive
            cost of financing.
   F-11
 
 e)          Financial
            instruments
 
 All
            financial
            assets and financial liabilities derived from any type of financial instrument
            are recognized in the balance sheet at fair value. The valuation effect
            is
            recognized in income. Revenues and expenses generated by financial instruments
            are recognized in income when earned or incurred, respectively.
 
 As
            of December 31, 2005, and 2006, the carrying
            value of financial instruments approximates its fair value due to the
            short-term
            nature thereof.
 
 f)          Allowance
            for doubtful accounts
 
 The
            allowance for
            doubtful accounts represents the Group ́s estimate of the probable loss in all
            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 contemplates 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
            2005 and 2006
            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.
            Therefore, no impairment charges resulted from the assessment performed
            by the
            Group.
 
 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
            individually at the fair value as of the acquisition date and reported
            separately, unless their cost cannot be reasonably determined. In that
            event,
            they are accounted for collectively as goodwill. The Group ́s goodwill arises
            from acquiring shares of capital stock of subsidiary companies at a price
            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. In business combinations, if there is
            no
            observable market for those assets their value is reduced to the amount
            of
            goodwill or to zero. In addition, intangible assets with an undefined
            economic
            useful life including goodwill are subject to a periodic impairment valuation,
            by following the provisions referred to in paragraph g) above.
 
 At
            2005 and 2006
            fiscal year end, the Group completed the fair value based impairment
            test on its
            goodwill. In 2005, the Group recorded an operating expense for goodwill
            impairment in the amount of Ps.46,742 (Ps. 44,921 historical Mexican
            pesos), whereas in 2006 there was no impact of impairment that should
            be
            recorded.
   F-12
 
 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.
 
 Significant
            obligations or losses related to contingencies are periodically evaluated.
            They
            are only accounted for when it is likely that present obligations will
            require
            the disbursement of economic resources, and there are reasonable elements
            for
            their quantification. If there are no such reasonable elements, they
            are
            disclosed qualitatively in the notes to the financial statements. Contingent
            revenues, income or assets are only recognized when their realization
            is
            practically certain.
 
 Commitments
            are not
            recognized unless they result in a loss. Commitments are disclosed when
            they
            represent significant additions of fixed assets, goods or services contracted
            substantially exceed the immediate needs of the Group or represent contractual
            obligations (restrictive covenants or significant events related to
            liabilities).
 
 j)           Labor
            obligations
 
 i)           Members
            of the Group that have personnel recognize the labor obligations for
            retirement
            pensions and seniority premiums for all their employees, as well as severance
            benefits to employees upon termination of the employer/employee relationship
            when they complete that employment relationship prior to retirement age
            due to
            causes other than restructuring. These labor obligations are derived from
            defined benefit plans. With regard to the foregoing: i) 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, and
            ii)
            retirement pensions are granted to all personnel that have completed
            at least
            ten years of service and have reached sixty-five years of age.
 
 Projected
            benefit obligations, unamortized
            items, and the net periodic cost applicable to labor obligations referred
            to
            above are determined by using the "projected unit credit method", in
            conformity
            with Bulletin D-3, "Labor obligations" 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.
 
 Members
            of the Group with employees have
            created a fund placed in an irrevocable trust in a financial institution
            to meet
            the labor obligations derived from defined benefits. During 2005 and
            2006, the
            contributions to the fund based on actuarial computations amounted to
            Ps. 15,041
            (Ps. 14,455 historical Mexican pesos) and Ps. 15,588, 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).
   F-13
  **December
                        31,****2005**
                    
                    **2006****Labor
                        liability**Vested
                        benefit obligation
                    Ps.
                    130,832
                    
                    Ps.
                    142,420Non-vested
                        benefit obligation
                    
                    13,217
                    
                    
                    14,392Accumulated
                        benefit obligation
                    
                    144,049
                    
                    
                    156,812Additional
                        benefit related to futurecompensation
                        increases
                    
                    26,014
                    
                    
                    29,876Projected
                        benefit obligation
                    
                    170,063
                    
                    
                    186,688Fair
                        value of
                        plan assets
                    
                    69,813
                    
                    
                    70,785Unfunded
                        projected benefit obligation
                    
                    100,250
                    
                    
                    115,903Unrecognized
                        net transition obligation
                    
                    (46,415)
                    
                    
                    (40,896)Negative
                        amendments
                    
                    16,035
                    
                    
                    14,953Unrecognized
                        net loss
                    
                    (44,239)
                    
                    
                    (45,334)Unfunded
                        accrued pension cost andseniority
                        premium to be recognizedunder
                        U.S.
                        GAAP and Mexican FRS
                    Ps.
                    25,631
                    
                    Ps.
                    44,626Additional
                        employee retirement liability
                    
                    65,631
                    
                    
                    60,323**Net
                        actual obligation**
                    **Ps.**
                    **91,262**
                    
                    **Ps.**
                    **104,949****Net
                        periodic cost**Service
                        cost
                    Ps.
                    8,528
                    
                    Ps.
                    8,587Interest
                        on
                        projected benefit obligation
                    
                    8,801
                    
                    
                    8,822Expected
                        return on plan assets
                    
                    (3,624)
                    
                    
                    (3,650)Amortization
                        of net transition obligation
                    
                    5,340
                    
                    
                    5,303Amortization
                        of amendments
                    
                    (1,048)
                    
                    
                    (1,040)Amortization
                        of losses
                    
                    2,045
                    
                    
                    1,948**Net
                        periodic cost under U.S. GAAP****And
                        Mexican FRS**
                    Ps.
                    **20,042**
                    
                    Ps.
                    **19,970****December
                        31,****2005**
                    
                    **2006****Assumptions
                        (real rates)**Discount
                        rate
                    
                    5.5%
                    
                    
                    5.5%Salary
                        increase rate
                    
                    1%
                    
                    
                    1%Return
                        on
                        plan assets
                    
                    6%
                    
                    
                    6.5%
   F-14
  **December
                      31,****2005**
                  
                  **2006****Change
                      in projected benefit obligation**Actual
                      projected benefit obligation atbeginning
                      of
                      year
                  Ps.
                  165,345
                  
                  Ps.
                  169,100Service
                      cost
                  
                  14,016
                  
                  
                  13,962Interest
                      on
                      projected benefit obligation
                  
                  8,715
                  
                  
                  8,033Actuarial
                      loss
                  
                  (4,644)
                  
                  
                  8,464Benefits
                      paid
                  
                  (13,369)
                  
                  
                  (12,572)Curtailment
                      on benefit obligation
                  
                  
                  
                  
                  (299)Projected
                      benefit obligation at end of year
                  Ps.
                  170,063
                  
                  Ps.
                  186,688**Change
                      in plan assets**Fair
                      value of
                      plan assets at beginning of year
                  Ps.
                  62,054
                  
                  Ps.
                  70,239Actual
                      return
                      on plan assets
                  
                  4,649
                  
                  
                  13,349Employer
                      contributions
                  
                  15,041
                  
                  
                  372Benefits
                      paid
                  
                  (11,931)
                  
                  
                  (10,293)Asset
                      reversion
                  
                  -
                  
                  
                  (2,882)Fair
                      value of
                      plan assets at end of year
                  Ps.
                  69,813
                  
                  Ps.
                  70,785Funded
                      status
                  Ps.
                  100,250
                  
                  Ps.
                  115,903Unrecognized
                      net transition obligation
                  
                  (46,415)
                  
                  
                  (40,896)Negative
                      amendments
                  
                  16,035
                  
                  
                  14,953Unrecognized
                      net loss
                  
                  (44,239)
                  
                  
                  (45,334)Unfunded
                      accrued pension cost and senioritypremium
                      to be
                      recognized under U.S. GAAPand
                      Mexican
                      FRS
                  Ps.
                  25,631
                  
                  Ps.
                  44,626**Amounts
                      recognized in the statement of****financial
                      position consist of:**Unfunded
                      accrued pension cost and senioritypremium
                      to be
                      recognized
                  Ps.
                  25,631
                  
                  Ps.
                  44,626Accrued
                      benefit liability
                  
                  (65,631)
                  
                  
                  (60,323)Intangible
                      asset
                  
                  36,175
                  
                  
                  33,264Accumulated
                      other comprehensive income
                  
                  29,456
                  
                  
                  27,059-
                  
                  
                  -Net
                      amount
                      recognized
                  Ps.
                  25,631
                  
                  Ps.
                  44,626
  At
            2005 and 2006 fiscal year end, the
            additional employee retirement liability (net actual obligation over
            net
            projected obligation) exceeded the limit amount for recording an intangible
            asset as an offsetting entry. The intangible asset is recorded up to
            the
            algebraic sum of the unrecognized net transition obligation plus prior
            services
            and amendments of plan. Therefore, the excess of additional employee
            retirement
            liability over the intangible asset was recognized in stockholders ́s equity as a
            debit item in the amount of Ps. 29,456 (Ps.28,309 historical Mexican
            pesos) and
            Ps. 27,059, respectively.
  F-15
  k)           Income
            tax and employee profit sharing
 
 i)           The
            Group records the provision for both income tax and employee profit sharing
            based on the amount payable determined based on taxable income that is
            obtained
            as provided for in the applicable provisions in effect.
 
 ii)           The
            deferred income tax effect is determined by applying the “comprehensive asset
            and liability method” in accordance with Mexican 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.
 
 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, 2004, 2005 and 2006, the Group determined that
            there
            was no valuation allowance to be recognized.
 
 iii)          The
            Group prepares its income tax return and asset tax return on a consolidated
            basis. The Group’s consolidated subsidiaries meet the characteristics set forth
            in the Income Tax Law for controlled companies. The Group recognizes
            the impact
            of the eliminations that should be recorded for accounting and tax consolidation
            purposes. Consequently, the Group’s consolidated financial statements reflect
            the amount of the provision for income tax of the Company and that of
            its
            consolidated subsidiaries, adjusted for the impact of
            consolidation.
 
 l)           Foreign
            currency transactions
 
 Foreign
            currency denominated 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 comprehensive cost of financing.
 
 m)        Comprehensive
            income
 
 Comprehensive
            income consists of the net income
            for the period, plus (less) other results (i.e. deficit on restatement)
            for the
            same period reflected in the stockholders’ equity pursuant to specific
            accounting 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.
 
 o)         Revenue
            recognition
 
 Revenues
            are recognized in the period on which
            risks and benefits are transferred to customers, which generally coincides
            with:
            (i) persuasive evidence that an arrangement exists, (ii) delivery has
            occurred
            to the satisfaction of customer’s orders, (iii) the seller’s price to the
            customer is fixed or determinable, and (iv) the collection is reasonably
            assured.
   F-16
   **4.          Receivables:**
  **2005**
                      
                      **2006**Trade
                          receivables
                      
                      Ps.
                      
                      4,267,565
                      
                      
                      
                      Ps.
                      
                      4,410,165Allowance
                          for
                          doubtful accounts
                      
                      
                      
                      (363,013
                      )
                      
                      
                      
                      
                      (348,366
                      )3,904,552
                      
                      
                      
                      
                      
                      4,061,799Other
                          receivables
                      
                      
                      
                      69,209
                      
                      
                      
                      
                      
                      77,040Related
                          parties
                      
                      
                      
                      4,027
                      
                      
                      
                      
                      
                      29,720Value
                          added
                          tax recoverable
                      
                      
                      
                      63,526
                      
                      
                      
                      
                      
                      92,867Income
                          tax
                          recoverable
                      
                      
                      
                      269,751
                      
                      
                      
                      
                      
                      167,254Asset
                          tax
                          recoverable
                      
                      
                      
                      19,384
                      
                      
                      
                      
                      
                      5,059Ps.
                      
                      4,330,449
                      
                      
                      
                      Ps.
                      
                      4,433,739
  
 **5.          Inventories:**
 **2005**
                        
                        **2006**Pharmaceutical
                              products
                        
                        Ps.
                        
                        2,515,049
                        
                        
                        
                        Ps.
                        
                        2,634,948Beauty
                              care
                              products
                        
                        
                        
                        317,902
                        
                        
                        
                        
                        
                        328,821Books
                            and
                            magazines
                        
                        
                        
                        228,549
                        
                        
                        
                        
                        
                        263,436Electric
                              appliances
                        
                        
                        
                        3,380
                        
                        
                        
                        
                        
                        3,248Groceries
                        
                        
                        
                        99,816
                        
                        
                        
                        
                        
                        70,551Other
                        
                        
                        
                        12,672
                        
                        
                        
                        
                        
                        11,8693,177,368
                        
                        
                        
                        
                        
                        3,312,873Estimate
                              for
                              slow-moving inventory
                        
                        
                        
                        (7,307
                        )
                        
                        
                        
                        
                        (7,017
                        )3,170,061
                        
                        
                        
                        
                        
                        3,305,856Merchandise-in-transit
                        
                        
                        
                        565,560
                        
                        
                        
                        
                        
                        517,379Ps.
                        
                        3,735,621
                        
                        
                        
                        Ps.
                        
                        3,823,235
 Merchandise-in-transit
            represents
            pharmaceutical products for which title and risk of loss has been transferred
            to
            the Group.
  **6.         Property
            and equipment:**
 
 **2005**
                  
                  **2006****Total**
                  
                  
                  **Original
                      cost**
                  
                  
                  **Restatement**
                  
                  
                  **Total**Buildings
                  
                  
                  Ps.
                  876,692
                  
                  Ps.
                  282,846
                  
                  Ps.
                  627,310
                  
                  Ps.
                  910,156Machinery
                      and
                      equipment
                  
                  
                  
                  98,635
                  
                  
                  41,086
                  
                  
                  58,559
                  
                  
                  99,645Transportation
                      equipment
                  
                  
                  
                  271,704
                  
                  
                  197,618
                  
                  
                  94,408
                  
                  
                  292,026Office
                      equipment
                  
                  
                  
                  150,597
                  
                  
                  46,232
                  
                  
                  103,468
                  
                  
                  149,700Computer
                      equipment
                  
                  
                  
                  320,074
                  
                  
                  180,510
                  
                  
                  165,549
                  
                  
                  346,0591,717,702
                  
                  
                  748,292
                  
                  
                  1,049,294
                  
                  
                  1,797,586Less-accumulated
                      depreciation
                  
                  
                  
                  (941,710)
                  
                  
                  (335,530)
                  
                  
                  (647,075)
                  
                  
                  (982,605)775,992
                  
                  
                  412,762
                  
                  
                  402,219
                  
                  
                  814,981Land
                  
                  
                  
                  332,441
                  
                  
                  65,130
                  
                  
                  274,720
                  
                  
                  339,850Ps.
                  1,108,433
                  
                  Ps.
                  477,892
                  
                  Ps.
                  676,939
                  
                  Ps.
                  1,154,831
   F-17
 
 As
            of December 31, 2005 and 2006, the net
            restated value of the property and equipment of the subsidiary Drogueros,
            that
            is included in the foregoing summary amounted to Ps. 117,792 and Ps.
            144,993,
            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 2005
            and 2006 were as follows:
 
 Buildings
                      and
                      improvements
                  2.10%Machinery
                      and
                      equipment
                  6.09%Transportation
                      equipment
                  10.15%Furniture
                      and
                      fixtures
                  6.50%Computer
                      equipment
                  11.15%
 
 
 **7.         Related
            party balances and transactions:**
 
 As
            of December 31, 2005 and 2006, the
            receivable balances from related parties were as follows:
 
 **2005**
                  **2006**Aeroxtra,
                      S.A. de C.V.
                  Ps.  2,081
                  Ps.  2,000Xtra
                      Inmuebles, S.A. de C.V.
                  1,946
                  2,028La
                      Nueva
                      Leona, S.A. de C.V.
                  -
                  13,325Other
                  -
                  12,367Ps.  4,027
                  Ps.  29,720
 
 The
            related parties
            referred to above consider common stockholders among them.
  At
            2005 year end,
            the receivable balances from Aeroxtra and Xtra Immuebles represented
            prepaid
            flight services and leasing of real property, respectively. During 2005,
            amounts
            paid to these related parties were expensed in the amounts of Ps. 11,826
            and Ps.
            4,986, respectively. At 2006 year end, amounts paid to those related
            parties
            were expensed in the amounts of Ps. 10,480 and Ps. 4,792,
            respectively.
 
 At
            2006 year end,
            the receivable balances from other related parties represented various
            transactions. During this year, the amount of transactions agreed upon
            amounted
            to Ps. 30,283. The receivable balances from La Nueva Leona, S.A. de C.V.
            represented a financing that bear interest at market rate.
 
 During
            2005 and
            2006, the Group had no other material related party agreements. The Group's
            management estimates that all related party transactions were agreed
            upon on an
            arm's length basis.
 
 
 **8.         Bank
            loans:**
 
 During
            the years
            ended December 31, 2005 and 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. Interests
            are
            included in income as a component of comprehensive cost of 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. 16,427. Applicable interest rates are
            adjusted
            monthly, in accordance with market rates in effect.
   F-18
 
 **9.         Deferred
            income tax and employee profit sharing:**
 
 As
            of December 31, 2005 and 2006, the deferred
            income tax liability was as follows:
  **2005**
                          
                          **2006**Cumulative
                                  inventory
                          
                          Ps.
                          
                          3,182,348
                          
                          
                          
                          Ps.
                          
                          2,562,326Allowance
                                  for
                                  doubfoul accounts and
                                estimate
                                  for
                                  slow-moving inventory
                          
                          
                          
                          (350,843
                          )
                          
                          
                          
                          
                          (337,176
                          )Property
                                and
                                equipment
                          
                          
                          
                          476,151
                          
                          
                          
                          
                          
                          492,824Other
                          
                          
                          
                          377,409
                          
                          
                          
                          
                          
                          395,496Excess
                                  of
                                  accounting over tax values of
                                assets
                                  and
                                  liabilities
                          
                          
                          
                          3,685,065
                          
                          
                          
                          
                          
                          3,113,470Tax
                                  loss
                                  carryforwards
                          
                          
                          
                          (11,862
                          )
                          
                          
                          
                          
                          (11,467
                          )Controlled
                                subsidiaries ́s tax loss
                              carryforwards
                                generated before they
                              were
                                incorporated to consolidation tax
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (305,588
                          )3,673,203
                          
                          
                          
                          
                          
                          2,796,415Income
                              tax
                              rate
                          
                          
                          
                          28%
                          
                          
                          
                          
                          
                          28%Deferred
                                income tax
                          
                          
                          
                          1,028,497
                          
                          
                          
                          
                          
                          782,996Less-Asset
                              tax
                              recoverable
                          
                          
                          
                          (122,492
                          )
                          
                          
                          
                          
                          (62,817
                          )Deferred
                              income tax liability
                          
                          Ps.
                          
                          906,005
                          
                          
                          
                          Ps.
                          
                          720,179
 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.
            This provision of Mexican FRS 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.
 
 As
            of December 31,
            2004, 2005 and 2006, the provision for deferred income tax applied to
            income
            amounted to Ps. 153,135, Ps. 92,022 and Ps. (64,840), respectively; whereas
            the
            provision for deferred employee profit sharing amounted to Ps. 8,513,
            Ps.
            (5,232) and Ps. 993, in the same years.
 
 
 **10.       Foreign
            currency position:**
 
 As
            of December 31, 2005 and 2006, assets and
            liabilities denominated in U.S. dollars were as follows:
 
 **2005**
                  
                  **2006**Current
                      assets
                  
                  $  10,122
                  
                  $  3,094Current
                      liabilities
                  
                  4,928
                  
                  3,529Net
                      position
                      in U.S. dollars
                  
                  $  5,194
                  
                  $  (435)Net
                      position
                      (at fiscal year end constant Mexican pesos)
                  
                  Ps.  55,640
                  
                  Ps.  (4,733)
   F-19
 
 As
            of December 31, 2005 and 2006, the Group
            valued its U.S. dollars denominated assets and liabilities at the fiscal
            year
            end exchange rate of Ps. 10.7109 (pesos) per dollar, and Ps. 10.8755
            (pesos) per
            dollar, respectively, published by the Central Bank of Mexico in the
            Official
            Daily Gazette.
 
 As
            of February 28, 2007, issue date of the
            accompanying financial statements, the consolidated net U.S. dollar position
            was
            similar to that of December 31, 2006 and the exchange rate was Ps. 11.1493
            (pesos) per dollar.
 
 
 **11.        Stockholders’
            equity:**
 
 Capital
            structure
 
 As
            of December 31, 2005 and 2006, paid-in
            capital stock was as follows:
 
 **Number
                      of shares**
                  
                  **Par
                      value****2005**
                  
                  **2006**Fixed
                      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.  1,083,052
                  
                  Ps.
                      1,083,052
 
 
 As
            of December 31,
            2005 and 2006, 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)). Up to December 31, 2005, variable capital stock may
            not exceed
            ten times the amount of fixed capital stock.
 
 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.
 
 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. The amount of
            the
            reserve for own share repurchases is appropriated from retained earnings.
            At
            2005 and 2006 year end, the Stockholders’ Meeting resolved to maintain the same
            level of the reserve approved by its similar on April 22, 2003. During
            2005 and
            2006, the stockholders resolved not to agree a specific number of shares
            and
            peso amount for repurchase of 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, 2005 and 2006, the Company’s legal
            reserve amounted to Ps. 62,001 and Ps. 99,888, respectively, which is
            included
            in the line item "Retained earnings".
   F-20
 
 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
            40.9% in
            fiscal 2006 (42.9% in fiscal 2005) 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 2005, and 2006, the consolidated balance of CUFIN amounted
            to Ps.
            342,523 (Ps. 329,180 historical Mexican pesos) and Ps.1,020,992,
            respectively.
 
 In
            April 2005 and
            2006, dividends were declared at the Company’s Stockholders’ Meetings in the
            amounts of Ps. 127,561 and Ps. 154,512, respectively (Ps. 120,000 and
            Ps.
            150,000 historical Mexican pesos), of retained earnings. Dividends paid
            in 2005
            were paid out of the consolidated CUFIN up to the amount of Ps. 102,798
            historical Mexican pesos. The remaining balance amounting to Ps. 17,202
            was
            subject to income tax amounting Ps. 7,671 (Ps. 7,372 historical Mexican
            pesos)
            that was applied to retained earnings. Dividends paid in 2006 did not
            exceed the
            consolidated balance of CUFIN at that date. Therefore, no income tax
            was
            due.
 
 The
            excess of capital reimbursement per share
            paid to stockholders over the balance of the consolidated "Restated contributed
            capital per share account" should be treated as a distributed dividend.
            The
            excess will be assessable as provided for in the Income Tax Law. The
            resulting
            income tax may be offset as referred to above. Restated contributed capital
            per
            share account is determined in accordance with currently enacted tax
            legislation.
 
 Dividends
            among companies of the
            Group
 
 Dividends
            distributed among 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 consolidates. During 2005 and
            2006, no
            corporate changes of that nature occurred in the Group.
 
 At
            the annual
            stockholders’ meetings held on April 1, 2005, the stockholders of Casa Saba
            declared the payment of dividends in the amount of Ps. 120,120 (Ps. 113,000
            historical Mexican pesos), of the retained earnigs. This payment was
            made out of
            the CUFIN of Casa Saba.
 
 
 **12.       Tax
            system:**
 
 a)         Consolidated
            income tax due
 
 i)          The
            annual income tax rate is 30% and 29% in 2005 and 2006, respectively,
            in
            conformity with currently enacted tax legislation (33% in fiscal
            2004).
 
 The
            Group
            determines the amount of income and asset taxes on a consolidated basis.
            For
            this purpose, effective fiscal 2005, the Company (Holding Company) includes
            the
            amount of “consolidating tax equity” in tax consolidation, that is, 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. Likewise, 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.
   F-21
 
 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, the Group 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. The Law allowed setting off the tax loss
            carryforwards amount at that date. Consequently, the Company offset off
            tax loss
            carryforwards in the amount of Ps. 554,351 historical Mexican pesos against
            the
            cumulative inventory value.
 
 At
            2005 and 2006
            fiscal year end, the cumulative inventory amount added to the taxable
            income for
            income tax purposes amounted to Ps. 134,364 (Ps. 129,130 historical Mexican
            pesos) and Ps. 481,564, 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 annual income and
            asset taxes
            separately from the Group under a special tax regime known as the
“administrative facilities”. This regime grants certain benefits regarding
            ascertainment of disbursements made by Marproa and other 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 of prior year, and the cumulative inventory effect
            of the
            year.
 
 At
            2005 and 2006
            year end, the Group generated consolidated taxable income for income
            tax in the
            amount of Ps. 1,067,139 (Ps. 1,025,570 historical Mexican pesos) and
            Ps.
            1,210,948, respectively. At 2005 year end, income tax due was partially
            offset
            by the remaining of consolidated tax loss carryforwards in the amount
            of Ps.
            653,260 (Ps. 627,813 historical Mexican pesos). The income tax effect
            offset
            amounted to Ps.195,978 (Ps. 188,344 historical Mexican pesos). The effect
            of the
            offset discussed is shown in the accompanying income statement.
 
 b)           Consolidated
            asset tax due
 
 Consolidated
            asset
            tax due is determined by applying a 1.8% annual tax rate to the restated
            average
            value of the assets less the average face value of certain debts (net
            lending
            position). The consolidated net Group ́s lending position is determined by
            considering both 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. In addition, effective 2005, the amount of
            debts with
            the financial system and nonresidents are deductible from the taxable
            basis of
            asset tax.
 
 Asset
            tax is only
            paid on the amount of 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. Further,
            income tax
            paid in excess of asset tax due may be credited for the immediately foregoing
            three years, under certain circumstances. In fiscal 2005 and 2006, there
            was no
            asset tax payable. In fiscal 2006, the Group made a recovery of asset
            tax paid
            in prior years in the amount of Ps. 59,026. This effect is shown in the
            accompanying income statement.
 
 Effective
            January
            1, 2007, asset tax is determined by applying a 1.25% annual rate on the
            restated
            average value of assets. In addition, the new provision of the Asset
            Tax Law
            does not permit reducing the value of debts contracted by taxpayers from
            the
            taxable basis in connection with asset tax. Through December 31, 2006,
            the
            annual rate was 1.8%, and the Asset Tax Law permitted reducing the average
            face
            value of certain debts to determine the taxable basis in connection with
            that
            asset tax.
 
 c)         Tax
            loss carryforwards and recoverable asset tax
 
 i)          Tax
            loss carryforwards can be offset against taxable income that may be generated
            in
            the future over a ten year term. Tax loss carryforwards can be restated
            based on
            the NCPI factor from the date incurred up to the sixth month of the year
            when
            they can be offset against taxable income. As discussed in paragraph
            a) above,
            prior year consolidated tax loss carryforwards were fully offset in the
            amount
            of Ps. 653,260 in fiscal 2005. Further, asset tax recoverable can be
            restated
            from the date on which the recoverable balance is generated up to the
            date when
            that balance is recovered.
   F-22
 
 As
            of December 31, 2006, the consolidated asset
            tax recoverable was as follows:
 
 Year
                  
                  Asset
                      taxIncurred
                  
                  Recoverable2002
                  
                  Ps.
                            
                      6,9512003
                  
                  33,3382004
                  
                  22,528Ps.   
                        62,817
 
 ii)         The
            Holding Company had incurred individual tax loss carryforwards derived
            from the
            sale of stock in the amount of Ps. 352,997 historical Mexican pesos,
            dating back
            to fiscal 2001. This tax loss carryforwards expired in fiscal 2006, pursuant
            to
            currently enacted tax legislation. The foregoing neither had impact on
            the
            Holding Company nor the Group ́s consolidated financial statements.
 
 iii)         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****2004**
                  
                  **2005**
                  
                  **2006****Statutory
                      income tax rate**
                  
                  **33%**
                  
                  **30%**
                  
                  **29%****Permanent
                      differences:**Comprehensive
                      cost of financing vs.annual
                      inflationary adjustment
                  
                  15
                  
                  1
                  
                  1Non-deductible
                      items
                  
                  (35)
                  
                  (3)
                  
                  (1)Cumulative
                      inventory
                  
                  
                  
                  (4)
                  
                  (12)Other
                  
                  
                  
                  
                  
                  8.9**Temporary
                      differences:**Depreciation
                  
                  9
                  
                  1
                  
                  1Book
                      cost of
                      sales vs. purchases,labor
                      and
                      overhead
                  
                  225Application
                      of prior year tax lossCarryforwards
                  
                  (226.1)
                  
                  (2.8)
                  
                  (1)20.9%
                  
                  22.2%
                  
                  25.9%
 
  F-23
   In
            fiscal 2004, 2005 and 2006, the Group
            generated consolidated taxable income for income tax purposes in the
            amounts of
            Ps. 120,743, Ps. 1,067,139 and Ps. 1,210,948, respectively (Ps. 112,300,
            Ps.1,025,570 and Ps. 1,210,948 historical Mexican pesos, respectively).
            At
            fiscal 2004 and 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. 39,848 and Ps. 195,978, respectively. That effect is shown in the
            accompanying statement of income.
 
 
 **13.       Segment
            information:**
 
 Although
            the Group
            distributes five product lines, it considers all of its operations, and
            reports
            the results of all of its operations to management as a single business
            segment
            as discussed in Note 1).
 
 As
            of December 31, 2004, 2005 and 2006, revenue
            attributable to each product lines, were as follows:
 
 **Millions
                      of Mexican pesos****2004**
                  
                  **2005**
                  
                  **2006**Pharmaceutical
                      products
                  Ps.
                  19,142
                  
                  Ps.
                  19,704
                  
                  Ps.
                  20,578Health
                      and
                      beauty aids/other products
                  
                  2,024
                  
                  
                  2,003
                  
                  
                  1,923Entertainment
                      products
                  
                  767
                  
                  
                  827
                  
                  
                  871Food/non-perishable
                      products
                  
                  183
                  
                  
                  221
                  
                  
                  227Office/electronic
                      products
                  
                  2
                  
                  
                  5Total
                  Ps.
                  22,118
                  
                  Ps.
                  22,760
                  
                  Ps.
                  23,599
 
 
 **14.       Contingencies
            and Commitments:**
 
 a)         On
            June 24, 2004, the Tax Administration System (SAT-Spanish acronym) determined
            an
            income tax liability payable by Casa Saba due to it offsets tax loss
            carryforwards in amount in excess for fiscal 1995, in opinion of SAT.
            At the
            date of the auditors’ report, the expert appointed by the SAT had not issued the
            relevant opinion. The Casa Saba’s tax advisors believe that there are reasonable
            elements for a ruling to be issued in favor of Casa Saba. Accordingly,
            Management believes that there are no elements to quantify and recognize
            the
            probable disbursement of economic resources regarding this contingency,
            in
            conformity with Mexican FRS.
 
 b)         In
            February 2005, the Group filed an appeal for constitutional relief (amparo)
            with
            the Federal Tax Court against the tax amendment that binds taxpayers,
            effective
            January 1, 2005, to adopt 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 (Note 12 a). To date the Federal Tax Court has yet to issue
            a
            ruling in this matter.
 
 c)         In
            May 2006, the subsidiary Servicios Administrativos Xtra, S. A. de C.
            V. (now
            Servicios Administrativos Grupo Casa Saba, S. A. de C. V.) filed an appeal
            for
            constitutional relief (amparo) with the Federal Tax Court against the
            provision
            of the Income Tax Law enacted in 2002. This provision limits setting
            off period
            of tax losses generated on the sale of stock against taxable income
            that may be generated in the future. To date the Federal Tax Court has yet
            to issue a ruling in this matter.
 
 d)         In
            February 2007, the Group filed an appeal for constitutional relief (amparo)
            with
            the Federal Tax Court against the tax amendment that binds taxpayers,
            effective
            January 1, 2007, to determine asset tax by applying a 1.25% annual rate
            to the
            restated average value of assets and the new provision that does not
            permit
            reducing the value of debts contracted by taxpayers from the taxable
            basis in
            connection with this asset tax (Note 12 b). To date the Federal Tax Court
            has
            yet to issue a ruling in this matter.
  Management
            estimates that the matters discussed
            in paragraphs b), c), and d) above do not represent contingencies payable
            by the
            Group that would require a disbursement of economic resources in the
            future.
 F-24
  e)          The
              Group is involved in various lawsuits and claims derived from the normal
              course
              of its operations. Management believes that such matters will not have
              a
              significant impact on the Group ́s consolidated financial position and operating
              income.
 
 f)           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.
   **15.       New
            accounting pronouncements:**
 
 i)          Research
            and Development Board of Financial Information Standards (CINIF-Spanish
            acronym)
 
 Effective
            June
            2004, the CINIF replaced the Accounting Principles Board (APB) of the
            IMCP in
            the duty of developing and issuing financial reporting standards (Mexican
            FRS),
            and reaching their convergence with International Financial Reporting
            Standards
            (Note 2).
 
 For
            this purpose,
            the CINIF rename from Mexican GAAP to Mexican FRS. CINIF established
            a
            conceptual framework to develop additional FRS that solves matters arising
            from
            accounting practices. The conceptual framework is formed by eight Series
            A FRS.
            These FRS, along with FRS B-1, both effective January 1, 2006, superseded
            some
            bulletins of Mexican GAAP. Accordingly, Mexican FRS was integrated as
            follows:
 
 ●
                  Bulletins
                      issued under the new duty and its Interpretations●
                  APB
                      Bulletins
                      transferred to the CINIF on May 31, 2004 that would not have
                      been amended,
                      substituted, or repealed by the new Mexican FRS; and●
                  International
                      FRS applicable to Mexican FRS
                      suppletorily
 
 The
            most
            significant change applies to FRS B-1, “Accounting changes and correction of
            errors”. This standard sets forth that changes in particular standards,
            reclassifications, and corrections of errors should be recognized
            retrospectively. Therefore, the financial statements affected by the
            change
            presented on a comparative basis with the current year should be adjusted
            from
            the beginning of the oldest period presented comparatively.
 
 Adoption
            of these provisions had no significant
            effect on the Group ́s consolidated financial position and operating
            income.
 
 ii)         Recently
            issued accounting pronouncements
 
 In
            December 2006, the CINIF issued the
            following Mexican FRS, effective January 1, 2007:
 
 FRS
            B-3, “Income
            statement”. This standard requires income, costs and expenses should be
            classified as ordinary and unordinary (nonrecurrent). The income statement
            should show ordinary items first and identify the main levels of income/loss
            (before taxes, before discontinued operations, and net income/loss).
            Costs and
            expenses should be classified based on their function, nature or combination
            of
            both. Special items set in some Mexican FRS should be classified as ordinary
            in
            the caption “Other income and expenses”, whereas extraordinary items should be
            classified as unordinary items. Employee Profit Sharing should be shown
            as an
            ordinary expense in the caption “Other income and expenses”. Moreover, the
            caption “accumulated effect of accounting changes at beginning of year” is
            eliminated since any effect due to the change should be shown in retained
            earnings. Adoption of this Mexican FRS will have no significant effect
            on the
            Group ́s consolidated financial position and operating income.
 
 FRS
            B-13, “Events subsequent to the date of the
            financial statements”. This standard requires that subsequent events derived
            from nonperforming portfolio and due dates of liabilities restructurings,
            as
            well as agreements to defer payments of liabilities should be recognized
            in the
            financial statements when entered into. These events are only disclosed
            in the
            notes to the financial statements. Financial statements should not be
            prepared
            on a going concern basis if subsequent events indicate that this base
            is not
            applicable. In addition, the Group should disclose the authorized issue
            date of
            the financial statements and the name of the officers or governing body
            with
            power to do so. Adoption of this Mexican FRS will have no significant
            effect on
            the Group ́s consolidated financial statements.
   F-25
 
 FRS
            C-13, “Related parties”. This standard
            expands the concept of related parties and includes: a) the joint venture
            that
            the Group participates in; b) close relatives of stockholders, members
            of the
            board of directors, and key management personnel; and c) remuneration
            plan fund
            for employee benefits. This standard requires disclosing if considerations
            among
            related parties are equivalent to considerations of similar transactions
            carried
            out with other independent parties, and in the case of public companies,
            the
            amount of benefits granted to key management personnel (direct short
            and
            long-term benefits, payments based on shares, and postretirement benefits).
            The
            prior year comparative financial statements should be adjusted retrospectively
            to disclose this provision in their applicable notes. Adoptions of this
            Mexican
            FRS had no significant effect on the Group ́s consolidated financial
            statements.
 
 FRS
            D-6,
“Capitalization of the comprehensive gain or loss on financing”. This standard
            sets forth that the comprehensive gain or loss on financing (RIF-Spanish
            acronym) attributable to qualifying assets should be capitalized as
            follows:
 
 ●
                  The
                      value of
                      the qualifying asset that is capitalized by the RIF should
                      not exceed the
                      future economic benefit of the asset.●
                  The
                      yield on
                      temporary investments (marketable securities) made while waiting
                      to
                      acquire qualifying  assets does not form part of the capitalized
                      RIF, in the event of financing in local currency.●
                  Losses
                      and
                      gains on financing should be considered net of the valuation
                      of financial
                      hedging  instruments associated to financing, in the event of
                      financing in foreign currency.●
                  The
                      specific
                      indexation sets forth in Bulletin B-10 issued by CINIF is not
                      admissible
                      in the period of capitalizing the RIF.●
                  The
                      Holding
                      Company of investments in unconsolidated associated or subsidiary
                      companies should not recognize the capitalization of the RIF
                      on those
                      investments.
 
 Capitalization
            starts at the time when activities for preparing the asset for use or
            sale are
            carried out, the investment to acquire the asset has started and interest
            is
            accrued. Capitalization ends at the time when financing is liquidated.
            The
            option of applying this standard for assets in the process of being acquired
            in
            prior periods to the effectiveness of FRS should be recognized as an
            accounting
            change, in accordance with FRS B-1 “Accounting changes and corrections of
            errors”. At 2006 year end, the Group had not acquired qualifying assets in those
            circumstances. However, that does not mean that the Group can not be
            made in the
            future such acquisitions.
 
 **16.       
            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 17). This partial reconciliation to U.S. GAAP does
            not
            include the reversal of the restatement of the financial statements to
            recognize
            the impact of inflation, as required under Mexican FRS, Bulletin B-10,
            as
            amended. The application of Bulletin B-10 represents a comprehensive
            measure of
            the impact of price-level changes in the inflationary Mexican economy
            and, as
            such, is considered a more meaningful presentation than historical cost-based
            financial reporting for both Mexican and U.S. accounting purposes.
 
 Other
            than
            inflation accounting, the principal differences between Mexican 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
 
 Under
            Mexican FRS,
            the Group prepares the consolidated statements of changes in financial
            position
            in accordance with Bulletin B-12, "Statement of Changes in Financial
            Position".
            Bulletin B-12 specifies the appropriate presentation of this statement
            when the
            financial statements have been restated to constant Mexican pesos in
            accordance
            with the Third Amendment to Bulletin B-10. Bulletin B-12 identifies the
            generation and application of resources representing differences between
            beginning and ending balance sheets in constant Mexican pesos, excluding
            the
            effect of the line item "Deficit on restatement". The Bulletin also requires
            treating monetary gains and losses and unrealized gains and losses on
            foreign
            currency transactions as cash items in the determination of net cash
            provided by
            operating activities. Consequently, the changes included in this financial
            statement constitute cash flow activity stated in constant Mexican pesos.
            Under
            Mexican 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-26
 
 Under
            Statement of Financial Accounting
            Standard No. 95, "Statement of Cash Flows" (SFAS 95), a statement of
            cash flows
            that presents only cash movement and excludes non-cash items is required.
            SFAS
            95 does not provide guidance on inflation-adjusted statements of changes
            in
            financial position. If the gain (loss) on monetary position were treated
            as a
            component of financing activities, resources provided by operating activities
            would be Ps. 1,115,366, Ps. 509,256 and Ps. 324,721 and net cash used
            in
            financing activities would be Ps. (655,126), Ps. (180,330) and Ps. (276,463)
            in
            2004, 2005 and 2006, respectively.
 
 b)         Deferred
            income tax and employee profit sharing
 
 i)          The
            Group adopted SFAS No. 109, "Accounting for income taxes" (SFAS 109)
            for U.S.
            GAAP reconciliation purposes. SFAS 109 determines the deferred income
            tax effect
            by applying the "Comprehensive asset and liability method." As described
            in Note
            12b), Mexican Income Tax Law requires paying a 1.8% annual tax rate (1.25%
            annual tax rate, effective 2007) on the Group’s net assets which may be used to
            offset income tax obligations. Under SFAS 109, such an amount should
            be treated
            as a deferred income tax benefit and reduced by a valuation allowance,
            if
            required.
 
 Moreover,
            for U.S.
            GAAP purposes, all of the changes in the required deferred income tax
            effect
            during the year are allocated in the income statement, except for the
            deferred
            income tax effect derived from temporary differences attributable to
            changes in
            other stockholders’ equity accounts. In that event, such an effect is applied
            directly to the specific stockholders’ equity accounts that generate such
            changes.
 
 The
            foregoing provisions are virtually
            identical to Mexican FRS, except that the recognition of the accumulated
            initial
            effect of the comprehensive asset and liability method as of January
            1, 2000 was
            recorded directly to stockholders’ equity for FRS Mexican purposes.
 
 ii)          Under
            Mexican FRS, the impact of inflation on the deferred income tax balance
            generated by monetary items is recognized in the gain (loss) on monetary
            position. Under U.S. GAAP, the deferred income tax balance is classified
            as a
            non-monetary item. As a result, the income statement differs with respect
            to 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
            non-current, based on the classification of the asset and liability items
            that
            give rise to it. As of December 31, 2005 and 2006, the deferred income
            tax
            effect under Mexican FRS and U.S. GAAP was classified as follows:
 
 
 **CONSTANT
                      MEXICAN PESOS****MEXICAN
                      GAAP**
                  
                  **U.S.
                      GAAP****2005**
                  
                  **2006**
                  
                  **2005**
                  
                  **2006**Current
                  
                  Ps.
                  –
                  
                  Ps.
                  –
                  
                  Ps.
                  898,495
                  
                  Ps.
                  (46,487)Noncurrent
                  
                  
                  906,005
                  
                  
                  720,179
                  
                  
                  7,510
                  
                  
                  766,666Ps.
                  906,005
                  
                  Ps.
                  720,179
                  
                  Ps.
                  906,005
                  
                  Ps.
                  720,179
 
 
 iv)           The
            Group’s consolidated subsidiaries that have personnel are obligated to pay
            profit sharing to their employees. Profit sharing is calculated by applying
            a
            10% annual rate to taxable income determined for each subsidiary as provided
            for
            in the Income Tax Law, as explained in Note 12d). Therefore, employee
            profit
            sharing is subject to the future consequences of temporary differences
            in the
            same manner as income tax.
   F-27
 
 For
            U.S. GAAP purposes, a deferred profit
            sharing expense and liability have been calculated. Therefore, in fiscal
            years
            2004, 2005 and 2006, the deferred employee profit sharing amounted to
            Ps. 8,513,
            Ps. (5,232) and Ps. 993, respectively. Employee profit sharing is classified
            as
            an operating expense for U.S. GAAP purposes. 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 liability as
            of December
            31, 2004, 2005 and 2006, were as follows:
  **DEFERRED
                      EMPLOYEE PROFIT SHARING****CONSTANT
                      MEXICAN PESOS****2004**
                  
                  **2005**
                  
                  **2006**CurrentInventories
                  
                  Ps.
                  29,606
                  
                  Ps.
                  
                  
                  Ps.Cumulative
                      inventory
                  
                  
                  
                  
                  
                  8,940Non-deductible
                      reserves
                  
                  
                  
                  
                  
                  (6,014)
                  
                  
                  (170)29,606
                  
                  
                  2,926
                  
                  
                  (170)Non-currentCumulative
                      inventory
                  
                  
                  
                  
                  
                  
                  
                  
                  3,780Property
                      and
                      equipment
                  
                  
                  
                  
                  
                  79
                  
                  
                  272Other
                  
                  
                  (21,093)(21,093)
                  
                  
                  79
                  
                  
                  4,052Ps.
                  8,513
                  
                  Ps.
                  3,005
                  
                  Ps.
                  3,882
  c)         Additional
            employee retirement liability and unrecognized net transition
            obligation
 
 At
            2005 and 2006
            fiscal year end, the additional employee retirement liability exceeded
            the limit
            amount for recording an intangible asset as an offsetting entry. Under
            Mexican
            FRS, the intangible asset is recorded up to the algebraic sum of the
            unrecognized net transition obligation plus prior services and amendments
            of
            plan. Therefore, the excess of additional employee retirement liability
            over the
            intangible asset was recognized in stockholders ́s equity as a debit item in the
            amount of Ps. 29,456 and Ps. 27,059.
 
 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 also requires additional disclosures in the notes
            to
            financial statements. SFAS 158 is effective for fiscal years ending after
            December15, 2006 for employers with publicly traded equity securities.
            Consequently, the intangible asset in the amount of Ps. 27,059 recorded
            for
            Mexican FRS purposes should be recorded as other comprehensive income
            for U.S.
            GAAP purposes.
 
 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. Up to December 31, 2004, these severance
            benefits
            were expensed when paid. Under U.S. GAAP this effect was included in
            income in
            2005 fiscal year. Therefore a reconciliation line item is shown in Note
            17).
   F-28
  **17.       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 share****NET
                      INCOME**
                  
                  
                  
                  **Convenience****Year**
                  
                  **translation****2004**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006**Net
                      income
                      under Me-xican
                      FRS
                  
                  Ps.
                  697,630
                  
                  Ps.
                  757,742
                  
                  Ps.
                  883,356
                  
                  $
                  81,704Additional
                      employee retirementliability
                      (Note 3.j)
                  
                  
                  
                  
                  
                  (29,456)
                  
                  
                  29,456
                  
                  
                  2,724Unrecognized
                      net transitionobligation
                      (Note 3.j)
                  
                  
                  
                  
                  
                  (4,268)
                  
                  
                  4,268
                  
                  
                  395(33,724)
                  
                  
                  33,724
                  
                  
                  3,119Net
                      income
                      under U.S. GAAP
                  
                  Ps.
                  697,630
                  
                  Ps.
                  724,018
                  
                  Ps.
                  917,080
                  
                  $
                  84,823Weighted
                      average commonshares
                      outstanding (thousands)
                  
                  
                  265,419
                  
                  
                  265,419
                  
                  
                  265,419Basic
                      and
                      diluted earnings pershare
                      under
                      U.S. GAAP
                  
                  Ps.
                  2.63
                  
                  Ps.
                  2.73
                  
                  Ps.
                  3.34
 
 Because
            Mexican GAAP requires use of a
            comprehensive method for recognizing the impact of inflation and because
            the
            financial statements are prepared on this basis, the applicable impact
            of
            inflation on U.S. adjustments was calculated and included in the heading
“impact
            of inflation accounting on U.S. GAAP adjustments.”
 
 **STOCKHOLDERS’
                      EQUITY**
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  **Convenience****translation****2004**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006**Stockholders’
                      equity underMexican
                      FRS
                  Ps.
                  4,336,396
                  
                  Ps.
                  4,801,312
                  
                  Ps.
                  5,343,165
                  
                  $
                  494,207Additional
                      employee retirementliability
                  
                  
                  
                  
                  (29,456)Unrecognized
                      net transitionObligation
                  
                  
                  
                  
                  (4,268)Amortization
                      of goodwill
                  
                  25,952
                  
                  
                  25,952
                  
                  
                  25,952
                  
                  
                  2,39725,952
                  
                  
                  (7,772)
                  
                  
                  25,952
                  
                  
                  2,397Stockholders’
                      equity underU.S.
                      GAAP
                  Ps.
                  4,362,348
                  
                  Ps.
                  4,793,540
                  
                  Ps.
                  5,369,117
                  
                  $
                  496,604
   F-29
 
 **Changes
                      in stockholders’ equity under U.S. GAAP**
                  
                  
                  
                  
                  
                  **Convenience****translation****2004**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006**Stockholders’
                      equity underU.S.
                      GAAP as
                      of beginning ofthe
                      year
                  Ps.
                  3,804,621
                  
                  Ps.
                  4,362,348
                  
                  Ps.
                  4,793,540
                  
                  $
                  443,368Comprehensive
                      income underU.S.
                      GAAP
                  
                  680,041
                  
                  
                  566,424
                  
                  
                  730,089
                  
                  
                  67,528Dividends
                      paid
                  
                  (122,314)
                  
                  
                  (135,232)
                  
                  
                  (154,512)
                  
                  
                  (14,292)Stockholders’
                      equity underU.S.
                      GAAP at
                      year end
                  Ps.
                  4,362,348
                  
                  Ps.
                  4,793,540
                  
                  Ps.
                  5,369,117
                  
                  $
                  496,604**Comprehensive
                      income under U.S. GAAP**
                  
                  
                  
                  
                  
                  
                  
                  **Convenience****translation****2004**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006**Net
                      income
                      under U.S.GAAP
                  Ps.
                  697,630
                  
                  Ps.
                  724,018
                  
                  Ps.
                  917,080
                  
                  $
                  84,823Deficit
                      on
                      restatement
                  
                  (17,589)
                  
                  
                  (128,138)
                  
                  
                  (189,388)
                  
                  
                  (17,517)Additional
                      employee retirementliability
                  
                  
                  
                  
                  (29,456)
                  
                  
                  2,397
                  
                  
                  222Comprehensive
                      incomeunder
                      U.S.
                      GAAP
                  Ps.
                  680,041
                  
                  Ps.
                  566,424
                  
                  Ps.
                  730,089
                  
                  $
                  67,528
 
 
 **18.       Supplementary
            U.S. GAAP disclosures:**
 
 a)         Financial
            instruments with off-balance-sheet risk
 
 Under
            the
            provisions of SFAS No. 105, "Disclosure of information about financial
            instruments with off-balance-sheet risk and financial instruments with
            concentrations of credit risk,” the Group sells its products mainly to
            distributors including supermarket chains, pharmacies and retail customers
            throughout Mexico. No single customer accounted for a significant amount
            of the
            Group’s sales in fiscal 2004, 2005 and 2006, and there were no significant
            accounts receivable from a single customer for the same years. Moreover,
            there
            is no significant concentration of a specific supplier relating to the
            purchase
            of inventories.
 
 The
            Group currently
            does not have any off-balance sheet arrangement that has or is reasonably
            likely
            to have a current or future effect on the financial statements, changes
            in
            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-30
   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 income is the amount by which the net book value
            exceeds
            its recovery value. At fiscal 2004, 2005 and 2006 year end, there were
            no
            indications that the net book value of long-lived asset may not be recoverable
            except as referred for intangible asset in Note 3h). 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 permitted 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
            their net book value or 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 2004, 2005
            and
            2006 year end, the Group had not any long-lived asset 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 through specific debt
            agreements.
 
 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, 2004, 2005 and 2006,
            is
            mentioned in Note 13).
 
 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 2004,
            2005, and
            2006 fiscal year end.
 
 h)          Recently
            Issued Accounting Pronouncements
 
 In
            June 2005, the
            FASB published SFAS No. 154, “Accounting changes and Error Corrections a
            replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No. 154),
            which changes the requirements for the accounting for and reporting of
            a change
            in accounting principle and redefines restatement as the revising of
            previously
            issued financial statement to reflect the correction of an error. SFAS
            No. 154
            requires retrospective application to prior period financial statements
            of
            changes in accounting principles, unless it is impracticable to determine
            the
            period-specific effects of the cumulative effect of the change. This
            Statement
            also carries forward without change the guidance contained in Opinion
            20 for
            reporting the correction of an error in previously issued financial statement
            and a change in accounting estimate. This statement does not change the
            transition provisions of any existing accounting pronouncement. SFAS
            No. 154 is
            effective for accounting changes and corrections of errors made in fiscal
            years
            beginning after December 15, 2005. The Group deems that adoption of these
            provisions had not impact on its consolidated results and financial
            position.
   F-31
 
 FRS
            B-1 "Accounting Changes and Error
            Corrections” issued by Mexican FRS which is similar to SFAS No. 154, is
            effective for accounting changes and corrections of errors made in fiscal
            years
            beginning after January 1, 2006.
 
 In
            September 2005, the Board ratified the
            consensus reached by the Emerging Issues Task Force (EITF) Issue No.
            04-13,
“Accounting for Purchases and Sales of Inventory with the Same Counterparty”.
            This guidance addresses the circumstances under which two or more inventory
            transactions with the same counterparty should be considered as a single
            non-monetary transaction with the scope of APB Opinion 29, “Accounting for
            Non-monetary Transactions”. The Task Force reached a consensus that non-monetary
            exchange whereby an entity transfers finished goods inventory in exchange
            for
            the receipt of raw materials or work-in-progress inventory within the
            same line
            of business is not considered as an exchange transaction to facilitate
            sales
            customers as described in APB Opinion 29 paragraph 20(b) and therefore
            should be
            recognized by the entity at fair value if it is determinable within reasonable
            limits and the transaction has commercial substance. All other non-monetary
            exchanges of inventory within the same line of business should be recognized
            at
            the carrying amount of the inventory transferred. The Task Force agreed
            that
            this consensus should be applied to transactions completed in reporting
            periods
            beginning after March 2006. The Group deems the adoption of these provisions
            had
            no impact on its consolidated results and financial position.
 
 In
            February 2006,
            the FASB issued Statement of Financial Accounting Standards No. 155,
“Accounting
            for Certain Hybrid Financial Instruments” (SFAS 155). SFAS 155 amends Statement
            133 to provide an irrevocable option to account for hybrid financial
            instruments
            at fair value. This option applies to all hybrid financial instruments,
            not just
            interests in securitized financial assets that contain embedded derivatives.
            The
            option can be applied on a contract-by-contract basis and must be documented
            concurrently or be subject to a preexisting documented policy. Under
            this
            election, the Group would measure the entire hybrid financial instrument
            at fair
            value with changes in fair value recognized in earnings. The hybrid financial
            instrument subject to this election can be an asset or liability, but
            cannot be
            recognized as equity. The option is not available for financial instruments
            designated as hedging instruments.
 
 FASB
            155 is
            effective for all financial instruments acquired or issued for fiscal
            years
            beginning after September 15, 2006. On adoption, the fair value election
            may be
            applied to hybrid financial instruments that had previously been bifurcated.
            The
            Group deems the adoption of these provisions had no impact on its consolidated
            results and financial position.
  In
            July 2006, the
            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 will
            be
            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 will be recognized or continue to be recognized. The
            cumulative effect of applying FIN 48 will be reported as an adjustment
            to
            retained earnings at the beginning of the period in which it is
            adopted.
 
 Interpretation
            48 is effective for fiscal years
            beginning after December 15, 2006, and will be adopted by the Group on
            January
            1, 2007. The Company currently****does not believe that the
            adoption of FIN 48 will have a significant effect on its financial statements
            or
            its ability to comply with its current debt covenants.
 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 will
            not be required to recognize any new instruments at fair value.
   F-32
 
 FASB
            157 creates a single definition of fair
            value, along with a conceptual framework to measure fair value. FASB
            157 defines
            fair value as “the price that would be received to sell an asset or paid to
            transfer a liability in an orderly transaction between market participants
            at
            the measurement date.” The Statement will require 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 will also
            require
            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.
            Early adoption is permitted; however, the Group does not intend to adopt
            Statement 157 prior to the required effective date of January 1, 2008.
            The Group
            is evaluating the impact Statement 157 will have on its financial
            statements.
 
 In
            September 2006,
            the SEC released Staff Accounting Bulletin 108, Considering the Effects
            of Prior
            Year Misstatements when Quantifying Misstatements in Current Year Financial
            Statements. SAB 108 provides guidance on how the effects of the carryover
            or
            reversal of prior year misstatements should be considered in quantifying
            a
            current year misstatement. In some situations, companies will be required
            to
            record errors that occurred in prior years even though those errors were
            immaterial for each year in which they arose. Companies may choose to
            either
            restate all previously presented financial statements or record the cumulative
            effect of such errors as an adjustment to retained earnings at the beginning
            of
            the period in which SAB 108 is applied.
 
 SAB
            108 is
            effective for fiscal years ending after November 15, 2006. Adoption of
            SAB 108
            did not have a significant effect on its financial statements.
 
 In
            November 2006, a
            consensus was reached on 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,” 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. EITF Issue 06-9 does not apply to a change in the parent company’s
            year-end.
 
 The
            consensus in
            EITF Issue 06-9 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 deems the adoption of these provisions will not impact
            its
            consolidated results and financial position.
 
 In
            December 2006,
            the FASB issued FASB Staff Position (FSP) EITF 00-19-2, “Accounting for
            Registration Payment Arrangements.” FSP EITF 00-19-2 requires an issuer of
            financial instruments, such as debt, convertible debt, equity shares
            or
            warrants, to account for a contingent obligation to transfer consideration
            under
            a registration payment arrangement in accordance with Statement 5, Accounting
            for Contingencies, and FASB Interpretation 14, Reasonable Estimation
            of the
            Amount of a Loss. That accounting applies regardless of whether the registration
            payment arrangement is a provision in a financial instrument or a separate
            agreement. The FSP requires issuers to make certain disclosures for each
            registration payment arrangement or group of similar arrangements.
 
 The
            FSP is
            effective for fiscal years beginning after December 15, 2006, for registration
            payment arrangements and financial instruments subject to those arrangements
            that are entered into prior to December 21, 2006. The Group does not
            believe
            that the adoption will have a significant effect on its financial
            statements.
   F-33
 
 In
            June 2006, the FASB ratified a consensus
            opinion reached by the EITF Issue 06-3, “How Taxes Collected from Customers and
            Remitted to Governmental Authorities Should Be Presented in the Income
            Statement
            (That Is, Gross versus Net Presentation).” The guidance in EITF Issue 06-3
            requires disclosure in interim and annual financial statements of the
            amount of
            taxes on a gross basis, if significant, that are assessed by a governmental
            authority that are imposed on and concurrent with a specific revenue
            producing
            transaction between a seller and customer such as sales, use, value added,
            and
            some excise taxes. Additionally, the income statement presentation (gross
            or
            net) of such taxes is an accounting policy decision that must be
            disclosed.
 
 The
            consensus in
            EITF Issue 06-3 is effective for interim and annual reporting periods
            beginning
            after December 15, 2006. The Group intends to adopt EITF Issue 06-3 effective
            January 1, 2007, and does not believe that the adoption will have a significant
            effect on its financial statements as it does not intend to change its
            existing
            accounting policy which is to present taxes within the scope of EITF
            Issue 06-3
            on a net basis.
 
 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.
     
 F-34