**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 20-F**

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

**OR**

**x****  ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2006**

**OR**

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

**for the transition period from        to        **

**OR**

**o****  SHELL COMPANY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Date of event requiring this shell company report               **

**For the transition period from              to              **

**Commission File Number: 1-14852**

**GRUMA, S.A.B. de C.V.**

(Exact name of Registrant as specified in its charter)

| **N/A**(Translation of Registrant’s name into English) |   | **United  Mexican States**(Jurisdiction of incorporation or organization) |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------|

 

**Calzada del Valle, 407Ote.**

**Colonia del Valle**

**San Pedro Garza García,Nuevo León**

**66220, México**

(Address of principal executive offices)

**Securities registered or to beregistered pursuant to Section 12(b) of the Act:**
| Title of each class:                       | ** ** | **Name of exchange on which registered:** |
|--------------------------------------------|------------|-------------------------------------------|
| Series B Common  Shares, without par value |       | New York Stock  Exchange*                 |
| American  Depositary Shares, each          |       | New York Stock  Exchange                  |
| representing  four Series B Common         |       |                                      |
| Shares, without  par value                 |       |                                      |

 

**Securities registered or to be registered pursuant toSection 12(g) of the Act:**

**None**

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

**7.625% Notes due 2007**

**Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report:**

**482,549,952Series B Common Shares, without par value**

**Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.**

**Yes**o                   Nox

**Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934.**

**Yes**o                   Nox

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.**

**Yes**x                   Noo

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated file**.

**Largeaccelerated filer**o                   Acceleratedfiler x                   Non-acceleratedfiler o

**Indicateby check mark which financial statement item the registrant has elected tofollow:**

**Item 17**o                   Item 18x

**Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).**

**Yes**o                   Nox

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

 

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

 

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**PRESENTATIONOF FINANCIAL INFORMATION**

Gruma, S.A.B. de C.V. is a publicly held corporation (*Sociedad Anónima Bursátil de Capital Variable*) organizedunder the laws of the United Mexican States, or Mexico.

In this Annual Report on Form 20-F, references to“pesos” or “Ps.” are to Mexican pesos, and references to “U.S. dollars,” “U.S.$,”“dollars” or “$” are to United States dollars. “We,” “our,” “us,” “our company,” “GRUMA” and similar expressions referto Gruma, S.A.B. de C.V. and its consolidated subsidiaries, except when thereference is specifically to Gruma, S.A.B. de C.V. (parent company only) or thecontext otherwise requires.

This Annual Report contains our audited consolidatedfinancial statements as of December 31, 2005 and 2006 and for the years endedDecember 31, 2004, 2005 and 2006. The financial statements have been audited by PricewaterhouseCoopers, anindependent registered public accounting firm.

We publish our financial statements in pesos andprepare our consolidated financial statements in accordance with the *Normas de Información Financiera*(Mexican FinancialReporting Standards), which are accounting principles generally accepted inMexico and are commonly referred to as “Mexican GAAP.”  Mexican GAAP differs in certain significantrespects from accounting principles generally accepted in the United States ofAmerica, commonly referred to as “U.S. GAAP.” See Note 22 to ouraudited consolidated financial statements for information relating to thenature and effect of such differences and for a quantitative reconciliation ofour consolidated net income and stockholders’ equity to U.S. GAAP.

As the Mexican economy experienced significant levelsof inflation prior to 2000, we are required under Mexican GAAP to recognize theeffects of inflation in our financial statements.  Under Bulletin B-10, issued by the *Consejo Mexicano para la Investigación y Desarrollo de Normas deInformación Financiera, A.C.* (Mexican Financial Reporting StandardsBoard), or “CINIF”, we are required to present our financial information ininflation-adjusted monetary units to allow for more accurate comparisonsof financial line items over time and to mitigate the distortive effects ofinflation on our financial statements. Unless otherwise indicated, all financial information in this AnnualReport has been restated in pesos of constant purchasing power as ofDecember 31, 2006.

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

Pursuant to Bulletin B-15 issued by CINIF, we applythe actual inflation rate in the relevant country of each non-Mexicansubsidiary and then translate the inflation-adjusted financial statements intopesos.  Thefigures for subsidiaries in Central America, Venezuela and the United Statesare restated to period-end constant local currencies following the provisionsof Bulletin B-10 and B-15, applying the general consumer price index from thecountry in which the subsidiary operates. Once figures are restated, they are converted to Mexican Pesos byapplying the exchange rate in effect at the end of the period.

For the purposes of the quantitative reconciliation toU.S. GAAP, we have restated the data as of December 31, 2005 and for yearsended December 31, 2004 and 2005 in pesos of constant purchasing power asof December 31, 2006 using the Mexican National Consumer Price Index, orNCPI, rather than the international restatement factor in Bulletin B-15 ofCINIF.  For a more detailed discussion ofMexican GAAP inflation accounting methodologies, see “Item 5.  Operating and Financial Review andProspects—Management’s Discussion and Analysis of Results of Operations—Overviewof Accounting Presentation.”

3

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**MARKET SHARE AND OTHER INFORMATION**

The information contained in this Annual Reportregarding our market positions is based primarily on our own estimates andinternal analysis.  Market positioninformation for the United States is also based on data from the TortillaIndustry Association and ACNielsen. While we believe our internal research and estimates are reliable, theyhave not been verified by any independent source and we cannot assure you as totheir accuracy.

All references to “tons” in this Annual Report referto metric tons.  One metric ton equals2,204 pounds.  Estimates of productioncapacity contained herein assume operation of the relevant facilities on thebasis of 360 days a year on three shifts and assume only regular intervalsfor required maintenance.

**FORWARDLOOKING STATEMENTS**

This Annual Report includes “forward-lookingstatements” within the meaning of Section 27A of the U.S.  Securities Act of 1933, as amended, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act, including the statements about our plans,strategies and prospects under “Item 4. Information on the Company” and “Item 5.  Operating and Financial Review and Prospects.”  Some of these statements contain words suchas “believe,” “expect,” “intend,” “anticipate,” “estimate,” “strategy,” “plans”and other similar words.  Although webelieve that our plans, intentions and expectations as reflected in orsuggested by these forward-looking statements are reasonable, we cannot assureyou that these plans, intentions or expectations will be achieved.  Actual results could differ materially fromthe forward-looking statements as a result of risks, uncertainties and otherfactors discussed in “Item 3.  KeyInformation—Risk Factors,” “Item 4. Information on the Company,”  “Item 5.  Operating and Financial Review and Prospects”and “Item 11.  Quantitative andQualitative Disclosures About Market Risk.” These risks, uncertainties and factors include:  general economic and business conditions,including changes in exchange rates, and conditions that affect the price andavailability of corn, wheat and edible oils; potential changes in demand forour products; price and product competition; and other factors discussedherein.

4

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# **PART I**

## **ITEM1.****                                                     Identityof Directors, Senior Management and Advisors.**

Not applicable.

## **ITEM2.****                                                     OfferStatistics and Expected Timetable.**

Not applicable.

## **ITEM3.****                                                     KeyInformation.**

**SELECTED FINANCIAL DATA**

The following tables present our selected consolidatedfinancial data as of and for each of the years indicated.  The data as of December 31, 2005 and2006 and for the years ended December 31, 2004, 2005 and 2006 are derivedfrom and should be read together with our financial statements included hereinand “Item 5.  Operating andFinancial Review and Prospects.”

Our consolidated financial statements are prepared inaccordance with Mexican GAAP, which differs in certain significant respectsfrom U.S. GAAP.  Note 22****to our auditedconsolidated financial statements provides information relating to the natureand effect of such differences, as they relate to us, and provides areconciliation to U.S. GAAP of majority net income and total stockholders’equity.

Pursuant to Mexican GAAP, the consolidated financialstatements and the selected consolidated financial data set forth below restatethe components of stockholders’ equity using the NCPI factors and record gainsand losses in purchasing power from holding monetary assets or liabilities.  Under Mexican GAAP, non-monetary assets, withthe exception of inventories and fixed assets of non-Mexican origin, arerestated using the NCPI and General Consumer Price Index, or GCPI, factors forforeign subsidiaries.  Inventories arerestated at current replacement costs while fixed assets of foreign origin arerestated by the inflation rate of the country of origin prior to translation topesos at the period-end exchange rate. Mexican GAAP also requires restatement of all financial statements topesos of constant purchasing power as of the date of the most recent balancesheet presented, and accordingly all data in the consolidated financialstatements and in the selected consolidated financial data set forth below havebeen restated in pesos of constant purchasing power as of December 31,2006.  The effects of inflationaccounting under Mexican GAAP, other than for the use of a specific index forthe restatement of fixed assets of foreign origin, have not been reversed inthe reconciliation to U.S. GAAP. See Note 22 to our consolidated financial statements.

5

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| ** **                                                       | ** **   | **2002**                                                                                                                                                                                    | ** **   | **2003**     | ** **   | **2004**     | ** **   | **2005**     | ** **   | **2006**     | ** **   |
|------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ** **                                                       | ** **   | **(thousands of Mexican pesos of constant purchasing power  as of December 31, 2006, except per share amounts)** | ** **   |
| **Income  Statement Data:**                                 | ** **   | ** **                                                                                                                                                                                  | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| ***Mexican  GAAP:***                                             | ** **   | ** **                                                                                                                                                                                  | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| Net sales                                                        |         | Ps.                                                                                                                                                                                         | 21,674,750   |         | Ps.          | 24,159,038   |         | Ps.          | 25,799,740   |         | Ps.          | 27,862,898 |   | Ps. | 30,654,178 |   |
| Cost of sales                                                    |         | (13,555,764                                                                                                                                                                                 | )            | (15,383,142  | )            | (16,552,730  | )            | (18,197,650  | )            | (19,974,480  | )            |
| Gross profit                                                     |         | 8,118,986                                                                                                                                                                                   |         | 8,775,896    |         | 9,247,010    |         | 9,665,248    |         | 10,679,698   |         |
| Selling, general  and administrative expenses                    |         | (6,432,111                                                                                                                                                                                  | )            | (6,942,774   | )            | (7,244,431   | )            | (8,032,119   | )            | (8,897,173   | )            |
| Operating income                                                 |         | 1,686,875                                                                                                                                                                                   |         | 1,833,122    |         | 2,002,579    |         | 1,633,129    |         | 1,782,525    |         |
| Net  comprehensive financing cost:                               |         |                                                                                                                                                                                        |         |         |         |         |         |         |         |         |         |
| Interest expense                                                 |         | (640,540                                                                                                                                                                                    | )            | (557,655     | )            | (502,436     | )            | (596,588     | )            | (713,273     | )            |
| Interest income                                                  |         | 65,199                                                                                                                                                                                      |         | 67,816       |         | 235,772      |         | 55,739       |         | 78,099       |         |
| Monetary  position gain, net                                     |         | 181,923                                                                                                                                                                                     |         | 197,197      |         | 250,668      |         | 314,385      |         | 320,499      |         |
| Foreign exchange  gain (loss), net                               |         | (297,403                                                                                                                                                                                    | )            | (190,477     | )            | (53,003      | )            | (53,476      | )            | (18,441      | )            |
| Total net  comprehensive financing cost                          |         | (690,821                                                                                                                                                                                    | )            | (483,119     | )            | (68,999      | )            | (279,940     | )            | (333,116     | )            |
| Other (expenses)  income, net                                    |         | 136,236                                                                                                                                                                                     |         | (183,504     | )            | (296,091     | )            | (147,134     | )            | (14,068      | )            |
| Income before  income tax and Other items                        |         | 1,132,290                                                                                                                                                                                   |         | 1,166,499    |         | 1,637,489    |         | 1,206,055    |         | 1,435,341    |         |
| Income tax  (current and deferred)                               |         | (634,417                                                                                                                                                                                    | )            | (708,758     | )            | (788,041     | )            | (386,425     | )            | (411,549     | )            |
| Employees’  statutory profit sharing (current and deferred) |         | (14,625                                                                                                                                                                                     | )            | 4,925        |         | (9,531       | )            | (20,688      | )            | (32,701      | )            |
| Other items(1)                                                   |         | 183,144                                                                                                                                                                                     |         | 246,554      |         | 291,313      |         | 593,696      |         | 612,626      |         |
| Minority  interest                                               |         | (221,929                                                                                                                                                                                    | )            | (192,332     | )            | (178,230     | )            | (153,884     | )            | (78,979      | )            |
| Majority net  income                                             |         | 444,463                                                                                                                                                                                     |         | 516,888      |         | 953,000      |         | 1,238,754    |         | 1,524,738    |         |
| Per share data(2):                                               |         |                                                                                                                                                                                        |         |         |         |         |         |         |         |         |         |
| Income from continuing operations                                |         | 1.00                                                                                                                                                                                        |         | 1.16         |         | 2.12         |         | 2.87         |         | 3.18         |         |
| Cumulative effect of change in accounting principle              |         | —                                                                                                                                                                                      |         | —       |         | —       |         | (0.13        | )            | —       |         |
| Majority net income per share                                    |         | 1.00                                                                                                                                                                                        |         | 1.16         |         | 2.12         |         | 2.74         |         | 3.18         |         |
| ***U.S.  GAAP:***                                                | *** *** | *** ***                                                                                                                                                                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Net sales                                                        |         | 22,377,108                                                                                                                                                                                  |         | 25,833,470   |         | 26,650,510   |         | 27,543,284   |         | 30,387,884   |         |
| Operating income                                                 |         | 1,681,092                                                                                                                                                                                   |         | 2,010,976    |         | 2,035,550    |         | 1,492,449    |         | 1,689,599    |         |
| Net income                                                       |         | 364,432                                                                                                                                                                                     |         | 666,209      |         | 835,674      |         | 1,238,932    |         | 1,448,421    |         |
| Per share data(2):                                               |         |                                                                                                                                                                                        |         |         |         |         |         |         |         |         |         |
| Net income per  share                                            |         | 0.82                                                                                                                                                                                        |         | 1.50         |         | 1.86         |         | 2.74         |         | 3.02         |         |
|                                                                  |              |                                                                                                                                                                                             |              |              |              |              |              |              |              |              |              |  |  |  |  |  |

 

6

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| ** **                                              | ** **   | **2002**                                                                                                                                                                                                             | ** **   | **2003**     | ** **   | **2004**     | ** **   | **2005**     | ** **   | **2006**     | ** **   |
|---------------------------------------------------------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ** **                                              | ** **   | **(thousands of Mexican pesos of constant purchasing power  as of December 31, 2006, except capital stock and operating data)** | ** **   |
| **Balance  Sheet Data (at period end):**                | ** **   | ** **                                                                                                                                                                                                           | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| ***Mexican  GAAP:***                                    | *** *** | *** ***                                                                                                                                                                                                         | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Property, plant  and equipment, net                     |         | 14,222,894                                                                                                                                                                                                           |         | 13,661,563   |         | 13,638,363   |         | 14,354,891   |         | 14,821,192   |         |
| Total assets                                            |         | 25,030,771                                                                                                                                                                                                           |         | 24,515,695   |         | 26,023,076   |         | 27,966,583   |         | 30,237,505   |         |
| Short-term debt(3)                                      |         | 893,635                                                                                                                                                                                                              |         | 523,546      |         | 538,226      |         | 537,094      |         | 882,697      |         |
| Long-term debt(3)                                       |         | 6,842,238                                                                                                                                                                                                            |         | 6,270,312    |         | 6,210,190    |         | 6,680,257    |         | 5,605,464    |         |
| Total  liabilities                                      |         | 11,428,641                                                                                                                                                                                                           |         | 10,964,027   |         | 11,817,674   |         | 13,241,631   |         | 13,189,364   |         |
| Capital stock                                           |         | 15,613,040                                                                                                                                                                                                           |         | 15,973,406   |         | 16,323,550   |         | 16,350,445   |         | 17,501,051   |         |
| Total  stockholders’ equity(4)                     |         | 13,602,130                                                                                                                                                                                                           |         | 13,551,668   |         | 14,205,402   |         | 14,724,952   |         | 17,048,141   |         |
| ***U.S.  GAAP:***                                       | *** *** | *** ***                                                                                                                                                                                                         | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Total assets                                            |         | 25,382,702                                                                                                                                                                                                           |         | 25,865,772   |         | 26,194,802   |         | 27,345,977   |         | 29,913,649   |         |
| Long-term debt                                          |         | 7,341,806                                                                                                                                                                                                            |         | 6,971,156    |         | 6,639,220    |         | 6,787,946    |         | 5,709,499    |         |
| Capital stock                                           |         | 15,628,118                                                                                                                                                                                                           |         | 15,973,408   |         | 16,226,959   |         | 16,253,852   |         | 17,404,458   |         |
| Total stockholders’  equity                        |         | 10,089,571                                                                                                                                                                                                           |         | 10,454,252   |         | 10,505,629   |         | 10,893,150   |         | 13,425,112   |         |
|                                                    |         |                                                                                                                                                                                                                 |         |         |         |         |         |         |         |         |         |
| **Other  Financial Information:**                       | ** **   | ** **                                                                                                                                                                                                           | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| ***Mexican  GAAP:***                                    | *** *** | *** ***                                                                                                                                                                                                         | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Capital  expenditures                                   |         | 784,087                                                                                                                                                                                                              |         | 677,796      |         | 1,320,818    |         | 2,145,091    |         | 2,432,963    |         |
| Depreciation and  amortization                          |         | 1,044,996                                                                                                                                                                                                            |         | 1,180,458    |         | 1,089,535    |         | 1,159,940    |         | 1,202,078    |         |
| Resources  provided by (used in):                       |         |                                                                                                                                                                                                                 |         |         |         |         |         |         |         |         |         |
| Operating activities                                    |         | 1,633,994                                                                                                                                                                                                            |         | 1,399,017    |         | 2,026,415    |         | 1,874,286    |         | 1,873,731    |         |
| Financing activities                                    |         | (915,281                                                                                                                                                                                                             | )            | (1,106,587   | )            | (410,319     | )            | 220,565      |         | (160,163     | )            |
| Investing activities                                    |         | (671,820                                                                                                                                                                                                             | )            | (415,871     | )            | (1,497,884   | )            | (2,254,589   | )            | (1,484,376   | )            |
| ***U.S.  GAAP:***                                       | *** *** | *** ***                                                                                                                                                                                                         | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Depreciation and  amortization                          |         | 1,144,802                                                                                                                                                                                                            |         | 1,149,663    |         | 1,126,595    |         | 1,131,487    |         | 1,196,884    |         |
| Net cash  provided by (used in):                        |         |                                                                                                                                                                                                                 |         |         |         |         |         |         |         |         |         |
| Operating activities                                    |         | 1,135,937                                                                                                                                                                                                            |         | 1,340,026    |         | 1,610,446    |         | 1,522,485    |         | 1,673,312    |         |
| Investing activities                                    |         | (636,922                                                                                                                                                                                                             | )            | (284,780     | )            | (1,285,512   | )            | (1,865,722   | )            | (1,484,376   | )            |
| Financing activities                                    |         | (659,966                                                                                                                                                                                                             | )            | (949,724     | )            | (160,600     | )            | 209,480      |         | 79,292       |         |
|                                                    |         |                                                                                                                                                                                                                 |         |         |         |         |         |         |         |         |         |
| **Operating  Data:**                                    | ** **   | ** **                                                                                                                                                                                                           | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| ***Sales  volume (thousands of tons):***                | * *     | * *                                                                                                                                                                                                             | * *     | * *     | * *     | * *     | * *     | * *     | * *     | * *     | * *     |
| Gruma  Corporation (corn flour, tortillas and other)(5) |         | 899                                                                                                                                                                                                                  |         | 979          |         | 1,088        |         | 1,275        |         | 1,335        |         |
| GIMSA (corn  flour, tortillas and other)(5)             |         | 1,397                                                                                                                                                                                                                |         | 1,406        |         | 1,448        |         | 1,585        |         | 1,734        |         |
| Gruma Venezuela  (corn flour, wheat flour and other)    |         | 454                                                                                                                                                                                                                  |         | 518          |         | 504          |         | 480          |         | 486          |         |
| Molinera de  México (wheat flour)                  |         | 536                                                                                                                                                                                                                  |         | 575          |         | 460          |         | 474          |         | 477          |         |
| Gruma  Centroamérica (corn flour and other)(5)     |         | 139                                                                                                                                                                                                                  |         | 144          |         | 154          |         | 178          |         | 213          |         |
| ***Production  capacity (thousands of tons):***         | *** *** |                                                                                                                                                                                                                 | *** *** |         | *** *** |         | *** *** |         | *** *** | *** *** | *** *** |
| Gruma  Corporation (corn flour and tortillas)           |         | 1,346                                                                                                                                                                                                                |         | 1,394        |         | 1,548        |         | 1,661        |         | 2,021        |         |
| GIMSA (corn  flour, tortillas and other)(6)             |         | 2,345                                                                                                                                                                                                                |         | 2,345        |         | 2,408        |         | 2,801        |         | 2,797        |         |
| Gruma Venezuela  (corn flour, wheat flour and other)(7) |         | 792                                                                                                                                                                                                                  |         | 792          |         | 786          |         | 764          |         | 764          |         |
| Molinera de  México (wheat flour)                  |         | 717                                                                                                                                                                                                                  |         | 717          |         | 717          |         | 801          |         | 801          |         |
| Gruma  Centroamérica (corn flour and other)        |         | 217                                                                                                                                                                                                                  |         | 217          |         | 220          |         | 264          |         | 266          |         |
| Number of employees                                     |         | 14,887                                                                                                                                                                                                               |         | 15,104       |         | 15,727       |         | 16,582       |         | 18,124       |         |

 

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| (1) | Other items include extraordinary items, equity in  earnings of associated companies and gain from sale of subsidiaries and  associated companies’ common stock. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| (2)    | Based upon weighted average of outstanding shares of  our common stock (in thousands), as follows: 446,202 shares for the year  ended December 31, 2002; 445,098 shares for the year ended  December 31, 2003; 450,306 shares for the year ended December 31,  2004; 451,446 shares for the year ended December 31, 2005; and 480,007  shares for the year ended December 31, 2006. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    | Short-term debt consists of bank loans and the  current portion of long-term debt. Long-term debt consists of debentures and  bank loans.                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    | Total stockholders’ equity includes minority  interests as follows: Ps.2,922 million at December 31, 2002; Ps.3,001  million at December 31, 2003; Ps.3,011 million at December 31,  2004; Ps.2,989 million at December 31, 2005; and Ps.2,922 million at  December 31, 2006.                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    | Net of intercompany transactions.                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)    | Includes 437  thousand tons of temporarily idled production capacity at  December 31, 2006.                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| (7)    | Includes 96  thousand tons of temporarily idled production capacity at  December 31, 2006.                                                                                                                                                                                                                                                                                                              |

 

**Dividends**

Our ability to pay dividends is limited by Mexicanlaw, our *estatutos sociales,* or bylaws, and byfinancial covenants contained in some of our credit agreements.  Because we are a holding company with nosignificant operations of our own, we have distributable profits to paydividends to the extent that we receive dividends from our subsidiaries.  Accordingly, there can be no assurance thatwe will pay dividends or of the amount of any such dividends.

Pursuant to Mexican law and our bylaws, thedeclaration, amount and payment of dividends are determined by a majority voteof the holders of the outstanding shares represented at a duly convenedshareholders’ meeting.  The amount of anyfuture dividend would depend on, among other things, operating results,financial condition, cash requirements, losses for prior fiscal years, futureprospects, the extent to which debt obligations impose restrictions ondividends and other factors deemed relevant by the board of directors and theshareholders.

In addition, underMexican law, companies may only pay dividends:

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

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

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

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

Holders of our American Depositary Receipts, or ADRs,on the applicable record date are entitled to receive dividends declared on theshares represented by American Depositary Shares, or ADSs, evidenced by suchADRs.  The depositary will fix a recorddate for the holders of ADRs in respect of each dividend distribution.  We pay dividends in pesos and holders of ADSswill receive dividends in U.S. dollars (after conversion by the depositary frompesos, if not then restricted under applicable law) net of the fees, expenses,taxes and governmental charges payable by holders under the laws of Mexico andthe terms of the deposit agreement.

The ability of our subsidiaries to make distributionsto us is limited by the laws of each country in which they were incorporatedand by their constitutive documents.  Forexample, our ability to repatriate dividends from Gruma Venezuela may beadversely affected by exchange controls and other recent events.  See “Item 3.  Risk Factors—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”  In the particular case of GrumaCorporation, our principal U.S. subsidiary, its ability to pay dividends issubject to financial covenants contained in some of its debt and leaseagreements, including covenants which limit the amount of dividend payments.  Upon the occurrence of any default or eventof default under these credit and lease agreements, Gruma Corporation generallyis prohibited from making any dividend or other payments.  See “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources—Indebtedness.”

During 2006, 2005, 2004and 2003, we paid dividends to shareholders, in nominal terms, of Ps.410million, Ps.359 million, Ps.315 million, and Ps.287 million,respectively.  In pesos of constantpurchasing power as of 

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December 31,2006, the dividends paid or payable to shareholders in 2006, 2005, 2004 and2003 amounted to Ps.424 million, Ps.381 million, Ps.351 million andPs.332 million, respectively.

**ExchangeRate Information**

Mexico has had a free market for foreign exchangesince 1991.  Prior to December 1994,the *Banco de México,* or Mexican CentralBank, kept the peso-U.S. dollar exchange rate within a range prescribed by thegovernment through intervention in the foreign exchange market.  In December 1994, the governmentsuspended intervention by the Mexican Central Bank**andallowed the peso to float freely against the U.S. dollar.  The peso declined during the period from 1994through 1998, at times in response to events outside of Mexico, but wasrelatively stable in 1999, 2000 and 2001. In late 2001 and early 2002, the Mexican peso appreciated considerablyagainst the U.S. dollar and, more strongly, against other foreigncurrencies.  From the second quarter of2002 and until the end of 2003, the Mexican peso depreciated in value.  From the beginning of 2004 to date in 2007,the Mexican peso has been relatively stable, ranging from 10.80 to 11.63.  There can be no assurance that the governmentwill maintain its current policies with regard to the peso or that the pesowill not depreciate or appreciate in the future.

The following table sets forth, for the periodsindicated, the high, low, average and period-end noon buying rate in New YorkCity for cable transfers in pesos published by the Federal Reserve Bank of NewYork, expressed in pesos per U.S. dollar. The rates have not been restated in constant currency units.
| ** **                   | ** ** | **Noon Buying Rate (Ps. Per U.S.$)** | ** ** |
|------------------------------|------------|---------------------------------------------------------------|------------|
| **Year**                     | ** ** | **High **(1)                                             | ** ** | **Low **(1) | ** ** | **Average **(2) | ** ** | **Period End** | ** ** |
| 2002                         |       | 10.4250                                                       |       | 9.0005 |   | 9.7458 |   | 10.4250 |   |
| 2003                         |       | 11.4063                                                       |       | 10.1130 |   | 10.8460 |   | 11.2420 |   |
| 2004                         |       | 11.6350                                                       |       | 10.8050 |   | 11.2900 |   | 11.1540 |   |
| 2005                         |       | 11.4110                                                       |       | 10.4135 |   | 10.8940 |   | 10.6275 |   |
| 2006                         |       | 10.4600                                                       |       | 10.4315 |   | 10.9060 |   | 10.7995 |   |
| 2007 (through  June 15) |       |                                                          |       |   |   |   |   |   |   |
| December 2006           |       | 10.9860                                                       |       | 10.7675 |   | 10.8550 |   | 10.7995 |   |
| January 2007            |       | 11.0920                                                       |       | 10.7650 |   | 10.9560 |   | 11.0381 |   |
| February 2007           |       | 11.1575                                                       |       | 10.9170 |   | 10.9950 |   | 11.1575 |   |
| March 2007              |       | 11.1846                                                       |       | 11.0130 |   | 11.1140 |   | 11.0427 |   |
| April 2007              |       | 11.0305                                                       |       | 10.9240 |   | 10.9800 |   | 10.9250 |   |
| May 2007                |       | 10.9308                                                       |       | 10.7380 |   | 10.8220 |   | 10.7380 |   |
| June 2007(3)            |       | 10.9785                                                       |       | 10.7116 |   | 10.8640 |   | 10.8095 |   |

 

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| (1)    | Rates shown are the actual low and high, on a  day-by-day basis for each period.    |
|--------|-------------------------------------------------------------------------------------|
| (2)    | Average of month-end rates.                                                         |
| (3)    | Through June 15, 2007.                                                         |
|   |                                                                                |
|   | On June 15, 2007, the noon buying rate for  pesos was Ps.10.8095 to U.S.$1.00. |

 

**RISKFACTORS**

**Risks Relating to Mexico**

***Our Results of OperationsCould Be Affected by Economic Conditions in Mexico***

We are a Mexican company with 47% of our consolidatedassets located in Mexico and 32%of our consolidated net sales derived from our Mexican operations as ofDecember 31, 2006.  As a result, Mexicaneconomic conditions could impact our results of operations.

In the past, Mexico hasexperienced exchange rate instability and devaluation of the peso as well ashigh levels of inflation, domestic interest rates, unemployment, negativeeconomic growth and reduced consumer 

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purchasingpower.  These events resulted in limitedliquidity for the Mexican government and local corporations.  Civil and political unrest in Venezuela orelsewhere could produce similar results. See “—Adverse Developments in Other Emerging Market Countries May AffectMexico or the Price of Our Securities.”  The Mexican economy grew by 0.9% in 2002, by 1.3% in 2003, by 4.4% in 2004, by 3.0% in 2005, by 4.8% in 2006 and by an annualized rate of 2.6% in the firstquarter of 2007.  However, if the Mexicaneconomy falls into recession, or if inflation and interest rates increase,consumer purchasing power may decrease and, as a result, demand for our productmay decrease.  In addition, a recessioncould affect our operations to the extent we are unable to reduce our costs andexpenses in response to falling demand.

***Our Business OperationsCould Be Affected by Government Policies in Mexico***

The Mexican government has exerted, and continues toexert, significant influence over the Mexican economy.  Mexican governmental actions concerning theeconomy could have a significant effect on Mexican private sector entities, aswell as on market conditions, prices and returns on securities of Mexicanissuers, including our securities.

Mexican presidential and congressional elections tookplace on July 2, 2006.  FelipeCalderón Hinojosa was elected president for the 2006-2012 term.  He is the second presidential candidate to beelected from the *Partido Acción Nacional*, whichwon for the first time in 2000.  Nopolitical party in Mexico succeeded in securing a majority in the Congress orSenate.  The lack of a majority party inthe legislature, the potential lack of alignment between the legislature andthe president and any changes that result from the presidential andcongressional elections could result in instability or deadlock, and preventthe timely implementation of economic reforms, which in turn could have amaterial adverse effect on Mexican economic policy and on our business.

Governmental policies have negatively affected oursales of corn flour in the past and may continue to do so in the future. We currently depend on corn import permits toensure an adequate supply of corn in low-corn producing regions of thecountry.  We believe that a shortage ofcorn imports would currently have a greater adverse impact on our results ofoperations than a surplus in the number of corn imports.  In the past, we have been able to obtainsufficient corn import permits to satisfy our corn requirements.  Nevertheless, we cannot assure that theMexican government will not take actions that could adversely affect us.  See “Item 4.  Information on the Company—Regulation.”

By the end of 2006, the price of corn set by theChicago Board of Trade and the average price of Mexican corn, increaseddramatically principally from corn being used in connection with themanufacture of ethanol, a substitute for gasoline, as well as other bio-fuels.Consequently, the price of corn flour and corn tortillas, the main food staplein Mexico, increased due to such increases in the international and domesticprices of corn. In order to stabilize the price of tortillas, the Mexicangovernment promoted two agreements among the various parties involved in thecorn-corn flour-tortilla production chain. The first agreement was effectivefrom January 15 through April 30, 2007.  On April 25, 2007, the Mexican governmentannounced a second agreement that extended the term through August 15,2007.

The Mexican government petitioned our company, amongothers, to voluntarily participate in these agreements through which we agreedto establish a price ceiling for our corn flour. Through these agreements: (i)corn flour producers have agreed to maintain an average price of Ps. 5.00 perkilo of corn flour; (ii) Wal-Mart and retailers affiliated with the *Asociación Nacional de Tiendas de Autoservicios,* or NationalAssociation of Supermarkets, have agreed to sell tortillas at an average priceof Ps. 6.50 per kilo, and; (iii) small tortilla manufacturers, or *tortillerías,* have agreed to sell tortillas at an averageprice of Ps. 8.50 per kilo.

As a result, our corn flour prices do not reflect therecent increase in the cost of corn, which resulted in a significantdeterioration in the financial performance of GIMSA, our subsidiary engaged incorn-flour production, during the first quarter of 2007, which may continue tothe extent the company does not increase prices.  While the Mexican government has not directlyfixed or capped corn flour or tortilla prices, it has strongly encouraged Mexicanproducers and retailers to voluntarily do so until the next harvest of Mexicancorn crops. We intend to fully abide by the terms of these agreements. We cannot assure you that there will not beanother extension of the agreements, that we will fully comply with their termsat all times or that the Mexican government will not take 

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actionsthat could adversely affect ourfinancial condition and results of operation. See “Item 4. Information on the Company—Business Overview—MexicanOperations—GIMSA—Corn Flour Operation.”

The level of environmental regulations and enforcementin Mexico has increased in recent years. In the past, the *Comisión Nacional delAgua,* or National Water Commission or CNA, has brought enforcementproceedings against us for fees arising from our alleged water discharges fromfive of our facilities in Mexico.  Ofsuch actions, only one is unresolved. The other proceedings have been resolved favorably.  We cannot assure you that further actions ofthis type will not be brought against us. We expect the trend toward greater environmental regulation andenforcement to continue and to be accelerated as a result of internationalagreements between Mexico and the United States.  The promulgation of new environmentalregulations or higher levels of enforcement may adversely affect us.  See “Item 8.  Financial Information3⁄4LegalProceedings” and “Item 4.  Information onthe Company—Regulation.”

***Devaluations of theMexican Peso Affect our Financial Performance***

As of December 31, 2006,****93% of our debt obligations weredenominated in U.S. dollars.  We generateapproximately 49% of ourrevenues in U.S. dollars, which in 2006 represented 217% of our thenoutstanding debt obligations.  While thedollar revenues we earn may act as a natural hedge for part of ourdollar-denominated debt obligations, we have not entered into derivativecontracts to hedge our foreign currency risk with respect to the outstandingprincipal amount of these obligations. As of June 15, 2007 we hadexchange rate forward contracts for only part of the interest payments due in2007 and 2008 on our U.S.$300 million 7.75% perpetual bond, for anaggregate notional amount of U.S.$34.9 million at an average exchange rateof Ps.10.94per U.S. dollar.  Therefore, we remain exposed to foreignexchange risks that could affect our ability to meet our obligations and resultin foreign exchange losses on our dollar-denominated obligations.

We posted net foreign exchange losses of Ps.53  million in 2004, Ps.53 million in 2005 and Ps.18 million in 2006.  Any significant decrease in the value of thepeso relative to the U.S. dollar may have an adverse effect on our liquidityand on our ability to meet our dollar-denominated debt obligations.

***High Levels of Inflationand High Interest Rates in Mexico Could Adversely Affect the Business Climatein Mexico and our Financial Condition and Results of Operations***

Mexico has experiencedhigh levels of inflation in the past. The annual rate of inflation, as measured by changes in the NationalConsumer Price Index, was 5.19% for 2004, 3.33% for 2005 and 4.05% for 2006.  From January through May 2007, theinflation rate was 0.46%.  OnJune 15, 2007, the 28-day CETES rate was 7.20%.  While thesubstantial part of our debt is dollar-denominated at this time, high interestrates in Mexico may adversely affect the business climate in Mexico generallyand our financing costs in the future and thus our financial condition andresults of operations.

***Developments in Other Countries Could Adversely Affectthe Mexican Economy, the Market Value of Our Securities and Our Results ofOperations***

The Mexican economy maybe, to varying degrees, affected by economic and market conditions in othercountries.  Although economic conditionsin other countries may differ significantly from economic conditions in Mexico,investors’ reactions to adverse developments in other countries may have anadverse effect on the market value of securities of Mexican issuers.  In recent years, economic conditions inMexico have become increasingly correlated to economic conditions in the UnitedStates.  Therefore, adverse economicconditions in the United States could have a significant adverse effect on theMexican economy.  In addition, in thepast, economic crises in Asia, Russia, Brazil, Argentina and other emergingmarket countries adversely affected the Mexican economy.

We cannot assure you thatthe events in other emerging market countries, in the United States orelsewhere will not adversely affect our business, financial condition andresults of operations.

***You May Be Unable toEnforce Judgments Against Us in Mexican Courts***

We are a Mexican publiclyheld corporation (*Sociedad Anónima Bursátil de CapitalVariable*).  Most of ourdirectors and executive officers are residents of Mexico, and a significantportion of the assets of our directors 

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and executiveofficers, and a significant portion of our assets, are located in Mexico.  You may experience difficulty in effectingservice of process upon our company or our directors and executive officers inthe United States, or, more generally, outside of Mexico and in enforcing civiljudgments of non-Mexican courts in Mexico, including judgments predicated oncivil liability under U.S. federal securities laws, against us, or ourdirectors and executive officers.  Wehave been advised by our General Counsel, that there is doubt as to theenforceability in original actions in Mexican courts of liabilities predicatedsolely on the U.S. federal securities laws.

***Differences BetweenMexican GAAP and U.S. GAAP May Have an Impact on the Presentation of OurFinancial Information***

Our annual auditedconsolidated financial statements are prepared in accordance with Mexican GAAP,which differ in some significant respects from U.S. GAAP.  Financial results reported using Mexican GAAPmay differ substantially from those results that would have been obtained usingU.S. GAAP.  We are required, however, tofile an annual report on Form 20-F containing financial statementsreconciled to U.S. GAAP, although this filing only contains year-end financialstatements reconciled to U.S. GAAP for our three most recent fiscal years.  See Note 22****toour audited consolidated financial statements.

**RisksRelating to Our Company**

***Fluctuations in the Costand Availability of Corn, Wheat and Wheat Flour May Affect Our FinancialPerformance***

Our financial performancemay be affected by the price and availability of corn, wheat and wheat flour aseach raw material represented 27%, 11% and 7%, respectively, of our cost ofsales in 2006.  Mexican and world marketshave experienced periods of either over-supply or shortage of corn and wheat,some of which have caused adverse effects on our results of operations.  Recently, there has been substantialvolatility and increases in the price of corn, partly due to the demand forcorn-based ethanol in the U.S., which has increased our cost of corn andnegatively affected our financial condition and results of operation.  It is likely that the demand for corn will belong-term in connection with the manufacture of corn-based ethanol.

To manage these pricerisks, we regularly monitor our risk tolerance and evaluate thepossibility of using derivative instruments to hedge our exposure tocommodity prices.  We currently hedge against fluctuations inthe costs of corn and wheat using futures and options contracts,but remain exposed to credit-related losses in the event ofnon-performance by counterparties to the financial instruments.  Inaddition, if corn or wheat prices decrease below the levelsspecified in our various hedging agreements, we would lose the value of adecline in these prices.

Additionally, because ofthis volatility and price variations, we may not always be able to pass alongour increased costs to our customers in the form of price increases.  We cannot always predict whether or whenshortages or over-supply of corn and wheat will occur.  In addition, as described above, futureMexican or other countries’ governmental actions could affect the price andavailability of corn and wheat.  Anyadverse developments in domestic and international corn and wheat markets couldhave a material adverse effect upon our business, financial condition, resultsof operations and prospects.

***The Presence ofGenetically Modified Corn in Our Products, Which is Not Approved for HumanConsumption, May Have a Negative Impact on Our Results of Operations***

As we do not grow our own corn, we are required to buyit from various producers in the United States, Mexico and elsewhere.  Although we only buy corn from farmers andgrain elevators who agree to supply us with approved varieties of corn and wehave developed a protocol to test and monitor our corn for certain strains ofbacteria and chemicals that have not been approved for human consumption, wemay unwittingly buy genetically modified corn that is not approved for humanconsumption.  This may result in costlyrecalls and subject us to lawsuits which may have a negative impact on ourresults of operations.

In recent years, various claims have been alleged,mostly in the United States and the European Union, that genetically modifiedfoods are unsafe for human consumption, pose risks of damage to the environmentand create legal, social and ethical dilemmas. Some countries, particularly in the European Union, as well as Australiaand 

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some countries in Asia,have instituted a partial limitation on the import of grain produced fromgenetically modified seeds.  Somecountries have imposed labeling requirements and traceability obligations ongenetically modified agricultural and food products, which may affect theacceptance of these products.  To theextent that we may unknowingly buy or be perceived to be a seller ofgenetically modified corn not approved for human consumption, this may have asignificant negative impact on our financial condition and results ofoperation.

***Downgrades of Our DebtMay Increase Our Financing Costs or Otherwise Adversely Effect Us or Our StockPrice***

We are currently rated BBB- by Standard & Poor’sand by Fitch and Ba1 by Moody’s. Moody’s recently changed its outlook of us frompositive to neutral and Standard & Poor’s from neutral to negative.  Any ratings downgrade or further changes inoutlook could cause our costs with respect to new debt to increase, which couldadversely affect our financial condition and results of operation.

***Regulatory Developments MayAdversely Affect Our Business***

We are subject toregulation in each of the territories in which we operate.  The principal areas in which we are subjectto regulation are health, environmental, labor, taxation and antitrust.  The adoption of new laws or regulations inthe countries in which we operate may increase our operating costs or imposerestrictions on our operations which, in turn, may adversely affect ourfinancial condition, business and results of operations.  Further changes in current regulations mayresult in an increase in compliance costs, which may have an adverse effect onour financial condition and results of operations.  See “Item 4. Information on the Company—Regulation.”

***Economic and Legal Risks Associatedwith a Global Business May Affect Our International Operations.***

           We conduct our business in many countries and anticipate that revenues from ourinternational operations will account for a significant portion of our futurerevenues.  There are risks inherent in conducting our businessinternationally, including:

·                  generalpolitical and economic instability in international markets;

·                  limitations inthe repatriation of our assets, including cash;

·                  expropriation ofour international assets;

·                  varying pricesand availability of corn, wheat and wheat flour and the cost and practicalityof hedging such fluctuations under current market conditions;

·                  differentliability standards and legal systems; and

·                  intellectualproperty laws of countries that do not protect our international rights to thesame extent as the laws of Mexico.

In addition, we haverecently expanded our operations to China, Australia and England.  Ourpresence in these and other markets could present us with new and unanticipatedoperational challenges.  For example, we may encounter laborrestrictions or shortages and currency conversion obstacles, or be requiredto comply with stringent local governmental and environmentalregulations.  Any of these factors could increase our operating expensesand decrease our profitability.

**RisksRelating to Venezuela**

***Venezuela PresentsSignificant Economic Uncertainty and Political Risk, Which May in the FutureHave an Adverse Impact on Our Operations and Financial Performance***

Our operations in Venezuela accounted forapproximately 10% of our netsales in 2006.  In recent years,political and social instability has prevailed in Venezuela.  This unrest presents a risk to our businesswhich cannot be controlled or accurately measured or estimated.  For instance, as a result of the nation-widegeneral strike that 

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took place from earlyDecember 2002 to February 2003, and in an effort to shore up theeconomy and control inflation, Venezuelan authorities imposed foreign exchangeand price controls in early 2003.

These price controls apply to products such as cornflour and wheat flour, which limit our ability to increase our prices in orderto compensate for higher costs in raw materials.  Additionally, the foreign exchange controlsimposed by the Venezuelan government limit our ability to convert bolívares(the Venezuelan currency) into other currencies and transfer funds out ofVenezuela.  In February 2003, theVenezuelan government established a single fixed exchange rate for the bolívarof 1,600.00 bolívares per U.S.$1.00, which has been increased on severaloccasions to the current fixed exchange rate of 2,150.00 bolívares perU.S.$1.00 in effect since March 2005.

Hugo Chávez, the current president of Venezuela wasreelected to a second term in December 2006 and it is expected that politicaland social instability will continue to prevail during his six year term.  Additionally, during the first quarter of2007, Hugo Chávez was vested with legislative authority to legislate by decreefor a period of 18 months in several strategic areas, which could result incertain structural changes in the economic and social policies in Venezuela. Most recently, the government’s actionshave adversely affected certain Venezuelan businesses, including news andmedia outlets, resulting in civil unrest and public demonstrations.

Our financial condition and results of operationscould be adversely affected since, among other reasons: (i) a portion of oursales are denominated in bolívares; (ii) Gruma Venezuela produces productsthat are subject to price controls; (iii) part of our sales depend oncentralized government procurement policies for its social welfare programs;(iv) we may have difficulties repatriating dividends from Gruma Venezuela,as well as importing some of its requirements for raw materials as a result ofthe exchange controls, and; (v) we may face increasing costs in some of our rawmaterials due to the implementation of import tariffs.

**RisksRelating to the United States**

***We May Be Unable toMaintain Our U.S. Profit Margin in the Face of a Consolidated RetailEnvironment***

Net sales in the U.S.constituted approximately 49% of our total sales in 2006.  As the retail grocery trade continues toconsolidate and our retail customers grow larger and become more sophisticated,our retail customers could demand lower pricing and increased promotionalprograms.  Also, our dependence on salesto retail customers could increase. There is a risk that we will not be able to maintain our U.S. profitmargin in this environment.

**RisksRelated to Our Controlling Shareholders and Capital Structure**

***Holders of ADSs May NotBe Able to Vote at our Shareholders’ Meetings***

Our shares are traded on the New York Stock Exchangein the form of ADSs.  There can be noassurance that holders of our shares through ADSs will receive notices ofshareholder meetings from our ADS depositary with sufficient time to enablesuch holders to return voting instructions to our ADS depositary in a timelymanner.  Under certain circumstances, aperson designated by us may receive a proxy to vote the shares underlying theADSs at our discretion at a shareholder meeting.

***Holders of ADSs Are NotEntitled to Attend Shareholder Meetings, and They May Only Vote Through theDepositary***

Under Mexican law, a shareholder is required todeposit its shares with a Mexican custodian in order to attend a shareholders’meeting.  A holder of ADSs will not beable to meet this requirement, and accordingly is not entitled to attendshareholders’ meetings.  A holder of ADSsis entitled to instruct the depositary as to how to vote the shares representedby ADSs, in accordance with procedures provided for in the deposit agreement,but a holder of ADSs will not be able to vote its shares directly at ashareholders’ meeting or to appoint a proxy to do so.  In addition, such voting instructions may belimited to matters enumerated in the agenda contained in the notice toshareholders and with respect to which information is available prior to theshareholders’ meeting.

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***Holders of ADSs May NotBe Able to Participate in Any Future Preemptive Rights Offering and as a ResultMay Be Subject to a Dilution of Equity Interest***

Under Mexican law, if we issue new shares for cash asa part of a capital increase, other than in connection with a public offeringof newly issued shares or treasury stock, we must generally grant ourshareholders the right to purchase a sufficient number of shares to maintaintheir existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptiverights.  We may not legally be permittedto allow holders of our shares through ADSs in the United States to exerciseany preemptive rights in any future capital increases unless (i) we file a registrationstatement with the U.S. Securities and Exchange Commission, or SEC, withrespect to that future issuance of shares or (ii) the offering qualifiesfor an exemption from the registration requirements of the Securities Act.  At the time of any future capital increase,we will evaluate the costs and potential liabilities associated with filing aregistration statement with the SEC, as well as the benefits of preemptiverights to holders of our shares through ADSs in the United States and any otherfactors that we consider important in determining whether to file aregistration statement.

We are under noobligation to, and there can be no assurance that we will, file a registrationstatement with the SEC to allow holders of our shares through ADSs in theUnited States to participate in a preemptive rights offering.  In addition, under current Mexican law, salesby the ADS depositary of preemptive rights and distribution of the proceedsfrom such sales to the holders of our shares through ADSs is not possible.  As a result, the equity interest of holdersof our shares through ADSs would be diluted proportionately and such holdersmay not receive any economic compensation. See “Item 10.  AdditionalInformation—Bylaws—Preemptive Rights.”

***The Protections Affordedto Minority Shareholders in Mexico Are Different From Those in the UnitedStates***

Under Mexican law, theprotections afforded to minority shareholders are different from those in theUnited States.  In particular, the lawconcerning fiduciary duties of directors, executive officers and controllingshareholders has been recently developed, with no legal precedent to predictthe outcome of any such action. Additionally, class actions are not available under Mexican law andthere are different procedural requirements for bringing shareholder derivativelawsuits.  As a result, in practice itmay be more difficult for our minority shareholders to enforce their rightsagainst us, our directors, our executive officers or our controllingshareholders than it would be for shareholders of a U.S. company.

***We Have SignificantTransactions With Affiliates That Could Create Potential Conflicts of Interest***

As of June 15, 2007, weheld approximately 9.86 % of the capital stock of Grupo Financiero Banorte,S.A. de C.V. or GFNorte,  a Mexicanfinancial institution.  In the normalcourse of business, we may obtain financing from GFNorte’s subsidiaries atmarket rates and terms.  For the pastfive and a half years, the highest outstanding loan amount wasPs.162 million (in nominal terms) with an interest rate of 8.9% inDecember 2003.

We purchase some of ourinventory ingredients from our shareholder and associate Archer-Daniels-MidlandCompany, or Archer-Daniels-Midland. During 2004, 2005 and 2006, we purchased U.S.$103** **million,U.S.$105 million and U.S.$115 million ofinventory ingredients, respectively, from Archer-Daniels-Midland.  Transactions with affiliates may create thepotential for conflicts of interest.  See“Item 7.  Major Shareholders andRelated Party Transactions—Related Party Transactions.”

***Exchange RateFluctuations May Affect the Value of Our Shares***

Fluctuations in the exchange rate between the Peso andthe U.S. Dollar will affect the U.S. Dollar value of an investment in ourshares and of dividend and other distribution payments on those shares.  See “Item 3.  Key Information—Exchange Rate Information.”

***Our Bylaws Restrict theAbility of Non-Mexican Shareholders to Invoke the Protection of TheirGovernments With Respect to Their Rights as Shareholders***

As required by Mexicanlaw, our bylaws provide that non-Mexican shareholders shall be considered asMexican in respect to their ownership interests in us, and shall be deemed tohave agreed not to invoke the protection of their governments in anycircumstances, under penalty to forfeit, in favor of the Mexican government,any participation or interest held in us.

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Under this provision, anon-Mexican shareholder is deemed to have agreed not to invoke the protectionof its own government by requesting the initiation of a diplomatic claimagainst the Mexican government with respect to its shareholder’s rights.  However, this provision shall not deemnon-Mexican shareholders to have waived any other rights they may have,including any rights under the U.S. securities laws, with respect to theirinvestment in us.

***Our ControllingShareholder Exerts Substantial Control Over Our Company***

As of April 27, 2007, Roberto González Barreraand his family controlled directly or indirectly approximately 50.9% of ouroutstanding shares.  Consequently,Mr. González Barrera and his family have the power to elect the majorityof our directors and to determine the outcome of most actions requiringapproval of our stockholders, including the declaration of dividends.  The interests of Mr. González Barreraand his family may differ from those of our other shareholders.  Mr. González Barrera and his family’sholdings are described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

Mr. González Barrera haspledged part of his shares in our company to secure some of hisborrowings.  If there is a default andthe lenders enforce their rights against any or all of these shares, Mr.González Barrera and his family could lose control over us and a change of controlcould result.  In addition, this couldtrigger a default in one of our credit agreements and have a material adverseeffect upon our business, financial condition, results of operations andprospects.  For more information aboutthis pledge, see “Item 7.  MajorShareholders and Related Party Transactions.”

***Archer-Daniels-Midland,Our Strategic Partner, Has Influence Over Some Corporate Decisions; OurRelationship With Archer-Daniels-Midland Could Become Adverse and Hurt OurPerformance***

Archer-Daniels-Midlandowns, directly or indirectly, approximately 27.1% of our outstandingshares.  However, a portion of suchinterest is held through a Mexican corporation jointly owned with Mr. GonzálezBarrera, who has the sole authority to determine how those shares arevoted.  Thus, Archer-Daniels-Midland onlyhas the right to vote 22% of our outstanding shares.  In addition, Archer-Daniels-Midland has theright to nominate two of the 15 members of our board of directors and theircorresponding alternates. As a result, Archer-Daniels-Midland may influence theoutcome of actions requiring the approval of our shareholders or our board ofdirectors.  Mr. González Barrera andArcher-Daniels-Midland have also granted each other rights of first refusal inrespect of their shares in our company, subject to specified conditions.

Additionally, subject tocertain requirements under the *Ley del Mercado deValores, or*Mexican Securities Law, Archer-Daniels-Midland may also:(i) request the Chairman of the board or the Chairman of the audit andcorporate governance committees to convene a general shareholders’ meeting;(ii) initiate civil lawsuits against members of the board of directors,members of the audit and corporate governance committees, and the chiefexecutive officer for breach of duty; (iii) judicially oppose resolutionsadopted at shareholder meetings; and (iv) request the deferral of any voteregarding an issue about which it does not believe it has been sufficientlyinformed.

Archer-Daniels-Midlandowns, directly or indirectly, a 40% interest in our subsidiary, Molinera deMéxico, S.A. de C.V., or Molinera de México, and a 20% interest in oursubsidiary, Azteca Milling, L.P., or Azteca Milling.  Additionally, Archer-Daniels-Midland owns a3% indirect interest in Molinos Nacionales, C.A., or MONACA and a 3% indirectinterest in Derivados de Maíz Seleccionado, C.A. or DEMASECA.  For more information, please see “Item 4.  Information on the Company—Business Overview—Gruma Venezuela.”  These subsidiariesaccount for 30% of ourrevenue.  Although we own a majorityownership interest in these subsidiaries, in each of Azteca Milling andMolinera de México we are required to obtain the consent and cooperation ofArcher-Daniels-Midland with respect to certain matters in order to increase ourcapital expenditures and to implement and expand upon our business strategies.

We cannot assure you thatour relationships with Archer-Daniels-Midland will be harmonious andsuccessful.  Disagreements withArcher-Daniels-Midland could affect the execution of our strategy and, as a result,we may be placed at a competitive disadvantage.

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***Our AntitakeoverProtections May Deter Potential Acquirors***

Certain provisions of our bylaws could make itsubstantially more difficult for a third party to acquire control of us.  These provisions in our bylaws may discouragecertain types of transactions involving the acquisition of our securities.  These provisions could discouragetransactions in which our shareholders might otherwise receive a premium fortheir shares over the then current market price.  Holders of our securities who acquire sharesin violation of these provisions will not be able to vote, or receivedividends, distributions or other rights in respect of, these securities andwould be obligated to pay us a penalty. For a description of these provisions, see “AdditionalInformation—Bylaws—Antitakeover Protections.”

***We Are a Holding Companyand Depend Upon Dividends and Other Funds From Subsidiaries to Service Our Debt***

We are a holding company with no significant assetsother than the shares of our subsidiaries. As a result, our ability to meet our debt service obligations dependsprimarily upon our receiving sufficient funds from our subsidiaries.  Under Mexican law, companies may only paydividends:

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

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

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

·                  aftershareholders have approved the payment of the relevant dividends at a dulyconvened meeting.

In addition, Gruma Corporation is subject to covenantsin some of its debt and lease agreements which partially restrict the amount ofdividends that can be paid, limit advances or loans to us, and require themaintenance of specified financial ratios and balances.  For additional information concerning theserestrictions on inter-company transfers, see “Item 3.  Key Information—Dividends” and “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources.”

We own approximately 83%of the outstanding shares of Grupo Industrial Maseca, S.A.B. de C.V., or GIMSA,84% of MONACA, 57% of DEMASECA, 80% of Azteca Milling, L.P. (through GrumaCorporation), 60% of Molinera de México, S.A. de C.V. and, as of June 15, 2007,9.86% of GFNorte.  Upon completion of aseries transactions which commenced in April 2006 and are expected to becompleted by December 2007, we will own a 57% interest in MONACA.  For more information regarding thesetransactions, please see “Item 4. Information on the Company—Business Overview— Gruma Venezuela.”  Accordingly, we are entitled to receive onlyour *pro rata* share of any of thesesubsidiaries’ dividends.

Our ability to repatriatedividends from Gruma Venezuela may be adversely affected by exchange controlsand other recent events.  See “Item 3.  Risk Factors—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”

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## **ITEM4.****                                                     Informationon the Company.**

**HISTORY AND DEVELOPMENT**

Gruma, S.A.B. de C.V. is a publicly held corporation (*Sociedad Anónima Bursátil de Capital Variable)* registered inMonterrey, Mexico under the *Ley General de SociedadesMercantiles*, or Mexican Corporations Law on December 24, 1971with a corporate life of 99 years.  Ourfull legal name is Gruma, S.A.B. de C.V., but we are also known by our commercialnames:  GRUMA and Maseca.  The address of our principal executive officeis Calzada del Valle. 407 Ote, Colonia del Valle, San Pedro Garza García, NuevoLeón, 66220 México and our telephone number is (52 81) 8399-3300.  Our legal domicile is Monterrey, Nuevo León,México.

We were founded in 1949, when Roberto GonzálezBarrera, the Chairman of our board of directors started producing and sellingcorn flour in Northeastern Mexico as an alternative raw material in producingtortillas.  Prior to our founding, allcorn tortillas were made using a rudimentary process.  We believe that the preparation of tortillasusing the corn flour method presents advantages, including greater efficiencyand higher quality, which makes tortillas consistent and readily available.  The corn flour process has been a significantimpetus for growth, resulting in expanding corn flour and tortilla productionand sales throughout Mexico, the United States, Central America, Venezuela,Europe, Asia and Oceania.  In addition,we have diversified our product mix to include wheat flour in Mexico andVenezuela.

One of our most important competitive advantages isour proprietary state-of-the art technology for the manufacturing of corn flourand tortillas and some other related products. We have been developing and advancing our own technology since thefounding of our company.  Throughout theyears we have been able to achieve vertical integration which is an importantpart of our competitive advantage.

The following are somesignificant historical highlights:

·                  **In 1949**, we founded GIMSA, which is engaged principally inthe production, distribution and sale of corn flour in Mexico.

·                  **In 1972**, we entered the Central American market with ourfirst operation in Costa Rica.  Today, wehave operations in Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua andEcuador.

·                  **In 1977**, we entered the U.S. market.  Our operations have grown to include productssuch as tortillas, corn flour and other tortilla related products.

·                  **From 1989 to 1995**, we significantly increased our installedmanufacturing capacity in the United States and in Mexico.

·                  **In 1993**, we entered the Venezuelan corn flour market throughan investment in DEMASECA, a Venezuelan corporation producing corn flour.

·                  **In 1994**, we began our packaged tortilla operations in Mexicoas part of our strategy to broaden our product lines in Mexico, achievevertical integration of our corn flour operations and capitalize upon ourexperience in producing and distributing packaged tortillas in the UnitedStates.  We were focused only on thenorthern part of Mexico.

·                  **In 1996**, we strengthened our position in the U.S. corn flourmarket through an association with Archer-Daniels-Midland, which currently ownsapproximately 27.13% of our shares. Through this association we combined our existing U.S. corn flouroperations and strengthened our position in the U.S. corn flour market.  This association also allowed us to enter theMexican wheat flour market by acquiring a 60% ownership interest in Archer-Daniels-Midland’sMexican wheat flour operations.

·                  **From 1997 through 2000**, we initiated a significant plantexpansion program.  During this period,we acquired or built wheat flour plants, corn flour plants, bread plants and/ortortilla plants in the United States, Mexico, Central America, Venezuela(acquisition of MONACA) and Europe.

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·                  **From 2001 to 2003**, as a result of a comprehensive review ofour business portfolio and our focus on our core businesses, we sold our breadbusiness.

·                  **In 2004**, we acquired Ovis Boske, a tortillacompany based in Holland, Nuova De Franceschi & Figli, S.P.A., orNuova De Franceschi & Figli, a corn flour company based in Italy and asmall tortilla plant in Las Vegas, Nevada. We continued to expand capacity and upgrade several of ourU.S. operations, the most relevant of which was the expansion of a cornmill in Indiana.  This expansion wascompleted during the second half of 2005.

·                  **In 2005**, we began the construction of atortilla plant in Pennsylvania, which has been operational sinceJuly 2005.  We continued to expandcapacity at existing plants.  Inaddition, Gruma Corporation acquired part of the manufacturing assets of theMexican food division of Cenex Harvest States or CHS, which consisted of threetortilla plants located in New Brighton, Minnesota; Forth Worth, Texas; andPhoenix, Arizona.  Gruma Corporation alsoacquired a small tortilla plant near San Francisco, California.  In August, GIMSA acquired 100% of the capitalstock of Agroindustrias Integradas del Norte and Agroinsa de México (together,and with their subsidiaries, Agroinsa), a group of companies based inMonterrey, Mexico engaged primarily in the production of corn flour and, to alesser extent, wheat flour and other products.

·                  **In 2006**, during the first quarter, we concluded theacquisitions of two small tortilla plants in Australia (Rositas Investments andOz-Mex Foods), which will strengthen our presence in the Asian and Oceaniamarkets.  In April, we entered into a contractto sell a 40% stake in MONACA to our partners in DEMASECA.  In conjunction with this transaction, we alsoagreed to purchase an additional 10% ownership interest in DEMASECA from ourpartners.  We also purchased theremaining 49% ownership interest in Nuova De Franceschi & Figli, acorn flour company based in Italy, in which we previously held a 51% ownershipinterest.  In September 2006, we openedour first tortilla plant in Asia, located in Shanghai, China.  We believe the plant will allow us tostrengthen our presence in the Asian markets by improving our service tocustomers and consumers, allowing us to introduce new products to the Asianmarket and offer fresher products.  InOctober 2006, we concluded the acquisition of Pride Valley Foods, a companybased in Newcastle, England, that produces tortillas, pita bread, naan, andchapatti.  We believe the acquisitionwill strengthen our presence in the European market and will provide anopportunity to expand our product portfolio to products similar to tortillas.

·                  **In 2007**, during the first quarter, we made major investmentsin capacity expansions and upgrades in Gruma Corporation, as well as in GIMSA,because we are rebalancing production corn flour requirements among differentregions in Mexico.

We are continuously considering potential acquisitionswhich could improve our market share, profitability and fit into our overallstrategy.

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**ORGANIZATIONAL STRUCTURE**

We are a holding company and conduct our operationsthrough subsidiaries.  The table belowsets forth our principal subsidiaries as of December 31, 2006.  
| **Name of  Company**                                                               | ** ** | **Principal  Markets**                                                     | ** ** | **Jurisdiction of  Incorporation** | ** ** | **Percentage  Owned**(1) | ** ** | **Products/  Services**                                                        |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------|------------|--------------------------------------------------------------------------------|
| ** **                                                                         |       |                                                                       |       |                               |       |                     |       |                                                                           |
| **Mexican  Operations**                                                            |       |                                                                       |       |                               |       |                     |       |                                                                           |
| ** **                                                                         |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Grupo Industrial  Maseca, S.A.B. de C.V. (“GIMSA”)                       |       | Mexico                                                                     |       | Mexico                             |       | 83%                      |       | Corn flour,  Tortillas, Other                                             |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Molinera de  México, S.A. de C.V.  (“Molinera de México”)      |       | Mexico                                                                     |       | Mexico                             |       | 60%                      |       | Wheat flour,   Other                                                           |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| **U.S.,  European, Asia and Oceania Operations**(2)                                |       |                                                                       |       |                               |       |                     |       |                                                                           |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Gruma  Corporation                                                                 |       | United States,   Europe, Asia,   Oceania                                   |       | Nevada                             |       | 100%                     |       | Packaged   tortillas, Other   tortilla related   products, Corn   flour, Other |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Azteca Milling(3)                                                                  |       | United States                                                              |       | Texas                              |       | 80%                      |       | Corn flour                                                                     |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| **Central  American Operations**                                                   |       |                                                                       |       |                               |       |                     |       |                                                                           |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Gruma Centroamérica,  LLC.                                                    |       | Costa Rica,   Honduras,   Guatemala, El   Salvador,   Nicaragua,   Ecuador |       | Nevada                             |       | 100%                     |       | Corn flour,   Packaged   tortillas, Snacks,   Hearts of palm,   Rice           |
| ** **                                                                         |       |                                                                       |       |                               |       |                     |       |                                                                           |
| **Venezuelan  Operations**(4)                                                      |       |                                                                       |       |                               |       |                     |       |                                                                           |
| ** **                                                                         |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Molinos  Nacionales, C.A. (“MONACA”) (5)                                 |       | Venezuela                                                                  |       | Venezuela                          |       | 84%                      |       | Corn flour,   Wheat flour,   Other products                                    |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Derivados de  Maíz Seleccionado, C.A. (“DEMASECA”) (5)              |       | Venezuela                                                                  |       | Venezuela                          |       | 57%                      |       | Corn flour                                                                     |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| **Other  Subsidiaries**                                                            |       |                                                                       |       |                               |       |                     |       |                                                                           |
| ** **                                                                         |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Productos y  Distribuidora Azteca, S.A. de C.V. (“PRODISA”)              |       |  

Mexico                                                             |       |  

Mexico                     |       |  

100%             |       |  

Packaged   tortillas, Other   related products                         |
|                                                                               |       |                                                                       |       |                               |       |                     |       |                                                                           |
| Investigación de  Tecnología Avanzada, S.A. de C.V. (“INTASA”) |       |  

Mexico                                                             |       |  

Mexico                     |       |  

100%             |       |  

Construction,  Technology and   Equipment   operations                 |

 

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(1)   Percentage of equity capital owned by usdirectly or indirectly through subsidiaries.(2)   Beginning in 2007, the Asia andOceania operations will be presented as a separate business unit from GrumaCorporation.

(3)   A limited partnership between Gruma Corporation(80%) and Archer-Daniels-Midland (20%).(4)   Together these subsidiaries arereferred to as “Gruma Venezuela.”

(5)          Upon completion of a series of transactions with ourVenezuelan partners in DEMASECA, GRUMA will hold a 57% interest, ADM will holda 3% interest and our partners will hold a 40% interest in both MONACA andDEMASECA.  Such transactions are expectedto be 

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completed byDecember 2007.  As of June 15, 2007,GRUMA holds a 73% interest in MONACA. For more information regarding these transactions, please see “—BusinessOverview– Gruma Venezuela.”

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Our subsidiaries accounted for the followingpercentages and amount of our net sales in millions of pesos of constantpurchasing power as of December 31, 2006 for the years endedDecember 31, 2004, 2005 and 2006.
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **In Millions  of Pesos**        | ** ** | **Percentage  of Net Sales** | ** ** | **In Millions  of Pesos** | ** ** | **Percentage  of Net Sales** | ** ** | **In Millions  of Pesos** | ** ** | **Percentage  of Net Sales** | ** ** |
| Gruma Corporation         |       | Ps.                                        | 12,296     |   | 48 | % | Ps. | 14,327 |   | 51 | % | Ps. | 16,312 |   | 53 | % |
| GIMSA                     |       | 6,222                                      |       | 24 |   | 6,791 |   | 24 |   | 7,388 |   | 24 |   |
| Gruma Venezuela           |       | 3,822                                      |       | 15 |   | 3,221 |   | 12 |   | 3,132 |   | 10 |   |
| Molinera de México   |       | 2,027                                      |       | 8 |   | 1,956 |   | 7 |   | 2,132 |   | 7 |   |
| Gruma Centroamérica  |       | 1,314                                      |       | 5 |   | 1,424 |   | 5 |   | 1,595 |   | 5 |   |
| Others (and eliminations) |       | 119                                        |       | — |   | 144 |   | 1 |   | 95 |   | 1 |   |
|                           |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Associationwith Archer-Daniels-Midland**

We entered into an association withArcher-Daniels-Midland in September 1996. Archer-Daniels-Midland is one of the world’s largest agriculturalprocessors and traders.  Through ourpartnership we have improved our position in the U.S. corn flour marketand gained an immediate presence in the Mexican wheat flour market.

As a result of thisassociation, we and Archer-Daniels-Midland combined our U.S. corn flouroperations to form Azteca Milling, L.P., a limited partnership in which wehold indirectly, 80% and Archer-Daniels-Midland holds indirectly, 20%.  We and Archer-Daniels-Midland agreed toproduce and distribute corn flour in the United States exclusively throughAzteca Milling.  In addition, we acquired60% of the capital stock of Archer-Daniels-Midland’s wholly-owned Mexican wheatmilling operations, Molinera de México, S.A. de C.V.  Archer-Daniels-Midland retained the remaining40%.  We and Archer-Daniels-Midlandagreed to produce and distribute wheat flour in Mexico exclusively throughMolinera de México.  As part of thisagreement, we also received U.S.$258.0 million in cash and gainedexclusivity rights from Archer-Daniels-Midland in specified corn flour andwheat flour markets.  In return,Archer-Daniels-Midland received 74,696,314 of our newly issued shares, whichrepresented at that time approximately 22% of our total outstanding shares andthe right to designate two of the 15 members of our board of directors andtheir corresponding alternates. Currently, Archer-Daniels-Midland owns, directly and indirectly,approximately 27% of our outstanding shares and, indirectly, a combined 3%stake in MONACA and DEMASECA.  See “Item 3.  Key Information—Risk Factors—Risks Relatingto Our Controlling Shareholders and Capital Structure—Archer-Daniels-Midland,Our Strategic Partner, Has Influence Over Some Corporate Decisions.” and “Item 10.  Additional Information—MaterialContracts—Archer-Daniels-Midland.”

**CapitalExpenditures**

Our capital expenditure program continues to beprimarily focused on our core businesses and markets. Capital expenditures for2004, 2005 and 2006 were U.S.$115 million, U.S.$193 million andU.S.$225 million, respectively.  Ourcapital expenditures include investments in property, plant and equipment,acquisitions of new plants and brands and investments in common stock.  Investments in 2004 were mainly applied toGruma Corporation for the expansion of corn flour and tortilla capacity,including two small European acquisitions, the acquisition of a small tortillaplant in Las Vegas, Nevada and general facilities upgrades at ourU.S. plants.  Investments in 2005were mainly applied to the construction of a new plant, expansions and upgradesof existing plants and several acquisitions, including the CHS (tortillaassets) ** **andAgroinsa acquisitions.  Investments in2006 were mainly applied to: (i) the expansion of tortilla capacity andupgrades in existing and new plants within Gruma Corporation; (ii) theacquisition of Pride Valley Foods, a company based in Newcastle, England, thatmanufactures tortillas, pita bread, chapatti, and naan, for an acquisition costof approximately U.S.$33 million; (iii) the construction of a tortillaplant in Shanghai, China, for a total investment of approximatelyU.S.$7million; (iv) the acquisition of Rositas Investments, a tortillacompany based in Australia, for approximately U.S.$13 million; (v) the 

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acquisition of Oz-MexFoods, a tortilla company based in Australia, for approximately U.S.$4 million;and (vi) the purchase of the remaining 49% ownership interest in Nuova DeFranceschi & Figli, a corn flour company based in Italy, in which wepreviously held a 51% ownership interest. To a lesser extent, investments were also applied to capacity expansionsin GIMSA and Gruma Centroamérica.  Theseinvestments were made to accommodate the continuous growth in ourbusiness.  We have budgeted approximatelyU.S.$250 million for capital expenditures in 2007.  Approximately U.S.$140 million of suchbudget is intended to be used for additional capacity in Gruma Corporation and,to a lesser extent, in GIMSA and Gruma Centroamérica.  We anticipate financing these expendituresthrough our own cash flows as well as through the sale of GFNorte sharesthroughout the year.  This capitalexpenditures budget does not include any potential acquisitions.

During the first quarter of 2007, we spentapproximately U.S.$45 million on capital expenditures.  Major investments were applied to capacityexpansions and upgrades in Gruma Corporation, as well as in GIMSA, in an effortto rebalance corn flour production requirements among different regions inMexico through the expansion of our Mérida and Mexicali plants. For moreinformation on capital expenditures please refer to the discussion of thespecific subsidiary.

We continue to analyze the Asia and Oceania markets,where we believe there is growth potential. In September 2006, we opened our first tortilla plant in Asia, which islocated in Shanghai, China.  This plantwill initially serve the foodservice channel, with an annual installed capacityof 30 thousand metric tons.  Ourinvestment in the plant was approximately U.S.$7 million.  This plant, together with our operations inAustralia, will enable us to better serve the Asia and Oceania markets.

The following table sets forth the aggregate amount ofour capital expenditures during the periods indicated.
| ** **                | ** ** | **Year ended December 31,**               | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(in millions of U.S. dollars**(1)) | ** ** |
| Gruma  Corporation        |       | $                                                        | 93.2       |   | $ | 88.0 |   | $ | 145.9 |   |
| GIMSA                     |       | 5.4                                                      |       | 69.6 |   | 31.3 |   |
| Gruma Venezuela           |       | 7.9                                                      |       | 17.2 |   | 21.9 |   |
| Molinera de  México  |       | 5.4                                                      |       | 1.8 |   | 5.1 |   |
| Gruma  Centroamérica |       | 0.0                                                      |       | 3.9 |   | 11.8 |   |
| Others and  eliminations  |       | 2.9                                                      |       | 12.7 |   | 9.1 |   |
| Total consolidated        |       | $                                                        | 114.8      |   | $ | 193.2 |   | $ | 225.1 |   |

 

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(1)          Amounts in respect of some of the capital expenditureswere paid for in currencies other than the U.S. dollar.  These amounts were translated into U.S.dollars at the exchange rate in effect at the end of each year on which a givencapital expenditure was made.  As aresult, U.S. dollar amounts presented in the table above may not be comparableto data contained elsewhere in this Annual Report.

For more information oncapital expenditures for each subsidiary, please see the sections entitled “Operationand Capital Expenditures” under the relevant sections below.

**BUSINESSOVERVIEW**

We believe we are one of the largest corn flour andtortilla producers and distributors in the world based upon revenue and salesvolume.  We also believe we are one ofthe leading producers and distributors of corn flour and tortillas in theUnited States, one of the leading producers of corn flour and wheat flour inMexico, and one of the leading producers of corn flour and wheat flour inVenezuela based upon revenue and sales volumes. We believe that we are also one of the largest producers of corn flourand tortillas in Central America, and one of the largest tortilla producers inEurope, Asia and Oceania, based upon revenue and sales volume.

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Our focus has been and continues to be the efficientand profitable expansion of our core business—corn flour, tortilla, and wheatflour production.  We pioneered the drycorn flour method of tortilla production, which offers several advantages overthe centuries-old traditional wet corn dough method.  These advantages include higher productionyields, reduced production costs, more uniform quality and longer shelflife.  The corn flour method ofproduction offers significant opportunities for growth.  Using our technology and know-how, we expectto encourage tortilla and tortilla chip producers in the United States, Mexico,Central America, and elsewhere to convert to the corn flour method of tortillaand tortilla chip production. Additionally, we expect to increase the presence of our other corebusinesses, including packaged tortillas in the United States, Mexico, CentralAmerica, Europe, Asia and Oceania, and wheat flour in Mexico and Venezuela.

The following table sets forth our revenues bygeographic market for years ended December 31, 2003, 2004 and 2005.
|                           | ** ** | **Year ended December 31,**                                                                                              | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                                                                                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(in millions of Pesos of constant purchasing power  as of December 31, 2006)** | ** ** |
| United States  and Europe |       | Ps.                                                                                                                                     | 12,296     |   | Ps. | 14,327 |   | Ps. | 16,310 |   |
| Mexico                    |       | 8,368                                                                                                                                   |       | 8,891 |   | 9,617 |   |
| Venezuela                 |       | 3,822                                                                                                                                   |       | 3,221 |   | 3,132 |   |
| Central America           |       | 1,314                                                                                                                                   |       | 1,424 |   | 1,595 |   |
|                      |       |                                                                                                                                    |       |   |   |   |   |
| Total                     |       | Ps.                                                                                                                                     | 25,800     |   | Ps. | 27,863 |   | Ps. | 30,654 |   |

 

**Strategy**

Our strategy for growth is to focus on our corebusiness—the manufacturing of tortillas, corn flour and wheat flour—and tocapitalize upon our leading positions in the corn flour and tortilla industries.  We have taken advantage of the increasingpopularity of Mexican food and, more importantly, tortillas in the U.S.,European and Asia and Oceania markets. We have also taken advantage from the adoption of tortillas by the U.S.general market and by Europeans for the preparation of different recipes otherthan Mexican food, and from the flexibility of our wraps and new productconcepts we have launched such as low-fat, carb-balance and multigrain.  We arecontinuously considering potential acquisitions which could improve our marketshare, profitability and fit into our overall strategy.  Our strategy includes the following keyelements:

*Expand in the Growing Retail andFood Service Tortilla Markets in New Regions in the United States*:  We believe that the size and growth of theU.S. retail and food service tortilla markets offer significant opportunitiesfor expansion.

*Enter and Expand in the TortillaMarkets in Other Regions of the World:* We believe that newmarkets in other continents such as Europe, Asia and Oceania offer ussignificant opportunities.  We believeour acquisitions in Europe will enable us to better serve markets in Europe andin the Middle East through stronger vertical integration, improvements inlogistical efficiencies, and enhanced knowledge of our local markets.  In Asia, we have established a presence withour first tortilla plant in China, which opened in September 2006.  Our presence in China will enable us to offerour customers fresh products and respond more quickly to their needs.  We have also strengthened our presence inOceania with the acquisition of two tortilla companies in Australia.  We also expanded our business portfolio withthe acquisition of Pride Valley Foods, a company based in England, whichmanufactures products similar to tortillas, such as pita, chapatti, and naanbread, as well as tortillas.  We willcontinue to evaluate ways to profitably expand into these rapidly growingmarkets.

*Continue the Process ofEstablishing Gruma Corporation’s MISSION**® and GUERRERO**® Tortilla Brands as the First and SecondNational Brands in the United States*:  We intend to achieve this by increasing ourefforts at building brand name recognition and by further expanding andutilizing Gruma Corporation’sdistribution network, first in Gruma Corporation’s existing markets, where webelieve there is potential for further growth, and second, in 

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regionswhere Gruma Corporation currently does not have a significant presence butwhere we believe strong demand for tortillas already exists.

*Encourage Transition fromTraditional Cooked-Corn Method to Corn Flour Method*:  We pioneered the dry corn flour method oftortilla production, which offers several advantages over the centuries-oldtraditional wet corn dough method.  Wecontinue to view the transition from the traditional method to the corn flourmethod of making tortillas and tortilla chips as the primary opportunity forincreased corn flour sales.  We willcontinue to encourage this transition through improving customer service, advertisingand promoting principally our MASECA® brand corn flour, as well as leveraging off ofour manufacturing capacity and distribution networks.  In addition, we see as an opportunity thefact that corn flour is more environmentally friendly than the traditionalmethod.

*Continually Improve Service andQuality of Our Products to Customers and Consumers*:* *We continue todevelop customer relationships by ensuring that our customer-service and salesrepresentatives develop an intimate knowledge of their clients’ businesses andby working with clients to help them improve their products, services, andsales to their consumers.  Wecontinuously work to improve service and the quality of our products toconsumers, raise consumer awareness of our products, and stay informed of ourconsumers’ preferences.

**U.S. and European Operations**

***Overview***

We conduct our United States and European operationsprincipally through our subsidiary, Gruma Corporation, which manufactures anddistributes corn flour, packaged tortillas, corn chips and relatedproducts.  The Asia and Oceaniaoperations were reported in our financial statements under Gruma Corporationthrough December 2006, but since 2007 the Asia and Oceania operations have beenreported as a separate business unit. Gruma Corporation commenced operations in the United States in 1977,initially developing a presence in certain major tortilla consumption marketsby acquiring small tortilla manufacturers and converting their productionprocesses from the traditional “wet corn dough” method to our dry corn flourmethod.  Eventually, we began to buildour own state-of-the-art tortilla plants in certain major tortilla consumptionmarkets.  We have vertically integratedour operations by (i) building corn flour and tortilla manufacturingfacilities; (ii) establishing corn purchasing operations; (iii) launchingmarketing and advertising campaigns to develop brand name recognition; (iv)expanding distribution networks for corn flour and tortilla products, and;(v) using our technology to design and build proprietary corn flour,tortilla and tortilla chip manufacturing machinery.

In September 1996, we combined our U.S. cornflour milling operations with Archer-Daniels-Midland’s corn flour millingoperations into a newly formed limited partnership, known as Azteca Milling,L.P., in which Gruma Corporation holds an 80% interest.

During 2000, GrumaCorporation opened its first European tortilla plant in England, initiating ourentry into the European market.  During 2004 Gruma Corporation concluded two smallacquisitions in Europe, a tortilla plant in Holland and a 51% ownership of acorn flour plant in Italy in an effort to strengthen our presence in thatregion.  During 2006, Gruma Corporationacquired a company in England, which we believe will allow us to expandour product portfolio with new types of flat breads.  In addition, Gruma Corporation also purchasedthe remaining 49% ownership interest in Nuova De Franceschi & Figli, acorn flour company based in Italy, in which we previously held a 51% ownershipinterest.

***Gruma Corporation***

Gruma Corporation operates primarily through itsMission Foods division, which produces tortillas and related products, andAzteca Milling, L.P., a limited partnership between Gruma Corporation(80%) and Archer-Daniels-Midland (20%) which produces cornflour.  We believe Gruma Corporation isone of the leading manufacturers and distributors of packaged tortillas andrelated products throughout the United States and Europe through its MissionFoods division.  We believe GrumaCorporation is also one of the leading producers of corn flour in the UnitedStates through its Azteca Milling division.

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*Principal Products*.  Mission Foods manufactures and distributespackaged corn and wheat tortillas and related products (which include tortillachips) under the MISSION® and GUERRERO® brand names in the United States, as well asother minor regional brands.  Bycontinuing to build MISSION® into a strong national brand for the generalconsumer market and GUERRERO® into a strong Hispanic consumer focused brand,Mission Foods expects to increase market penetration, brand awareness andprofitability.  Azteca Millingmanufactures and distributes corn flour in the United States under the MASECA® brand.

*Sales and Marketing*.  Mission Foods serves both retail and foodservice customers.  Retail customers,which represent most of our business, include supermarkets, mass merchandisersand smaller independent stores.  Our foodservice customers include major chain restaurants, food service distributors,schools, hospitals and the military.

In the tortilla market, Mission Foods’ currentmarketing strategy is to increase market penetration by increasing consumerawareness of tortilla products in general, to expand into new regions and tofocus on product innovation and customer needs. Mission Foods promotes its products primarily through cooperativeadvertising programs with supermarkets as well as radio and televisionadvertising, targeting both Hispanic and non-Hispanic populations.  We believe these efforts have contributed togreater consumer awareness.  MissionFoods also targets food service companies and works with restaurants,institutions and distributors to address their individual needs and providethem with a full line of products. Mission Foods continuously attempts to identify new customers andmarkets for its tortillas and related products in the United States and, morerecently, in Europe.

Azteca Milling distributes approximately 38% of the corn flour it produces toMission Foods’ plants throughout the United States and Europe.  Azteca Milling’s third-party customersconsist largely of other tortilla manufacturers, corn chip producers, retailcustomers and wholesalers.  AztecaMilling sells corn flour in various quantities, ranging from four-pound retailpackages to bulk railcar loads.

We anticipate continued growth in the U.S. market forcorn flour, tortillas, and related products. We believe that the growing consumption of Mexican-style foods bynon-Hispanics will continue to increase demand for tortillas and tortillarelated products, particularly flour tortillas. Also influential is the fact that tortillas are no longer solely used asMexican food, for example, the use of tortillas for wraps, which will continueto increase demand for tortillas.  Growthin recent years in the corn flour market is attributable to this increase ofcorn tortilla and tortilla chip consumption in the U.S. market as well as theconversion of tortilla and tortilla chip producers from the wet corn doughprocess to our dry corn flour method, the increase of Hispanic population, theconsumption of tortillas and tortilla chips by the general consumer market, andstronger and increased distribution.

*Competition and Market Position*.  We believe the tortilla market is highlyfragmented, regional in nature and extremely competitive.  Mission Foods’ main competitors are hundredsof tortilla producers who manufacture locally or regionally and tend to be soleproprietorships.  However, a fewcompetitors have a presence in several U.S. regions.  In addition, a few large companies havetortilla manufacturing divisions that compete with Mission Foods, for example,Tyson,****Bimbo, Hormel Foods, Flowers andGeneral Mills.  We believe Mission Foodsis one of the leading manufacturers and distributors of packaged tortillas andrelated products throughout the United States and Europe.

Competitors within the corn flour milling industryinclude Minsa and corn flour milling divisions of large companies, such asCargill.  Azteca Milling competes withthese corn flour manufacturers in the United States primarily on the basis ofsuperior quality, technical support, customer service and brandrecognition.  However, we believe thereis great potential for growth by converting tortilla and tortilla chipmanufacturers that still use the traditional method to our corn flourmethod.  We believe Azteca Milling is oneof the leading producers of corn flour in the United States.

We believe there is asignificant growth potential for tortillas in Europe.  Approximately two-thirds of our production isallocated to foodservice, while the remaining one-third is for retail.  We believe we are one of the largest tortillaproducers in Europe, and our main competitors in Europe are General Mills andSanta Maria.

*Operation and Capital Expenditures*.  Annual total production capacity for GrumaCorporation is estimated at 2.0 millionmetric tons as of December 31, 2006, with an average utilization of80% in 2006.  The average size of 

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our plants measured insquare meters is approximately 8,545 (about 92,000 square feet) as ofDecember 31, 2006.  Capitalexpenditures for the past three years were U.S.$327.1 million, mostly for expansion and upgrades of existingfacilities, the construction of new tortilla plants in Pennsylvania and China,as well as several acquisitions: three in Europe, two in Australia, one in LasVegas, Nevada, one in San Francisco, California, and the tortilla assets of CHSwhich consisted of three plants (Forth Worth, Texas, Phoenix, Arizona and NewBrighton, Minnesota).  Gruma Corporationalso purchased the remaining 49% ownership interest in Nuova DeFranceschi & Figli, a corn flour company based in Italy, in which wepreviously held a 51% ownership interest. Gruma Corporation’s capitalexpenditures projected for 2007 will be approximately U.S$140 million andinclude capacity expansions at existing facilities and manufacturing andtechnology upgrades, as well as the construction of a tortilla plant inSouthern California.  These budgetedcapital expenditures do not include any potential acquisitions.

Mission Foods produces its packaged tortillas andother related products at 22 manufacturing facilities worldwide.  Nineteen of these facilities are located inlarge population centers throughout the United States.  Outside the United States, Mission Foods hastwo plants in England and one plant in The Netherlands.

Mission Foods is committed to offering the bestquality products to its customers and uses the American Institute of Baking(AIB) food safety standards to measure and ensure food compliance with thiscommitment. AIB is a corporation founded in 1919 by the North Americanwholesale and retail baking industries that is dedicated to protecting thesafety of the food supply chain.  All ofthe Mission Foods manufacturing facilities worldwide have earned either asuperior or excellent category rating from the AIB.  Many of Mission Foods’s U.S. plants haveearned the AIB’s highest award, the combined AIB-HAACP certification, with the exceptionof the recently acquired plants in Nevada, Texas, Arizona, Minnesota andCalifornia, as well as the recently constructed plant in Pennsylvania.  We anticipate these plants will completetheir HAACP certification during the next two years.  Besides the AIB, Mission Foods plants areregularly evaluated by other third party organizations as well ascustomers.  Our plants in England and TheNetherlands are also evaluated by other third party organizations such asInternational Food Standards and British Retail Consortium.

Azteca Milling produces corn flour at six plantslocated in Amarillo, Edinburg and Plainview, Texas; Evansville, Indiana;Henderson, Kentucky; and Madera, California. Gruma Corporation also produces corn flour at a plant in Ceggia, Italy.  The majority of our plants are located withinimportant corn growing areas.  Due toAzteca Milling’s manufacturing practices and processes, we are the only cornmilling company to achieve ISO 9002 certification as well as certification bythe American Institute of Baking.  Allsix facilities located in the U.S. have achieved ISO 9002 certification.  The corn flour plant in Italy has both AIBand International Food Standards certifications.

*Seasonality. *We believe there is no significant seasonality in ourproducts, however part of our products tend to experience a slight volumeincrease during the summer months. Tortillas and tortilla chips sell year round, with special peaks duringthe summer, when we increase our promotion and advertising taking advantage ofseveral holidays and major sporting events. Tortilla and tortilla chip sales decrease slightly towards the end ofthe year when many Mexicans go back to Mexico for the holidays.  Sales of corn flour fluctuate seasonally asdemand is higher in the fourth quarter during the holidays.

*Raw Materials*.  Corn is the principal raw material used inthe production of corn flour, which is purchased from local producers.  Azteca Milling buys corn only from farmersand grain elevators that agree to supply varieties of corn approved for humanconsumption.  Azteca Milling tests andmonitors for corn not approved for human consumption, for certain strains ofbacteria, fungi metabolites and chemicals. In addition, Azteca Milling applies certain testing protocols toincoming raw materials to identify genetically modified products not approvedfor human consumption.

Because corn prices tend to be somewhat volatile,Azteca Milling engages in a variety of hedging activities in connection withthe purchase of its corn supplies, including the purchase of corn futurescontracts.  In so doing, Azteca Millingattempts to assure corn availability approximately 12 months in advance ofharvest time and guard against price volatility approximately 6 months inadvance.  The Texas Panhandle currentlyis the single largest source of food-grade corn.  Azteca Milling is also involved in short-termcontracts for corn procurement with many corn suppliers.  Where suppliers fail to deliver, AztecaMilling can easily access the spot markets. Azteca Milling does not anticipate any difficulties in securing adequatecorn supplies in the future.

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Corn flour for Mission Foods’ products is supplied byAzteca Milling and, to a much lesser extent, by GIMSA and our corn flouroperations in Italy.

Wheat flour for the production of wheat tortillas andother types of wheat flat breads is purchased from third party producers atprices prevailing in the commodities markets. Mission Foods believes the market for wheat flour is sufficiently largeand competitive to ensure that wheat flour will be available at competitiveprices to supply our needs.  Contractsfor wheat flour supply are made on a short-term basis.

*Distribution*.  An important element of Mission Foods’ salesgrowth has been the expansion and improvement of its tortilla distributionnetwork, including a direct-store-delivery system to distribute most of itsproducts.  Tortillas and other freshlymade products are generally delivered daily to customers, especially in retailsales and in regions where we have plants. In regions where we do not have plants, there is no daily distributionand tortillas are sometimes sold refrigerated. In keeping with industry practice, Mission Foods generally does not havewritten sales agreements with its customers. Nevertheless, from time to time,Mission Foods enters into consumer marketing agreements with retailers, inwhich certain terms on how to market our products are agreed.  Mission Foods has also developed a foodservice distribution network on the west and east coasts of the United States,and in certain areas of the Midwest.

The vast majority of cornflour produced by Azteca Milling is sold to tortilla and tortilla chipmanufacturers and is delivered directly from the plants to the customer.  Azteca Milling’s retail customers areprimarily serviced by a network of distributors, although a few large retailcustomers have their corn flour delivered directly to them from the plants.

**Mexican Operations**

***Overview***

Our largest business inMexico is the manufacture and sale of corn flour, which we conduct through oursubsidiary GIMSA.  Through ourassociation with Archer-Daniels-Midland, we have also entered the wheat millingbusiness in Mexico through Molinera de México. Our other subsidiaries engage in the manufacturing and distribution ofpackaged tortillas and other related products in northern Mexico,  conductresearch and development regarding corn flour and tortilla manufacturingequipment, produce machinery for corn flour and tortilla production and constructour corn flour manufacturing facilities.

***GIMSA—Corn FlourOperation***

*Principal Products. *GIMSA produces, distributes and sells corn flour inMexico, which is then used in the preparation of tortillas and other relatedproducts.  In 2006, GIMSA had net salesof Ps.7,388 million.  We believe GIMSA isone of the largest corn flour producers in Mexico.  GIMSA estimates that its corn flour is usedin one third of the corn tortillas consumed in Mexico.  It sells corn flour in Mexico mainly underthe brand name MASECA®.  MASECA® flour is aready-mixed corn flour that becomes a dough when water is added.  This corn dough can then be pressed to anappropriate thickness, cut to shape and cooked to produce tortillas and similarfood products.

GIMSA produces over 40 varieties of corn flour for themanufacture of different food products which are developed to meet therequirements of our different types of customers according to the kind oftortillas they produce and markets they serve. It sells corn flour to tortilla and tortilla chip manufacturers as wellas in the retail market.  GIMSA’sprincipal corn flour product is MASECA®,astandard fine-textured, white corn flour used to manufacture tortillas.  GIMSA also produces and sells tortillasthrough several small tortilla shops mainly located in central Mexico.  GIMSA’s tortilla sales representapproximately 1% of its total sales volume and approximately 2% of its netsales.  As a result of the aforementionedacquisition of Agroinsa, GIMSA also sells wheat flour and other products.

*Sales and Marketing*.  GIMSA sells packaged corn flour in bulkprincipally to thousands of small tortilla and tortilla chip manufacturers, or *tortillerías,* which purchase in 20-kilogram sacks andproduce tortillas on their premises for sale to local markets. Additionally,GIMSA sells packaged corn flour in the retail market, which 

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purchases in one-kilogrampackages. To a lesser extent, GIMSA also produces and sells tortillas to theend consumer.

The following table sets forth GIMSA’s bulk and retailsales volumes of corn flour, tortilla sales volume and other products for theperiods indicated.
| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** ** | ** ** | **Tons**                                   | ** ** | **%** | ** ** | **Tons** | ** ** | **%** | ** ** | **Tons** | ** ** | **%** | ** ** |
| Corn Flour |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Bulk       |       | 1,223,585                                  |       | 85 |   | 1,252,794 |   | 79 |   | 1,330,123 |   | 77 |   |
| Retail     |       | 207,858                                    |       | 14 |   | 225,485 |   | 14 |   | 262,551 |   | 15 |   |
| Tortillas  |       | 16,400                                     |       | 1 |   | 14,852 |   | 1 |   | 15,069 |   | 1 |   |
| Other      |       |                                       |       |   |   | 88,614 |   | 6 |   | 126,398 |   | 7 |   |
|       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Total      |       | 1,447,843                                  |       | 100 |   | 1,581,745 |   | 100 |   | 1,734,141 |   | 100 |   |

 

Retail sales of corn flour are channeled to twodistinct markets:  urban centers andrural areas.  Sales to urban consumersare made mostly through supermarket chains that use their own distributionnetworks to distribute MASECA® flour or throughwholesalers who sell the product to smaller grocery stores throughoutMexico.  Sales to rural consumers aremade principally through the Mexican government’s social and distributionprogram *Distribuidora Conasupo, S.A.,*or DICONSA, which consists of a network of small government-owned stores andwhich supplies rural areas with basic food products.

Mexico’s tortilla industry is highly fragmented,consisting mostly of *tortillerías*,many of which continue to utilize, what is in our opinion, the relativelyinefficient wet corn dough method of tortilla production.  We estimate that the traditional wet corndough method accounts for approximately half of all tortillas produced inMexico.  Tortilla producers that do notutilize corn flour buy the wet dough from dough producers or buy and mill theirown corn and produce tortillas themselves.

This traditional method is a rudimentary practicerequiring more energy, time and labor because it involves cooking the corn inwater and with lime, milling the cooked corn, creating and shaping the dough,and then making tortillas from that dough. We pioneered the dry corn flour method in which we mill the raw corn inour facilities into corn flour.  Tortillaproducers and consumers, once they acquire the corn flour, may then simply addwater to transform the flour into wet dough to produce tortillas.  We believe the preparation of tortillas usingthe dry corn flour method possesses several advantages over the traditionalmethod.  Our internal studies show thatthe dry corn flour method consumes less water, electricity, fuel and labor.  We estimate that one kilogram of cornprocessed through the corn flour method yields more tortillas on average than asimilar amount of corn processed using the traditional method.  Corn flour is also transported more easilyand under sanitary conditions than wet corn dough and has a shelf life ofapproximately three months, compared with one or two days for wet corndough.  The market for wet corn dough islimited due to the perishable nature of the product, restricting sales of mostwet corn dough producers to their immediate geographic areas.  Additionally, the corn flour’s longer shelflife makes it easier for consumers in rural areas, where *tortillerías*are relatively scarce, to produce their own tortillas.

We believe in the benefits of our dry corn flourmethod and, thus also, believe that we have substantial opportunities forgrowth by encouraging a transition to our method.  Corn flour is primarily used to produce corntortillas, a principal staple of the Mexican diet.  The tortilla industry is one of the largestindustries in Mexico as tortillas constitute the single largest component ofMexico’s food industry.  However, thereis still reluctance to abandon traditional practice, particularly in centraland southern Mexico, because corn dough producers and/or tortilla producersusing the traditional method incur lower expenses by working in an informaleconomy.  Additionally, generally suchproducers are not required to comply with environmental regulations, which also

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represent savings forthem.  To the extent regulations inMexico are enforced and we and our competitors are on the same footing, weexpect to benefit from these developments.

GIMSA has embarked on several programs to promote cornflour sales to tortilla producers and consumers.  GIMSA offers incentives to potentialcustomers, such as small independent *tortillerías*,to convert to the corn flour method from the traditional wet corn doughmethod.  The incentives GIMSA offersinclude new, easy to use equipment designed specifically for small-volumeusers, financing, and individualized training. For example, in order to assist traditional tortilla producers in makingthe transition to corn flour, GIMSA also sells specially designed mixers madeby Tecnomaíz, S.A. de C.V., or Tecnomaíz, one of our research and developmentsubsidiaries.  For more information aboutour research and development department, see “—Miscellaneous—INTASA—Technologyand Equipment Operations.”  GIMSA alsohelps its *tortillería* customers to improve salesby directing consumer promotions to heighten the desirability of their productsand increase consumption, which, in turn, should increase corn flour sales.  These efforts to improve sales include primetime advertising on television as well as radio, magazine and billboardadvertising.  In 2006, GIMSA’sspecialized sales teams continued their efforts to provide better and moreindividualized service to different types of customers.  During 2007, we will focus on the developmentof new sales programs to strengthen our commercial relationships with ourcurrent customers and the expansion of our coverage to areas with lowconsumption of corn flour to attract new customers with programs designedspecifically for these markets.

GIMSA has implemented initiatives focused on developinga successful business model for its customers to increase the consumption ofcorn-flour based products generally and its products specifically.  GIMSA’s strategy is based on a comprehensivebusiness proposal that includes the following product, service and marketingobjectives:

·                  developmentof new types of corn flour for its customers;

·                  designof individualized support regarding the type of machinery required for theirbusiness, financial advisory and training;

·                  assistanceto customers in the development of new profitable distribution methods toincrease their market penetration and sales;

·                  developmentof tailored marketing promotions to increase consumption in certain customersegments; and

·                  assistanceto customers in the development of new higher margin products such as tortillachips, taco shells and enchilada tortillas, reflecting current consumptiontrends.

GIMSA hascontinued working with its customers to reinforce these initiatives and intendsto continue focusing on supplying the corn flour required by our customersaccording to their needs and assist them with the training and technicalsupport that will help them create a more profitable operation.

GIMSA hasimplemented a national marketing campaign in Mexico to emphasize the benefitsand nutritional value of tortillas made with 100% MASECA® corn flour.  This campaign targetes both consumption oftortillas made by GIMSA’s customers and consumption of its retail corn flourpackages sold directly to consumers by repositioning the use of corn flour notonly for making tortillas but for a wide variety of foods which are part of theMexican diet.  We believe this campaignhas helped to increase the recognition of the MASECA® brand, created a greaterawareness about tortillas made with 100% MASECA® corn flour and created agreater awareness of the nutritional value of tortillas made of naturalingredients.  We believe this campaignhas also helped us to position MASECA® corn flour as a nutritional product whichcan be used in the production of tortillas and other foods.  In addition, we believe that this campaignhas also helped contribute to the perception that tortillas are a healthyalternative to other food products. During 2006, GIMSA’s national marketing campaign reinforced the previousmessage with respect to the nutritional value of the tortilla, targeted Mexico’syoung population and emphasized where tortillas made from MASECA® corn flourcould be purchased.

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*Competition and Market Position*.  GIMSA faces competition on three levels—fromother corn flour producers, from sellers of wet corn dough and from the many *tortillerías* that produce their own wet corn dough on theirpremises.  Our estimates indicate thatabout half of tortilla producers continue to use the traditional wet corn doughmethod.

GIMSA’s biggest challenge in increasing its marketshare is the prevalence of the traditional method.  In the corn flour industry, GIMSA’s principalcompetitors are Grupo Minsa, S.A. de C.V. and a few regional corn flourproducers.  OPTIMASA, a subsidiary ofCargill de México, built a corn flour plant and began to offer corn flour inthe central region of Mexico, therefore becoming a new competitor for GIMSAsince 2005.  We compete against othercorn flour manufacturers on the basis of quality, brand recognition,technology, customer service and nationwide coverage. We believe that GIMSA hascertain competitive advantages resulting from its proprietary technology,greater economies of scale and broad geographic coverage, which may provide itwith opportunities to more effectively source raw materials and reducetransportation costs.

*Operations and Capital Expenditures*.  GIMSA currently owns 19 corn flour mills, allof which are located throughout Mexico, typically within corn growing regionsand those of large tortilla consumption. Two of these plants resulted from GIMSA’s acquisition of 100% of thecapital stock of Agroinsa, a company based in Monterrey, Mexico, inAugust 2005. Even though the two plants operated during 2005, GIMSAdecided to relocate their production to other GIMSA plants to increaseproduction efficiency.  The Celaya plantpermanently ceased operations on December 1, 2005 and the Monterrey plantpermanently ceased corn flour operations on April 1, 2006, but stillproduces wheat flour and other products. In addition, GIMSA owns 163 small tortilla shops throughout Mexico.

One of GIMSA’s plants (Chalco) is temporarilyclosed.  The Chalco plant has beeninactive since October 1999.  GIMSAhas temporarily shifted production to other plants to achieve savings inoverhead costs.  These idled assets are not being depreciated since the carrying value isexpected to be recovered and the remaining useful life is maintained.  GIMSA will consider reopening this plantshould market demands require additional capacity.

In recent years,GIMSA’s capital expenditures were primarily used to update technology and cornflour production process and to a lesser extent for acquisitions.  In 2006, GIMSA began capacity expansions atits Mérida and Mexicali plants.  GIMSAspent U.S.$106.3 million, for these purposes from 2004 to 2006.  Although no assurances can be given as tofuture levels of capital expenditures, during first quarter of 2007 GIMSA spentU.S.$6.2 million on investments in its fixed assets and currently projectstotal investments in fixed assets during 2007 of approximately U.S.$32 million,which will be used primarily for capacity expansion in the Mexicali and Méridaplants and for upgrading production equipment, acquisition of transportation equipmentand information technology upgrades.  Asof December 31, 2006, on average, the size of our plants measured insquare meters was approximately 20,315 (approximately 218,700 square feet).

Pursuant to an agreement between GIMSA and *Investigación de Tecnología Avanzada*, or**INTASA,our wholly-owned subsidiary, INTASA provides technical assistance to each ofGIMSA’s operating subsidiaries for which each pays to INTASA a fee equal to0.5% of its consolidated net sales.  Eachof GIMSA’s corn flour facilities uses proprietary technology developed by ourtechnology and equipment operations.  Formore information about our in-house technology and design initiatives, see “—Miscellaneous—INTASA—Technologyand Equipment Operations.”

*Seasonality. *The demand for corn flour varies slightly with theseasons.  After the May/June andDecember harvests, when corn is more abundant and thus less expensive,tortilla producers are more inclined to purchase corn and use the traditionalmethod.  In the months immediately precedingsuch harvests, corn is more costly and in shorter supply and more tortillaproducers then employ the corn flour method of production.

*Raw Materials*.  Corn is the principal raw material requiredfor the production of corn flour, and constituted approximately 59% of GIMSA’scost of sales for 2006.  We purchase cornprimarily from Mexican growers and grain elevators, and from world markets atinternational prices under import permits granted by the Mexican government.  All of our domestic corn purchases are madeon a spot basis pursuant to short-term contractual arrangements, some of whichare in the form of oral agreements entered into at the beginning of theharvest.  

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Compañía NacionalAlmacenadora, S.A. de C.V., a subsidiary of GIMSA, contracts for and purchasesthe corn, and also monitors, selects, handles and ships the corn.

We believe that the diverse geographic locations ofGIMSA’s production facilities in Mexico enables GIMSA to achieve savings in rawmaterial transportation and handling.  Inaddition, by sourcing corn locally for its plants, GIMSA is better able tocommunicate with local growers concerning the size and quality of the corn cropand is better able to maintain quality control. In Mexico, GIMSA purchases corn on delivery in order to strengthen itsability to obtain the highest quality corn on the best terms.

Traditionally, domestic corn prices in Mexico tend tobe higher than those abroad, and typically follow trends in the internationalmarket only when corn prices are increasing. During most periods, the price at which GIMSA purchases corn depends onthe international corn market.  As aresult, corn prices are sometimes unstable and volatile. ** **For more information regarding thegovernment’s effect on corn prices, see “Item 4.  Information on the Company—Regulation.”

By the end of 2006, the price of corn set by theChicago Board of Trade and the average price of Mexican corn increaseddramatically principally from corn being used in connection with themanufacture of ethanol, a substitute for gasoline, as well as other bio-fuels.Consequently, the price of corn flour and corn tortillas, the main food staplein Mexico, increased due to such increases in the international and domesticinternational prices of corn. In order to stabilize the price of tortillas, theMexican government promoted two agreements among the various parties involvedin the corn-corn flour-tortilla production chain. The first agreement waseffective from January 15 through April 30, 2007.  On April 25, 2007, the Mexican governmentannounced a second agreement that extended the term through August 15,2007.

The Mexican government petitioned our company, among others,to voluntarily participate in these agreements through which we agreed toestablish a price ceiling for our corn flour. Through these agreements: (i)corn flour producers have agreed to maintain an average price of Ps. 5.00 perkilo of corn flour; (ii) Wal-Mart and retailers affiliated to the *Asociación Nacional de Tiendas de Autoservicios,* or NationalAssociation of Supermarkets, have agreed to sell tortillas at an average priceof Ps. 6.50 per kilo, and; (iii) small tortilla manufacturers, or *tortillerías,* have agreed to sell tortillas at an averageprice of Ps. 8.50 per kilo.

As a result, our cornflour prices do not reflect the recent increase in our cost of corn, whichresulted in a significant deterioration in the financial performance of GIMSA duringthe first quarter of 2007, which may continue to the extent the company doesnot increase prices. While the Mexican government has not directly fixed orcapped corn flour or tortilla prices, it has strongly encouraged Mexicanproducers and retailers to voluntarily do so until the next harvest of Mexicancorn crops. We intend to fully abide by the terms of these agreements. We cannot assure you that there will not beanother extension of the agreements, that we will fully comply with their termsat all times or that the Mexican government will not take actions that could adverselyaffect our financial condition and resultsof operations.

In addition to corn, theother principal materials and resources used in the production of corn flourare packaging materials, water, lime, additives and energy.  GIMSA believes that its sources of supply forthese materials and resources are adequate, although energy, additives andpackaging costs tend to be volatile.

*Distribution*.  GIMSA’s products are distributed throughindependent transport firms contracted by GIMSA.  Most of GIMSA’s sales are made free-on-boardat GIMSA’s plants, in particular those to tortilla manufacturers.  With respect to other sales, in particularretail sales (one-kilogram packages) to the Mexican government and sales tolarge supermarket chains, GIMSA pays the freight cost.

***Molinera de México—WheatFlour Operation***

*Principal Products*.  In 1996, in connection with our associationwith Archer-Daniels-Midland, we entered the wheat milling market in Mexico byacquiring a 60% ownership interest in Archer-Daniels-Midland’s wheat flouroperation, Molinera de México.  Molinera’smain product is wheat flour, although it also sells wheat bran and otherbyproducts.  Our wheat flour brands areREPOSADA®, PODEROSA® and SELECTA®, among others.

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*Sales and Marketing*.  In 2006, approximately 90% of Molinera’s wheat flourproduction was sold in bulk and 10%was sold for the retail segment.  Most ofthe bulk sales are made to thousands of bakeries and, to a lesser extent, tocookie and pasta manufacturers.  Most ofthe retail sales are made to large supermarkets and wholesalers throughoutMexico.  Through wholesalers, ourproducts are distributed to small grocery stores.

Our marketing strategy depends on the type of customerand region.  Overall, our aim is to offerproducts according to customers’ specifications as well as technicalsupport.  We are trying to increase ourmarket share in bakeries by offering products with consistent quality.  In the retail segment we target small grocerystores through wholesalers, and supermarkets through centralized and nationallevel negotiations.  We are focusing onimproving customer service, continuing to increase our distribution of productsto supermarkets’ in-store bakeries, and developing new types of pre-mixedflours for the supermarket in-store bakery segment.  We provide direct delivery to supermarkets,supermarkets’ in-store bakeries, wholesalers, industrial customers and somelarge bakeries.  Most small bakeries andsmall grocery stores are served by wholesalers.

*Competition and Market Position*.  We believe that we are one of Mexico’slargest wheat flour producers based on revenues and sales volume.  Molinera de México competes with many smallwheat flour producers.  We believe thewheat flour industry is highly fragmented and estimate that there are about 90 participants.  Our main competitors are Bimbo, Munsa,Trimex, Tablex, La Espiga and Elizondo.

*Operations and Capital Expenditures.*  We own and operate nine wheat flour plants,in one of which we hold only a 40% ownership interest.  The facilities’ average extent of utilizationis estimated at 77% for2006.  On average, the size of our plantsmeasured in square meters is approximately 11,300 (approximately 121,200 squarefeet) as of December 31, 2006.

Capital expenditures from 2004 through 2006 amountedto U.S.$12.3 million.  Molinera de México’s capital expenditures in2007 are projected to be U.S.$7.1 million, which will be used primarily forcapacity expansions at the Obregon and Celaya plants, transportation equipment, and additional upgrades.

*Seasonality.* Molinera’s sales are seasonal in that higher sales volumes are achievedin the fourth and first quarters during the winter, when we believe per capitaconsumption of wheat-based products, especially bread and cookies, increasesdue in part to the celebration of holidays occurring during these quarters.

*Raw Materials. *Wheat is the principal raw material required for theproduction of wheat flour.  Molinera deMéxico purchases approximately 23% of its wheat from Mexican growers, and 77% from world markets.  Molinera de México purchases from localfarmers, farmers associations and trading companies.  In the case of domestic wheat, purchases aremade pursuant to short-term oral arrangements, the terms of which arenegotiated at the time of execution. These arrangements are usually made approximately two months in advanceof the beginning of the harvest.  In thecase of imported wheat, which we import from the United States and Canadathrough several trading companies, purchases are made based on short-termrequirements, with the aim of maintaining low levels of inventories.

In recent years the priceof wheat domestically and abroad has been volatile.  Volatility is due to the availability ofwheat, which depends on various factors including the size of the harvest(which depends in large part on the weather).

**Central American Operations**

***Overview***

In 1972, we entered theCosta Rican market.  Our operations sincethen have expanded into Guatemala, Honduras, El Salvador, Nicaragua, andEcuador.

***Gruma Centroamérica***

*Principal Products*.  Gruma Centroamérica produces corn flour, andto a lesser extent tortillas and snacks. We also cultivate and sell hearts of palm and process and sellrice.  We believe we are one of thelargest corn flour 

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producers in theregion.  We sell corn flour under theMASECA®,TORTIMASA®, MASARICA® and MINSA® brands.  In Costa Rica, we sell packaged tortillasunder the TORTI RICA® andMISIÓN® brands.  We operate a Costa Ricansnack operation which manufactures tortilla chips, potato chips and similarproducts under the TOSTY® brand. Hearts of palm are exported to numerous European countries as well asthe United States, Canada, Chile and México.

*Sales and Marketing*.  The largest portion, 181,000 tons or 56%,of Gruma Centroamérica’s sales volume in 2006 derived from the sale of cornflour.

Gruma Centroamérica corn flour bulk sales are orientedpredominantly to small tortilla manufacturers through direct delivery andwholesalers.  Supermarkets make up thecustomer base for retail corn flour. Bulk sales volume represented approximately 74% and retail sales represented approximately 26% of Gruma Centroamérica’s cornflour sales volume during 2006.

*Competition and Market Position*.  We believe that we are one the largest cornflour producers in Central America based on revenues and sales volume.  We believe that there is significantpotential for growth in Central America as corn flour is used in only approximately14% of all tortilla production; the majority of tortilla manufacturers use thewet corn dough method.  Additionally, webelieve we are one of the largest producers of tortillas, and snacks, and oneof the largest processors of rice.

Within the corn flour industry, our main competitorsare Del Comal and Instamasa.  However,one of our main growth potentials is to convert tortilla manufacturers thatstill use the traditional method to our corn flour method.

*Operations and Capital Expenditures. *We had an annual installedproduction capacity of 266,483****tons for cornflour and other products as of December 31, 2006, with an averageutilization of approximately 85% during 2006. We operate one corn flour plant in Costa Rica, Honduras, El Salvador,and two plants in Guatemala for a total of five plants throughout theregion.  In Costa Rica, we also have oneplant producing tortillas, one plant producing snacks, one plant processinghearts of palm and one plant processing rice. In Nicaragua we have one small tortilla plant and in Ecuador we lease afacility which processes hearts of palm. On average, the size of our plants measured in square meters isapproximately 3,000****(approximately32,300 square feet) as of December 31, 2006.

During 2004, 2005 and 2006 mostof our capital expenditures were oriented to technology upgrades, the expansionof a tortilla plant and a corn flour plant, a distribution center andadministrative offices in Costa Rica.  Totalcapital expenditures for the past three years was approximately U.S.$15.7****million.  Capital expenditures for 2007 are projectedto be U.S.$15.6 million, which will be used primarily for the expansion of thecorn flour plant in Honduras and manufacturing upgrades.

*Seasonality.* Typically, corn flour sales volume is lower during the second quarter ofthe year due to higher availability and lower prices of corn.  Most of our products sales increase duringthe fourth quarter as demand is higher during the holidays.

*RawMaterials*.  Corn is themost important raw material needed in our operations and is obtained primarilyfrom imports from the United states and from local growers.  All countries in which we have corn flourplants, except Costa Rica, do not restrict corn import permits granted by theUnited States.  Price fluctuation andvolatility are subject to domestic conditions, such as annual crop results andinternational conditions.

**Gruma Venezuela**

***Overview***

In 1993, we entered theVenezuelan corn flour industry through a participation in DEMASECA, a cornflour company in Venezuela.  InAugust 1999, we acquired 95% of DAMCA International Corporation, aDelaware corporation which owned 100% of MONACA, Venezuela’s second largestcorn and wheat flour producer at that time, for approximatelyU.S.$94 million.  Additionally,Archer-Daniels-Midland acquired the remaining 5% interest in MONACA.

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In April 2006, weentered into a contract to sell a 40% stake in MONACA to our current partner inDEMASECA at a price of U.S.$65.6 million. As of June 15, 2007, we had received US$39.6 million of this amount. Thetotal payment of the sale price and the respective delivery of our interests inMONACA will be completed in a series of installments that will end inDecember 2007.  Not withstanding theforegoing, the purchaser will not have voting or other corporate rights withrespect to such interests until the full purchase price is paid. In addition tosuch transaction, we agreed to: (i) purchase an additional 10% ownershipinterest in DEMASECA at a price of U.S.$2.6 million; (ii) purchasefrom ADM a 2% stake in MONACA at a price of U.S.$3.28 million, and;(iii) sell to ADM a 3% interest in DEMASECA at a price ofU.S.$0.78 million.  Upon completionof these transactions, we will own a 57% interest, our partner will own a 40%interest and ADM will own a 3% interest in each of DEMASECA and MONACA.DEMASECA and MONACA are collectively referred to as “Gruma Venezuela.”

***DEMASECA and MONACA***

*Principal Products*.  Gruma Venezuela produces and distributes cornflour as well as wheat flour, rice, oats and other products.  We sell corn flour under the brand namesJUANA®, TIA BERTA®, DECASA®, and DEMASA®. We sell wheat flour under the ROBIN HOOD® andPOLAR® brand, riceunder the MONICA® brand and oats under the LASSIE® brand.

*Sales and Marketing. *Venezuelans use corn flourto produce and consume *arepas*, whichare made at home or in restaurants for household consumption rather thanmanufactured by specialty shops or other large manufacturers.  In 2006, we sold corn flour only in theretail market in one kilogram bags to independent distributors, supermarkets,wholesalers, and governmental social welfare and distribution programs.  We also sell wheat flour both in bulk andretailer, distributing it in 45 kilogram bags and in one kilogram bags,respectively.  Bulk sales to customerssuch as bakeries made up approximately 79%of our total wheat flour sales volume in 2006. The remaining 21% of sales in 2006 were in the retail market, whichincludes independent distributors, supermarkets and wholesalers.

*Competition and Market Position*.  With the MONACA acquisition in 1999, wesignificantly increased our share of the corn flour market and entered thewheat flour market.  We believe we areone of the largest corn flour and wheat flour producers in Venezuela.

In corn flour, our main competitor is Alimentos Polar,and, to a lesser extent, Industria Venezolana Maizera PROAREPA, Asoportuguesaand La Lucha.  In wheat flour, ourprincipal competitor is Cargill.

*Operation and Capital Expenditures*.  We operate five corn flour plants, four wheatflour plants, two rice plants, and two plants that produce oats and spices inVenezuela with a total annual production capacity of 764,087 tons as ofDecember 31, 2006 and an average utilization of approximately 61% during 2006.  However, one corn flour plant, representing 47,143 tons, and one rice plant,representing 48,462 tons, aretemporarily idle.  On average, the sizeof our plants measured in square meters is approximately 9,200****(approximately99,000 square feet) as of December 31, 2006.

Capital expenditures for the past three years wereU.S.$47****million.  Capital expenditures for 2007 are expected tobe U.S.$15.6 million and are expected to be focused on the construction of awheat flour mill and upgrades for manufacturing and information technologies.

*Seasonality. *Salesfluctuate seasonally as demand for flour-based products is lower during thosemonths when most schools are closed for vacation.  In addition, sales are higher in November ascustomers build inventory to satisfy increased demand during the holiday seasonin December.

*RawMaterials*.  Corn andwheat are our most important raw materials. Corn is purchased in Venezuela and is subject to the corn market’svolatility and governmental regulations related to prices, quantities andstorage facilities.  Corn prices arefixed by a government agency. Approximately 87% of our wheat is purchased from the U.S. and Canada,and more recently, the remaining 13%, also from Argentina,  with its availability and price volatility dependentupon those markets.  We do not engage inany type of hedging activity for our supplies since 

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exchange ratepolicies and country risk for Venezuela constraints our capacity to transferfunds abroad in order to fund any hedging strategy.

**Miscellaneous—INTASA—Technologyand Equipment Operations**

We have had our own technology operations since ourfounding.  Since 1976 our technology andequipment operations have been conducted principally through INTASA, which hastwo subsidiaries:  Tecnomaíz, S.A. deC.V., or Tecnomaíz, and Constructora Industrial Agropecuaria, S.A. de C.V., orCIASA.  The principal activity of thesesubsidiaries is to provide research and development, equipment, andconstruction services to us and small equipment to third parties.  Through Tecnomaíz, we also engage in thedesign, manufacture and sale of machines for the production of tortillas andtortilla chips.  The machinery for thetortilla industry includes a range of capacities, from machines that make 50 to300 corn tortillas per minute to dough mixers. The equipment is sold under the TORTEC® andBATITEC® trademarks in Mexico.  Tecnomaíz also manufactures high volumeenergy efficient corn and wheat tortilla systems that can produce up to 1,200corn tortillas and 600 wheat tortillas per minute.

We carry out proprietarytechnological research and development for corn milling and tortilla productionas well as all engineering, plant design and construction through INTASA andCIASA.  These companies administer andsupervise the design and construction of our new plants and also provideadvisory services and training to employees of our corn flour and tortillamanufacturing facilities.  We manufacturecorn tortilla-making machines for sale to tortilla manufacturers and for use in“in-store *tortillerías*,” as well as high-capacitycorn and flour tortilla-makers that are supplied only to us.

***GFNorte Investment***

As of June 15, 2007, weheld approximately 9.86% of the outstanding shares of GFNorte, a Mexicanfinance services holding company and parent of Banco Mercantil del Norte, S.A.,or Banorte, a Mexican bank.  As of thesame date, our investment in GFNorte represented approximately 9% or Ps.2,593****million of ourtotal assets and 40% of our majority net income for the year.  In accordance with Mexican GAAP, GFNorte’sresults of operations are accounted for in our consolidated results ofoperations using the equity method of accounting.

**REGULATION**

**MexicanRegulation**

***Corn Commercialization Program***

To support thecommercialization of corn for Mexican corn growers, Mexico’s Secretary ofAgriculture, Livestock, Rural Development, Fisheries and Food Ministry (*Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca yAlimentación*, or SAGARPA), through the Agricultural Incentivesand Services Agency (*Apoyos y Servicios a laComercialización Agropecuaria*, or ASERCA), has implemented a programdesigned to promote corn sales in certain regions of Mexico. The programincludes the following objectives:

***·***                              Support corn growers by setting target prices andpaying the difference versus market price.

***·***                              Support corn growers by providing economic supportto reduce the cost of raw materials required for corn crops.

***·***                              Support a portion of the freight expenses relatedto the distribution of corn surpluses to regions away from the corn growingarea in seasons when there is a surplus. This support for freight expenses applies to any corn buyer that canprove that the purchased corn will be consumed in regions where there is nocorn available and that are distant from the regions where corn is grown.

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***Environmental Regulations***

Our Mexican operations are subject to Mexican federal,state and municipal laws and regulations relating to the protection of theenvironment.  The principal federalenvironmental laws are the *Ley General de EquilibrioEcológico y Protección al Ambiente, or* General Law of EcologicalEquilibrium and Protection of the Environment, or the Mexican EnvironmentalLaw, which is enforced by the *Secretaría de MedioAmbiente y Recursos Naturales,*or Ministry of the Environment andNatural Resources, or SEMARNAT and the *Ley Federal de Derechos*or the Mexican Federal Law of Governmental Fees.  Under the Mexican Environmental Law, each ofour facilities engaged in the production of corn flour, wheat flour, andpackaged tortillas is required to obtain an operating license from SEMARNATupon initiating operations, and then annually submit a certificate of operationto maintain the operating license. Furthermore, the Mexican Federal Law of Governmental Fees requires thatMexican manufacturing plants pay a fee for the discharge of residual wastewater to drainage.  Rules have beenissued concerning hazardous substances and water, air and noise pollution.  In particular, Mexican environmental laws andregulations require that Mexican companies file periodic reports with respectto air and water emissions and hazardous wastes.  Additionally, they also establish standardsfor waste water discharge.  We must alsocomply with zoning regulations as well and rules regarding health, workingconditions and commercial matters. SEMARNAT and the Federal Bureau of Environmental Protection can bringadministrative and criminal proceedings against companies that violateenvironmental laws, as well as close non-complying facilities.

We believe we are currently in compliance in allmaterial respects with all applicable Mexican environmental regulations.  The level of environmental regulation andenforcement in Mexico has increased in recent years.  We expect this trend to continue and to beaccelerated by international agreements between Mexico and the UnitedStates.  To the extent that newenvironmental regulations are issued in Mexico, we may be required to incuradditional remedial capital expenditures to comply.  Management is not aware of any pendingregulatory changes that would require additional remedial capital expendituresin a significant amount.

***Competition Regulations***

The *Ley Federal de CompetenciaEconómica* or**MexicanCompetition Law, and the *Reglamento de la Ley Federalde Competencia Económica*or Regulations of the Mexican CompetitionLaw, regulate monopolies and monopolistic practices, and require the Mexicangovernment approval for certain mergers and acquisitions.  The Mexican Competition Law grants thegovernment the authority to establish price controls for products and servicesof national interest qualified as such by Presidential decree, and establishedthe *Comisión Federal de Competencia*, orFederal Competition Commission, to enforce the law. Mergers and acquisitionsand other transactions that may restrain trade or that may result inmonopolistic or anti-competitive practices or combinations must be approved bythe Federal Competition Commission. The Mexican Competition Law may potentiallylimit our business combinations, mergers and acquisitions and may subject us togreater scrutiny in the future in light of our market presence, although it hashad little effect on our operations, and we do not believe that thislegislation will have a material adverse effect on our existing or developingbusiness operations.

**U.S.Federal and State Regulations**

Gruma Corporation issubject to regulation by various federal and state agencies, including the Foodand Drug Administration, the Occupational Safety and Health Administration, theFederal Trade Commission, the Environmental Protection Agency and the TexasDepartment of Agriculture.  We believethat we are in compliance in all material respects with all environmental andother legal requirements.  Our foodmanufacturing and distribution facilities are subject to periodic inspection byvarious public health agencies, and the equipment utilized in these facilitiesmust generally be governmentally approved prior to operation.

**EuropeanRegulation**

We are subject toregulation in each country in which we operate in Europe.  We believe that we are currently incompliance with all applicable legal requirements in all material respects.

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**CentralAmerican and Venezuelan Regulation**

Gruma Centroamérica andGruma Venezuela are subject to regulation in each country in which theyoperate.  We believe that GrumaCentroamérica and Gruma Venezuela are currently in compliance with allapplicable legal requirements in all material respects.

**Asiaand Oceania Regulation**

We are subject to regulationin each country in which we operate in Asia and Oceania.  We believe that we are currently incompliance with all applicable legal requirements in all material respects.

**ITEM 4A.****                                            UnresolvedStaff Comments.**

None.

## **ITEM5.****                                                     Operatingand Financial Review and Prospects.**

**MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

*Youshould read the following discussion in conjunction with our financialstatements and the notes thereto contained elsewhere herein.  Our financial statements have been preparedin accordance with Mexican GAAP, which differ in some significant respects fromU.S. GAAP.  See Note 22 to our financial statements forinformation related to the nature and effect of such differences and a quantitativereconciliation to U.S. GAAP of our majority net income and stockholders’equity.  For more information about ourfinancial statements in general, see “Presentation of Financial Information.”*

**Overview of Accounting Presentation**

***Effects of Inflation***

Mexican GAAP requires that financial statementsrecognize the effects of inflation in accordance with Bulletins B-10 and B-15issued by CINIF.  The purpose of thismethodology is to present all information in comparable monetary units andthereby mitigate the distortive effect of inflation in the financialstatements.  Unless otherwise statedherein, the financial statements and other financial data in this Annual Reporthave been restated in pesos of constant purchasing power as ofDecember 31, 2006.

We restate all non-monetary assets using the MexicanNational Consumer Price Index, except inventories, which are restated usingactual replacement costs, and fixed assets of non-Mexican origin, which may berestated using a specified index which considers the consumer price index ofthe relevant foreign country and the fluctuations of the exchange rate betweenthe Mexican peso and the currency of such foreign country.

Bulletin B-15 prescribes the methodology for restatingand translating the financial statements of a Mexican company’s non-Mexicansubsidiaries into Mexican GAAP for purposes of recognizing the effects ofinflation in such financial statements. Bulletin B-15 requires, among other things, that local currency-basedfinancial statements of a non-Mexican subsidiary of a Mexican company for aparticular period be: (i) restated by using the relevant inflation rate inthe relevant foreign country, and; (ii) then translated into pesos.

Bulletin B-15 also requires that inflation rates inforeign countries be used in calculating monetary position gains or losses on aconsolidated basis.  In addition,Bulletin B-15 provides that the consolidated financial statements of a Mexicancompany for all periods prior to the most recent period are to be restated inpesos of constant purchasing power.  Thisrestatement may be accomplished by using an “international restatement factor,”which takes into account the inflation rates, exchange rate movements andrelative net sales in Mexico and the other countries in which we and oursubsidiaries operate, rather than using the inflation rate in Mexico.

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For comparison purposes,the following table sets forth, for each of the three years endedDecember 31, 2004, 2005 and 2006:

·                  theinternational restatement factor used to restate the financial statements datafor each of these periods to pesos of constant purchasing power as ofDecember 31, 2006;

·                  thecumulative Mexican National Consumer Price Index for each period which, in theabsence of Bulletin B-15, would have been used to restate the financialstatements to pesos of constant purchasing power as of December 31, 2006;and

·                  thecomparison factor for each period which represents the index that must beapplied to the financial statements for each period (which have been restatedusing the international restatement factor) in order to restate the financialstatements and financial data in December 31, 2006 pesos of constantpurchasing power using the cumulative Mexican National Consumer Price Index.
| **Financial data in  Mexican pesos as of December 31,** | ** ** | **Cumulative   International  Restatement Factor** | ** ** | **Cumulative Mexican  National Consumer  Price Index** | ** ** | **Comparison  Factor** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------|------------|
| 2004                                                                                       |       | 3.23                                                         |       | 7.52                                                                  |       | 1.0416                 |       |
| 2005                                                                                       |       | 4.45                                                         |       | 4.05                                                                  |       | 0.9962                 |       |
| 2006                                                                                       |       | —                                                       |       | —                                                                |       | 1.0000                 |       |

In futureperiods, the application of U.S. inflation rates could have a substantialeffect on our reported results of operations and financial condition if suchrates are lower than inflation rates in Mexico, assuming that we maintainsignificant U.S. dollar-denominated debt and other liabilities and assumingthat all other relevant variables, such as foreign exchange rates, remainconstant.  In addition, because GrumaCorporation, our principal U.S. subsidiary, generates a significantportion of our consolidated net sales in U.S. dollars, Bulletin B-15 couldresult in decreased net sales in peso terms, again relative to priorperiods.  By contrast, if U.S. and othernon-Mexican inflation rates exceed inflation rates in Mexico in future periods,then our monetary position gain and net sales as they relate to foreignsubsidiaries would tend to increase in comparison to prior periods.

**Effectsof Devaluation**

Because a significant portion of our net sales aregenerated in U.S. dollars, changes in the peso/dollar exchange rate can have asignificant effect upon our results of operations as reported in pesos.  When the peso depreciates against the U.S.dollar, Gruma Corporation’s net sales in U.S. dollars represent a largerportion of our net sales in peso terms than when the peso appreciates againstthe U.S. dollar.  And when the pesoappreciates against the dollar, Gruma Corporation’s net sales in U.S. dollarsrepresent a smaller portion of our net sales in peso terms than when the pesodepreciates against the dollar.  For adescription of the peso/U.S. dollar exchange rate see “Item 3.  Key Information—Exchange Rate Information.”

In addition to the above,our net income may be affected by changes in our foreign exchange gain or loss,which may be impacted by significant variations in the peso/dollar exchangerate.  In 2004, we recorded a net foreignexchange loss of Ps.53 million. During 2005, we recorded a net foreign exchange loss ofPs.53 million.  During 2006, werecorded a net foreign exchange loss of Ps.18 million.

**Critical**Accounting Policies

Management’s Discussionand Analysis of Financial Condition and Results of Operations discusses ourconsolidated financial statements, which have been prepared in accordance withMexican GAAP as issued by the Mexican Financial Reporting Standards Board.  A reconciliation from Mexican GAAP to U.S.GAAP of majority net income and total stockholders’ equity is included in Note 22****to ourconsolidated financial statements.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements, as well as the reported amounts of revenues and expensesduring the reporting period.

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We have identified belowthe most critical accounting principles that involve a higher degree ofjudgment and complexity and that management believes are important to a morecomplete understanding of our financial position and results of operations.  These policies are outlined below.

Additional accountingpolicies that are also used in the preparation of our financial statements areoutlined in the notes to our consolidated financial statements included in thisAnnual Report.

***Property, Plant andEquipment***

We depreciate ourproperty, plant and equipment over their respective estimated usefullives.  Useful lives are based onmanagement’s estimates of the period that the assets will remain in service andgenerate revenues.  Estimates are basedon independent appraisals and the experience of our technical personnel.  To the extent that our estimates areincorrect, our periodic depreciation expense or carrying value of our assetsmay be impacted.

We evaluate any event orchange in circumstances that indicate that the book value of our property,plant and equipment will not be recovered. When applicable, we perform impairment tests as follows:

Fair value of assets heldfor use is determined using the higher between the discounted net cash flowsexpected from the assets and the market price; an impairment loss is recordedto the extent that the net book value exceeds the fair value of theassets.  Market price is determined usingmarket values for transactions with similar assets less costs to sell.

Fair value of assets tobe disposed of is determined using the lower between book value and marketprice; an impairment loss is recognized for the excess of book value overmarket price.  These assets aresubsequently restated using NCPI factors and are no longer depreciated oramortized.

The estimates ofundiscounted cash flows take into consideration expectations of futuremacroeconomic conditions as well as our internal strategic plans.  Therefore, inherent to the estimated futurecash flows is a certain level of uncertainty which we have considered in ourvaluation; nevertheless, actual future results may differ.

Primarily as a result ofplant rationalization, certain facilities and equipment are not currently inuse in operations.  We have recordedimpairment losses related to certain of those assets and additional losses maypotentially occur in the future if our estimates are not accurate and/or futuremacroeconomic conditions differ significantly from those considered in ouranalysis.

***Goodwill and OtherIntangible Assets***

Intangible assets withdefinite lives are amortized on a straight-line basis over estimated usefullives.  Goodwill and indefinite-livedintangible assets are no longer amortized, but are subject to annual impairmenttests.

A key component of theimpairment test is the identification of reporting units and the allocation ofgoodwill to such reporting unit.  Areporting unit is constituted by a group of one or more cash generating units.  Estimates of fair value are primarilydetermined using discounted cash flows. Cash flows are discounted at present value and an impairment loss isrecognized if such discounted cash flows are lower than the net book value ofthe reporting unit.

These estimates andassumptions could have a significant impact on whether or not an impairmentcharge is recognized and also the magnitude of any such charge.  We perform internal valuation analyses andconsider relevant internal data as well as other market information that ispublicly available.

This approach usessignificant estimates and assumptions including projected future cash flows(including timing), a discount rate reflecting the risk inherent in future cashflows and a perpetual growth rate. Inherent in these estimates and assumptions is a certain level of riskwhich we believe we have considered in our valuation.  Nevertheless, if future actual results differfrom estimates, a possible impairment charge may be recognized in futureperiods related to the write-down of the carrying value of goodwill and otherintangible assets.

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***Deferred Income Taxes***

Under both Mexican andU.S. GAAP, we record deferred income tax assets and liabilities using enactedtax rates for the effect of temporary differences between the book and taxbasis of assets and liabilities.  If enactedtax rates change, we adjust the deferred tax assets and liabilities through theprovision for income taxes in the period of change, to reflect the enacted taxrate expected to be in effect when the deferred tax items reverse.  We also record a valuation allowance toreduce our deferred tax assets to the amount that is more likely than not to berealized.  While we have consideredfuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the need for the valuation allowance, in the event we were todetermine that we would be able to realize our deferred tax assets in thefuture in excess of the net recorded amount, an adjustment to the deferred taxasset would increase income in the period such determination was made.  Should we determine that we would not be ableto realize all or part of our net deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination was made.

***Derivative Financial Instruments***

We use derivativefinancial instruments in the normal course of business, primarily to hedgecertain operational and financial risks to which we are exposed, such as:(i) future and options contracts for certain key production requirementslike natural gas, heating oil and some raw materials such as corn and wheat, inorder to minimize the cash flow variability due to price fluctuations;(ii) interest rate swaps, with the purpose of managing the interest raterisk related to our long-term debt; and (iii) forward contracts andexchange rate option contracts (mainly Mexican peso — U.S. dollar, and in somecases other currencies), in order to hedge the financial risks due to exchangerate fluctuations over part of the quarterly interest payments related to ourdebt and other obligations denominated in U.S. dollars.

We account for derivativefinancial instruments used for hedging purposes either as cash-flow hedges orfair value hedges with changes in fair value reported in other comprehensiveincome and earnings, respectively. Derivative financial instruments not designated as an accounting hedgeare recognized at fair value, with changes in fair value recognized currentlyin income.

The determination of thefair values of derivative financial instruments requires considerable judgmentin interpreting and developing estimates. We base our estimates on available market information and valuationmethodologies that we consider appropriate. The use of different market assumptions and/or estimation methodologiescould have a material adverse impact on the estimated fair value amounts.

**FactorsAffecting Financial Condition and Results of Operations**

In recent years, our financial condition and resultsof operations have been significantly influenced by some or all of the followingfactors:

·                  thelevel of demand for tortillas, corn flour and wheat flour;

·                  theeffects of government polices on imported and domestic corn prices in Mexico;

·                  thecost and availability of corn and wheat;

·                  thecost of energy and other related products;

·                  ouracquisitions, plant expansions and divestitures;

·                  theeffect of government initiatives and policies, in particular on price controlsand cost of grains in Venezuela; and

·                  theeffect from variations on interest rates and exchange rates.

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**RESULTS OF OPERATIONS**

The following table sets forth our consolidated incomestatement data on a Mexican GAAP basis for the years ended December 31,2004, 2005 and 2006, expressed as a percentage of net sales.  All financial information has been prepared underthe Bulletin B-15 methodology.  For adescription of the method, see “Presentation of Financial Information” and “—Overviewof Accounting Presentation.”
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Income Statement Data**                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                       |       | 100                              | %          | 100 | % | 100 | % |
| Cost of sales                                                   |       | 64.2                             |       | 65.3 |   | 65.2 |   |
| Gross profit                                                    |       | 35.8                             |       | 34.7 |   | 34.8 |   |
| Selling, general and administrative expenses                    |       | 28.1                             |       | 28.8 |   | 29.0 |   |
| Operating income                                                |       | 7.7                              |       | 5.9 |   | 5.8 |   |
| Net comprehensive financing cost                                |       | (0.3                             | )          | (1.0 | ) | (1.1 | ) |
| Other income (expenses), net                                    |       | (1.1                             | )          | (0.5 | ) | — |   |
| Income taxes (current and deferred)                             |       | 3.1                              |       | 1.4 |   | 1.3 |   |
| Employee’s statutory profit sharing (current and deferred) |       | —                           |       | 0.1 |   | 0.1 |   |
| Other items                                                     |       | 1.1                              |       | 2.1 |   | 2.0 |   |
| Minority interest                                               |       | 0.7                              |       | 0.6 |   | 0.3 |   |
| Majority net (loss) income                                 |       | 3.7                              |       | 4.4 |   | 5.0 |   |

 

The following table sets forth our net sales andoperating income as represented by our principal subsidiaries for 2004, 2005and 2006.  Net sales and operating incomeof our subsidiary PRODISA are part of “others and eliminations”.  Financial information with respect to GIMSAincludes sales of Ps.194 million, Ps.221** **millionand Ps.276 million in 2004, 2005 and 2006, respectively, in corn flour to GrumaCorporation, Molinera de México and PRODISA; financial information with respectto Molinera de México includes sales of Ps.21 million, Ps.30** **millionand Ps.45 million in 2004, 2005 and 2006, respectively, to GIMSA andPRODISA; financial information with respect to PRODISA includes sales ofPs.50 million, Ps.57** **million and Ps.64 million in 2004, 2005 and 2006,respectively, in tortilla related products to Gruma Corporation; and financialinformation with respect to INTASA includes sales of Ps.391 million, Ps.436** **millionand Ps.911 million in 2004, 2005 and 2006, respectively, in technologicalsupport to certain subsidiaries of Gruma, S.A.B. de C.V.  In the process of consolidation, all theaforementioned intercompany transactions are eliminated from the financialstatements.
| ** **                | ** ** | **Year Ended December 31,**                                                                                                  | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                                                                                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **Net  Sales**                                                                                                                              | ** ** | **Operating  Income** | ** ** | **Net  Sales** | ** ** | **Operating  Income** | ** ** | **Net  Sales** | ** ** | **Operating  Income** | ** ** |
| ** **                | ** ** | **(in millions of pesos of constant purchasing power as of December 31, 2006)** | ** ** |
| Gruma  Corporation        |       | Ps.                                                                                                                                         | 12,296     |   | Ps. | 1,219 |   | Ps. | 14,327 |   | Ps. | 1,184 |   | Ps. | 16,312 |   | Ps. | 938 |   |
| GIMSA                     |       | 6,222                                                                                                                                       |       | 485 |   | 6,791 |   | 722 |   | 7,388 |   | 823 |   |
| Gruma Venezuela           |       | 3,822                                                                                                                                       |       | 213 |   | 3,221 |   | (91 | ) | 3,132 |   | 96 |   |
| Molinera de  México  |       | 2,027                                                                                                                                       |       | (21 | ) | 1,956 |   | (131 | ) | 2,132 |   | (84 | ) |
| Gruma  Centroamérica |       | 1,314                                                                                                                                       |       | 20 |   | 1,424 |   | (2 | ) | 1,595 |   | 56 |   |
| Others and  eliminations  |       | 119                                                                                                                                         |       | 87 |   | 144 |   | (49 | ) | 95 |   | (46 | ) |
| Total                     |       | Ps.                                                                                                                                         | 25,800     |   | Ps. | 2,003 |   | Ps. | 27,863 |   | Ps. | 1,633 |   | Ps. | 30,654 |   | Ps. | 1,783 |   |

 

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**YearEnded December 31, 2006 Compared with Year Ended December 31, 2005**

***ConsolidatedResults***

***GRUMA’s sales volume increased 6% to 4,197 thousand metrictons compared with 3,957 thousand metric tons in 2005.  This increase was driven mainly by sales atGIMSA and Gruma Corporation.  Net salesincreased by 10% to Ps.30,654 million during 2006 compared with Ps.27,863million in 2005 due primarily to sales increases at Gruma Corporation andGIMSA.  Sales from non-Mexican operationsconstituted 69% of consolidated net sales in 2006 compared to 68% in 2005.***

**Net Salesby Subsidiary:**By major subsidiary, the percentages ofconsolidated net sales in 2006 and 2005 were as follows:

|                           | ** ** | **Percentage of Consolidated Net Sales** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|
| **Subsidiary**            | ** ** | **2005**                                                     | ** ** | **2006** | ** ** |
| Gruma  Corporation        |       | 51.4                                                         | %          | 53.2 | % |
| GIMSA                     |       | 24.4                                                         |       | 24.1 |   |
| Gruma Venezuela           |       | 11.6                                                         |       | 10.2 |   |
| Molinera de  México  |       | 7.0                                                          |       | 7.0 |   |
| Gruma  Centroamérica |       | 5.1                                                          |       | 5.2 |   |
| Others and  eliminations  |       | 0.5                                                          |       | 0.3 |   |

 

***Cost of sales increased by 10% to Ps.19,974 million comparedwith Ps.18,198 million in 2005, due primarily to Gruma Corporation andGIMSA.  Cost of sales as a percentage ofnet sales improved slightly to 65.2% from 65.3%.  The improvement was driven mainly by theelimination of tariffs on imported wheat and logistical efficiencies in thehandling of raw materials in Gruma Venezuela and, to a lesser extent, lowercosts of corn in GIMSA and higher wheat flour prices in Molinera de México.  Selling, general, and administrative expenses(SG&A) increased by 11% to Ps.8,897 million compared with Ps.8,032 millionin 2005, due primarily to Gruma Corporation and GIMSA.  SG&A as a percentage of net salesincreased slightly to 29.0% from 28.8% in 2005, driven mainly by increases insales volume, fuel prices, intercompany shipments, promotion and advertisingexpenses and administrative expenses in Gruma Corporation and, to a lesserextent, due to the cancellation of provisions for administrative expensesduring 2005, general salary increases and higher maintenance expenses in GrumaVenezuela.  GRUMA’s operating incomeincreased by 9% to Ps.1,783 million compared with Ps.1,633 million in2005.  This increase was due primarily tohigher operating income from Gruma Venezuela and GIMSA and, to a lesser extent,Gruma Centroamérica and Molinera de México. As a percentage of net sales, operating income decreased slightly to5.8% from 5.9% in 2005, due primarily to lower operating margins from GrumaCorporation.***

***Net comprehensive financing cost increased 19% to Ps.333million compared with Ps.280 million in 2005. This rise was due to losses in connection with financial instrumentsrelated to corn hedges implemented by Gruma Corporation.***

***Other expenses, net, decreased 90% to Ps.14 million comparedwith Ps.147 million in 2005.  Thereduction was due primarily to the gain on the sale of GFNorte’s shares andMONACA’s shares, partially offset by impairment losses related principally toMolinera de México.***

***Provisions for income taxes and employees’ profit sharingincreased 9% to Ps.444 million compared with Ps.407 million in 2005.  This increase was due primarily to higherpre-tax income.***

***GRUMA’s equity in earnings of associated companies, net,including GFNorte, represented income of Ps.613 million in 2006 compared withincome of Ps.650 million in 2005.***

***GRUMA’s net income was Ps.1,604 million in 2006 comparedwith Ps.1,393 million in 2005.  Majoritynet income was Ps.1,525 million compared with Ps.1,239 million in 2005.  The 15% increase in total net income and the23% increase in majority net income was due mainly to higher operating profitsand a reduction in other expenses, net.***

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***Subsidiary Results***

***Gruma Corporation***

***Sales volume increased 5% to 1,335 thousand metric tonscompared with 1,275 thousand metric tons in 2005.  The increase in sales volume was drivenlargely by the continued strong demand in the U.S. tortilla and corn flourbusinesses and, to a lesser extent, the effect of additional sales fromrecently acquired companies, including those in Australia and England.***

***Net sales increased 14% to Ps.16,312 million during 2006compared with Ps.14,327 million in 2005, due to price increases implementedduring the first and third quarters of 2006 and higher sales volume.***

***Cost of sales increased 18% to Ps.9,697 million in 2006compared with Ps.8,245 million in 2005. As a percentage of net sales, cost of sales increased to 59.4 % from57.5% due to: (i) higher costs for raw materials (primarily wheat flour),energy, and packaging; (ii) higher costs due to new plants and capacityexpansions at existing plants that had not been fully absorbed.  In absolute terms, cost of sales alsoincreased due to the aforementioned sales volume growth.***

***SG&A increased 16% to Ps.5,676 million in 2006 comparedwith Ps.4,898 million in 2005 due to higher sales volume, fuel prices,intercompany shipments to new and acquired plants, promotion and advertisingexpenses, administrative expenses related to management information systems, aswell as the new administrative infrastructure built for our Asia and Oceaniaoperations.  SG&A as a percentage ofnet sales increased to 34.8% in 2006 from 34.2% in 2005.***

***Operating income as a percentage of net sales declined to5.8% from 8.3%.  In absolute terms,operating income decreased 21% to Ps.938 million.***

***GIMSA***

***Sales volume increased 9% to 1,734 thousand metric tonsduring 2006 compared with 1,585 thousand metric tons in 2005 mainly as a resultof the acquisition of Agroinsa.  Cornflour sales volume increased 4% to 1,595 thousand metric tons, and the salesvolume of other products increased 136% to 141 thousand metric tons.  Approximately 74% of GIMSA’s sales volumegrowth derived from the relocation of production from Agroinsa, whoseoperations were reflected in GIMSA’s financial results beginning in August2005.  Net sales increased by 9% toPs.7,388 million in 2006 compared with Ps.6,791 million in 2005, reflectinghigher sales volume.***

***Cost of sales increased 8% to Ps.5,190 million from Ps.4,801million in 2005 due to higher sales volume. Cost of sales as a percentage of net sales decreased to 70.2% from 70.7%due primarily to lower corn costs.***

***SG&A rose 8% to Ps.1,375 million compared with Ps.1,268million in 2005 due to the acquisition of Agroinsa, the strengthening of thesales and distribution departments and higher marketing and advertisingexpenses.  SG&A as a percentage ofnet sales improved slightly to 18.6% compared with 18.7% in 2005 due to betterexpense absorption.***

***Operating income as a percentage of net sales increased to11.1% from 10.6% and, in absolute terms, increased 14% to Ps.823 million.***

***Gruma Venezuela***

***Sales volume increased 1% to 486 thousand tons in 2006compared with 479 thousand tons in 2005 due to higher wheat flour salesvolume.  Net sales decreased 3% to Ps.3,132million in 2006 compared with Ps.3,221 million in 2005 because price increasesrose at a lower rate than inflation.***

***Cost of sales decreased 11% to Ps.2,456 million in 2006 fromPs.2,771 million in 2005 and, as a percentage of net sales, decreased to 78.4%from 86.0%, due primarily to the elimination of tariffs on imported wheat andlogistical efficiencies in the handling of raw materials.***

***SG&A increased 7% to Ps.580 million compared with Ps.540million in 2005 due to the cancellation of approximately Ps.33 million inprovisions for administrative expenses during 2005, general salary increasesand higher maintenance expenses related to an expanded vehicle fleet.  SG&A as a percentage of net salesincreased to 18.5% from 16.8% in 2005 due to the same reasons.***

***Operating income was Ps.96 million compared with anoperating loss of Ps.91 million in 2005. Operating margin improved to positive 3.1% from negative 2.8%.***

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***Molinera de México***

***Sales volume increased 1% to 477 thousand tons in 2006compared with 474 thousand tons in 2005 due to increased sales to corporatecustomers.  Net sales increased 9% toPs.2,132 million from Ps.1,956 million in 2005 due to higher prices, which wereimplemented in order to offset higher wheat costs.***

***Cost of sales increased 7% to Ps.1,809 million compared withPs.1,689 million in 2005, primarily due to higher wheat costs.  Cost of sales as a percentage of net salesdecreased to 84.9% from 86.3% due to higher wheat flour prices, which more thanoffset the increase in wheat costs.***

***SG&A increased 2% to Ps.406 million compared with Ps.398million in 2005 due to higher expenses for advertising and informationtechnology.  SG&A as a percentage ofnet sales decreased to 19.1% from 20.4% in 2005 due to better expenseabsorption in connection with increased net sales. Operating loss was Ps.84million compared with Ps.131 million in 2005.***

***Gruma Centroamérica***

***Sales volume increased 20% to 213 thousand tons in 2006compared with 178 thousand tons in 2005. The increase was due primarily to higher corn flour sales volume inconnection with the acquisition of a corn flour plant in Guatemala duringDecember 2005 and, to a lesser extent, increased corn flour consumption due toa corn shortage in the region.  Net salesincreased 12% to Ps.1,595 million from Ps.1,424 million in 2005 due to theincrease in sales volume in the corn flour segment.  The rate of growth in net sales lagged salesvolume due mainly to the integration of the corn flour plant acquisition behindthe growth in and a change in our sales mix toward corn flour in bulkpresentation, which has lower prices than retail presentation.***

***Cost of sales increased 14% to Ps.1,112 million comparedwith Ps.979 million in 2005, due primarily to the higher corn flour salesvolume.  The percentage increase in costof sales was lower than in sales volume due to lower corn costs.  Cost of sales as a percentage of net salesincreased to 69.7% from 68.8%, due mainly to the integration of the corn flourplant acquisition, which reports lower gross margins than the rest of GrumaCentroamérica’s corn flour operations.***

***SG&A decreased 4% to Ps.428 million compared with Ps.447million in 2005 and, as a percentage of net sales, decreased to 26.8% from31.4% in 2005.  The improvement was dueto an extraordinary expense of Ps.44 million in 2005 related to technicalservices provided by GRUMA’s technology division.***

***Operating income was Ps.56 million compared with anoperating loss of Ps.2 million in 2005. Operating margin improved to positive 3.5% from negative 0.1%.***

***Year EndedDecember 31, 2005 Compared with Year Ended December 31, 2004***

***Consolidated Results***

GRUMA’s sales volume increased 9% to 3,957 thousandmetric tons compared with 3,629 thousand metric tons in 2004, due mainly toGruma Corporation and GIMSA.  GRUMA’s netsales increased by 8% to Ps.27,863 million in 2005 compared withPs.25,800 million in 2004.  Theincrease in net sales was due primarily to higher net sales in GrumaCorporation by 17% and, to a lesser extent, in GIMSA.  This increase was partially offset by lowernet sales in Gruma Venezuela and Molinera de México.  Sales from non-Mexican operations constituted68% of consolidated net sales in 2005.

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*Net Salesby Subsidiary*:  Bymajor subsidiary, the percentages of consolidated net sales in 2005 and 2004were as follows: 

|                           | ** ** | **Percentage of Consolidated Net Sales** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|
| **Subsidiary**            | ** ** | **2004**                                                     | ** ** | **2005** | ** ** |
| Gruma  Corporation        |       | 47.7                                                         | %          | 51.4 | % |
| GIMSA                     |       | 24.1                                                         |       | 24.4 |   |
| Gruma Venezuela           |       | 14.8                                                         |       | 11.6 |   |
| Molinera de  México  |       | 7.9                                                          |       | 7.0 |   |
| Gruma  Centroamérica |       | 5.1                                                          |       | 5.1 |   |
| Others and eliminations   |       | 0.4                                                          |       | 0.5 |   |

 

Cost of salesincreased by 10% to Ps.18,198 million in 2005 compared withPs.16,553 million in 2004.  Thisincrease was due primarily to higher sales volume in Gruma Corporation.  Cost of sales as a percentage of net salesincreased to 65.3% in 2005 from 64.2% in 2004. The increase was driven mainly by Gruma Corporation and, to a lesserextent, Gruma Venezuela and Molinera de México.

Selling, general, and administrative expenses(SG&A) increased by 11% to Ps.8,032 million in 2005 compared withPs.7,244 million in 2004, resulting primarily from sales volume growth inGruma Corporation.  SG&A as apercentage of net sales increased to 28.8% in 2005 from 28.1% in 2004, drivenmainly by small increases in various subsidiaries.

GRUMA’s operating income decreased 18% toPs.1,633 million in 2005 compared with Ps.2,003 million in 2004.  This decrease was due primarily to loweroperating income in Gruma Venezuela and, to a lesser extent, Molinera deMéxico.  As a percentage of net sales,operating income decreased to 5.9% in 2005 from 7.8% in 2004, due primarily todecreased operating margins in Gruma Corporation, Gruma Venezuela, and Molinerade México.

Net comprehensive financing cost increased 306% toPs.280 million in 2005 compared with Ps.69 million in 2004.  This increase was due to lower interestincome and, to a lesser extent, higher interest expense.  Lower interest income resulted fromnonrecurring gains in connection with equity swaps of GRUMA shares during 2004.  Higher interest expense was due to increaseddebt and higher average interest rates.

Other expenses, net, decreased 50% toPs.147 million in 2005 compared with Ps.296 million in 2004.  The reduction is due primarily to write-downsin 2004 of certain fixed assets at GIMSA and PRODISA.

Provisions for income taxes and employees’ profitsharing decreased 49% to Ps.407 million in 2005 compared withPs.798 million in 2004.  Thisdecrease was due to: (i) a reduction in pretax income, and; (ii) theconsolidation of 100% of the ownership interest of controlled Mexicansubsidiaries, whereas until December 31, 2004, tax regulations limitedthis consolidation to 60% of the ownership interest.

GRUMA’s equity in earnings of associated companies,net increased 123% to Ps.650 million in 2005 compared withPs.291 million in 2004.  Thisincrease was due to higher net income from GFNorte.

GRUMA’s net income increased 23% toPs.1,393 million in 2005 compared with Ps.1,131 million in 2004.  Our majority net income increased 30% toPs.1,239 million compared with Ps.953 million in 2004.  These increases were due mainly to higherincome from GFNorte and lower provisions for income tax and employees’ profitsharing.

***Subsidiary Results***

***Gruma Corporation***

Sales volume increased by 17% to 1,275 thousand tonsin 2005 compared with 1,088 thousand tons in 2004.  The increase in sales volume was drivenlargely by: (i) continued strong demand in the tortilla and corn flour 

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businesses;(ii) increased marketing of tortilla-related products by certain fast-foodrestaurant chains; (iii) introduction of the GUERRERO® brand across additional markets in the UnitedStates, and; (iv) the effect of recent acquisitions, including thepurchase of the following:

(a)                                  OvisBoske, a wheat flour tortilla company based in Holland, in July 2004;

(b)                                 a51% interest in Nuova De Franceschi & Figli, a corn flour company based inItaly, in July 2004;

(c)                                  thetortilla assets in the United States acquired from Cenex Harvest States inMay 2005; and

(d)                                 asmall tortilla company near San Francisco, California, in September 2005.

Acquisitions contributed approximately 37% of GrumaCorporation’s volume growth in 2005.

Net sales increased 17% to Ps.14,327 millionduring 2005 compared with Ps.12,296 million in 2004, due primarily to anincrease in the sales volume.

Cost of sales increased 21% to Ps.8,245 millionin 2005 compared with Ps.6,806 million in 2004, due primarily to highersales volume.  As a percentage of netsales, cost of sales increased to 57.5% from 55.4% due mainly to:(i) higher fixed costs due to capacity expansions and acquisitions;(ii) increased cost for utilities, raw materials, and packaging, and;(iii) a change in the sales mix.

SG&A increased 15% to Ps.4,898 million in2005 compared with Ps.4,271 million in 2004, due primarily to sales volumegrowth, higher fuel prices, and an increase in the number of intercompanyshipments.  SG&A as a percentage ofnet sales improved to 34.2% in 2005 from 34.7% in 2004, due primarily to betterexpense absorption in connection with sales volume growth and a change in themix towards foodservice sales, which require lower selling expenses than retailsales.

Operating income as a percentage of net sales declinedto 8.3% in 2005 from 9.9% in 2004.  Inabsolute terms, operating income decreased 3% to Ps.1,184 million.

***GIMSA***

Sales volume increased 9%to 1,582 thousand tons in 2005 compared with 1,448 thousand tons in 2004.  Sales volume increased mainly as a result of:(i) the acquisition of Agroinsa; (ii) increased sales to corporatecustomers in connection with new product development; (iii) increasedsales to wholesalers, and; (iv) exports to Gruma Corporation.  Approximately 72% of GIMSA’s sales volumegrowth derived from the acquisition of Agroinsa, whose operations werereflected in GIMSA’s financial results beginning in August 2005.  Net sales increased by 9% toPs.6,791 million in 2005 compared with Ps.6,222 million in 2004,reflecting higher sales volume.

Cost of sales increased5% to Ps.4,801 million in 2005 from Ps.4,585 million in 2004 due tohigher sales volume.  The percentage ofincrease in cost of sales was lower than in sales volume due mostly to lowercorn costs.  Cost of sales as apercentage of net sales improved to 70.7% from 73.7%, due primarily to lower corncosts.

SG&A rose 10% toPs.1,268 million in 2005 compared with Ps.1,153 million in 2004 and,as a percentage of net sales, increased slightly to 18.7% in 2005 compared with18.5% in 2004.  This increase was dueprimarily to higher freight and advertising expenses and the acquisition ofAgroinsa.  Freight expenses increased inconnection with: (i) growth in sales to corporate customers for whom weusually pay freight expenses, and; (ii) an increase in the number ofintercompany shipments due to higher exports and to higher corn flour demand inthe southeast region of Mexico.

Operating income as a percentage of net salesincreased to 10.6% in 2005 from 7.8% in 2004 and, in absolute terms, increased49% to Ps.722 million.

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***Gruma Venezuela***

Sales volume decreased 5% to 479 thousand tons in 2005compared with 504 thousand tons in 2004. The decrease was the result of: (i) intense competition from theleading corn flour producer; (ii) entry into the market in 2004 of a newcorn flour competitor oriented to government supply, and; (iii) governmentprocurement’s policies for its social welfare programs which have increasedtheir share of corn flour sales to consumers. Net sales decreased 16% to Ps.3,221million in 2005 compared withPs.3,822 million in 2004, resulting from lower sales volume and lowerprices.  Lower prices resulted fromintense competition in the industry and from price controls, which have limitedour ability to raise prices, particularly in the wheat flour and corn flourbusinesses.

Cost of sales decreased 7% to Ps.2,771 million in2005 from Ps.2,985 million in 2004, primarily due to lower salesvolume.  Cost of sales as a percentage ofnet sales increased to 86.0% from 78.1% due mainly to higher raw-materialcosts, lower prices, and lower absorption of fixed costs.

SG&A decreased 13% to Ps.540 million in 2005compared with Ps.623 million in 2004 due to the cancellation ofapproximately Ps.33 million in provisions for administrative expenses, aswell as to lower expenses in connection with lower sales volume.  SG&A as a percentage of net salesincreased to 16.8% in 2005 from 16.3% in 2004, due primarily to lowerabsorption of fixed expenses in connection with lower net sales.

Operatingloss was Ps.91 million in 2005 compared with an operating income ofPs.213 million in 2004.  Operatingmargin decreased to negative 2.8% in 2005 from positive 5.6% in 2004*.*

***Molinera de México***

Salesvolume increased 3% to 474 thousand tons in 2005 from 460 thousand tons in 2004due to increased sales to corporate customers. Net sales decreased 3% to Ps.1,956 million in 2005 fromPs.2,027 million in 2004 due to lower prices resulting from increasedcompetitive pressure in the industry which was partially offset by an increasein sales volume.

Cost ofsales increased 3% to Ps.1,689 million in 2005 compared withPs.1,640 million in 2004, primarily in connection with sales volumegrowth.  Cost of sales as a percentage ofnet sales increased to 86.3% from 81.0% due to lower prices and higherpackaging and additive costs.

SG&Adecreased 2% to Ps.398 million in 2005 compared with Ps.407 millionin 2004, due to the reclassification of some operating expenses as cost ofsales.  SG&A as a percentage of netsales increased to 20.4% in 2005 from 20.1% in 2004, due primarily to reducedexpense absorption.

Operatingloss was Ps.131 million in 2005 compared with an operating loss ofPs.21 million in 2004.

***Gruma Centroamérica***

Sales volume increased15% to 178 thousand tons in 2005 compared with 154 thousand tons in 2004, dueto higher corn flour sales volume driven by low local corn supplies andincreased advertising.  Net salesincreased 8% to Ps.1,424 million from Ps.1,314 million in 2004 due toincreased sales volume in the corn flour segment.  The rate of growth in net sales lagged salesvolume growth due primarily to a change in the sales mix toward bulk sales ofcorn flour.

Cost of sales increased7% to Ps.979 million in 2005 compared with Ps.913 million in 2004,due primarily to higher corn flour sales volume.  The percentage increase in cost of sales waslower than in sales volume due to lower corn costs.  Cost of sales as a percentage of net salesimproved to 68.8% in 2005 from 69.5% in 2004 due to lower corn costs and betterfixed-cost absorption.

SG&A increased 17% toPs.447 million in 2005 compared with Ps.381 million in 2004 and, as apercentage of net sales, increased to 31.4% from 29.0% in 2004.  These increases were due primarily to:(i) extraordinary expense of Ps.44 million in fourth quarter 2005related to technical services provided by GRUMA’s technology division;(ii) higher distribution expenses in connection with corn flour salesvolume growth and higher fuel prices, 

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and;(iii) increased promotion and advertising in connection with the launchingof new products and increased advertising in the tortilla business.

Operating loss was Ps.2 million in 2005 comparedwith an operating income of Ps.20 million in 2004.  Operating margin decreased to negative 0.1%in 2005 from positive 1.5% in 2004.

**LIQUIDITY AND CAPITALRESOURCES**

Our liquidity and capital resource requirements from1999 to 2001 reflected a high level of capital expenditures in connection withthe construction and acquisition of additional facilities in Mexico, the UnitedStates, Central America and Venezuela, as well as significant working capitalrequirements.  During 2004, most of ourcapital expenditures were oriented to Gruma Corporation for the expansion ofcapacity at existing plants, general facilities upgrades, and the acquisitionof one corn flour company in Italy, one tortilla plant in the Netherlands, andone tortilla plant in Las Vegas.  During2005, most of our capital expenditures were mainly applied to Gruma Corporationand GIMSA for the construction of a new tortilla plant, expansion of corn flourand tortilla capacity at existing plants, several acquisitions including theCHS (tortilla assets), the tortilla company near San Francisco, and theAgroinsa acquisition, and general facilities upgrades.  In 2006, most of our capital expenditureswere invested in: (i) the expansion of tortilla capacity and upgrades inexisting and new plants within Gruma Corporation; (ii) the acquisition ofPride Valley Foods, a company based in Newcastle, England, that manufacturestortillas, pita bread, chapatti, and naan; (iii) the construction of atortilla plant in Shanghai, China; (iv) the acquisition of RositasInvestments and Oz-Mex Foods Pty Ltd, two tortilla companies based inAustralia, and; (v) the purchase of the remaining 49% ownership interest ofNuova De Franceschi & Figli, a corn flour company based in Italy ofwhich we previously held a 51% ownership interest.  To a lesser extent, investments were alsoapplied to capacity expansions in GIMSA and Gruma Centroamérica.  These investments were made to accommodate thecontinuous growth of our business.

We fund our liquidity andcapital resource requirements through a variety of sources, including:

·                  cashgenerated from operations;

·                  uncommittedshort-term and long-term lines of credit;

·                  committedmedium-term facilities;

·                  offeringsof medium- and long-term debt; and

·                  salesof our equity securities and those of our subsidiaries and affiliates from timeto time.

We believe that our overall sources of liquidity willcontinue to be sufficient during the next 12 months to satisfy ourforeseeable financial obligations and operational requirements.  The principal factors that could decrease oursources of liquidity are a significant decrease in the demand for, or price of,our products, each of which could limit the amount of cash generated fromoperations, and a lowering of our corporate credit rating or any otherdowngrade, which could increase our costs with respect to new debt and causeour stock price to suffer.  Our liquidityis also affected by factors such as the depreciation or appreciation of thepeso and changes in interest rates.  Asdiscussed below, Gruma, S.A.B. de C.V. is subject to financial covenantscontained in some of its debt agreements which require it to maintain certainfinancial ratios and balances on a consolidated basis and Gruma Corporation issubject to financial covenants contained in some of its debt and leaseagreements which require it to maintain certain financial ratios and balanceson a consolidated basis.  The interestthat Gruma, S.A.B. de C.V. and Gruma Corporation pay on a  30% and 60%, respectively, of its debt mayincrease if their overall leverage ratio increases above 2.0x and 1.5x,  respectively.  An increase in the interest that Gruma, S.A.B.de C.V. and Gruma Corporation pay on its debt could limit these companies’ability to help support our liquidity and capital resource requirements.

Mr. González Barrera haspledged part of his shares in our company to secure some of hisborrowings.  If there is a default andthe lenders enforce their rights against any or all of these shares, Mr.González Barrera and his family could lose control over us and a change ofcontrol could result.  This could triggera default in one of our credit agreements and have a material adverse effectupon our business, financial condition, results of operations and 

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prospects.  For more information about this pledge, see “Item 7.  Major Shareholders and Related PartyTransactions.”

We intend to mitigateliquidity risks by increasing revenues through capitalizing on our existinginfrastructure and production capacity and pursuing moderate growth, but wecannot assure you that we will succeed in this regard.

**WorkingCapital**

We define working capital as current assets, excludingrestricted cash, minus current liabilities, excluding short-term bank loans andcurrent portion of long-term debt.  Ourworking capital as of the dates indicated was as follows:
| December 31, 2005  |   | Ps. | 4,828million |   |
|-------------------------|--------|-----|--------------|--------|
| December 31,  2006 |   | Ps. | 5,465million |   |

 

**Indebtedness**

Our indebtedness bears interest at fixed and floatingrates.  As of June 15, 2007,approximately 59% of our outstanding indebtedness bore interest at fixed ratesand approximately 41% bore interest at floating rates, with almost allfloating-rate indebtedness bearing interest based on LIBOR.  We partially hedge both our interest rateexposure and our foreign exchange rate exposure as discussed below.  For more information about our interest rateand foreign exchange rate exposures, see “Item 11.  Quantative and Qualitative Disclosures AboutMarket Risk.”

Standard & Poor’s upgraded Gruma, S.A.B. deC.V. to BBB- from BB+ with a stable outlook in June 2004.  In September 2004, Fitch Ratingsassigned Gruma, S.A.B. de C.V. a new senior unsecured foreign currency andlocal currency rating of “BBB-” with an outlook of “Stable.”  The foreign currency debt rating is alsoapplicable to Gruma, S.A.B. de C.V.’s 7.625% Notes Due 2007.  On November 21, 2004, Fitch Ratingsassigned its ‘BBB-’ rating to Gruma S.A.B. de C.V.’s U.S.$300 millionperpetual bond.  Also, onNovember 24, 2004, Standard & Poor’s Ratings Services assigned its ‘BBB-’rating to Gruma S.A.B. de C.V.’s U.S.$300 million perpetual bond.  In addition, in November 2004, Moody’sInvestors Service upgraded Gruma, S.A.B. de C.V.’s senior unsecured notes toBa1 from Ba2 and its senior implied rating to Ba1 from Ba2, with an outlook of “Positive.”  Moody’s recently changed its outlook on usfrom positive to neutral and Standard & Poor’s from neutral to negative.  Any ratings downgrades or further changes inoutlook with negative implications could cause our debt costs to fluctuateswhich could ultimately affect our financial condition and results of operation.

On November 16, 2004, Gruma S.A.B. de C.V.commenced a tender offer to purchase its outstanding U.S.$250,000,000 aggregateprincipal amount of 7.625% Notes Due 2007. Upon completion of the tender offer approximately U.S.$200,000,000aggregate principal amount of the 7.625% Notes Due 2007 had been tendered andapproximately U.S.$50,000,000 in aggregate principal amount of the 7.625% NotesDue 2007 remain outstanding.  InApril 2001, we entered into an interest rate swap converting the interestpayments on the U.S.$250,000,000 debt from a fixed rate (7.625%) to a variablerate (LIBOR plus 2.035%).  We immediatelyentered into a further swap agreement with respect to the interest payments onthe same U.S.$250,000,000 debt whereby we paid a fixed interest rate of 5.485%and received a LIBOR rate.  These swapsagreements remain in place with respect to interest payments on theU.S.$250,000,000 principal amount.  Theseswap agreements offset each other effectively leaving us with the originalfixed interest rate payment of 7.625% on the approximately U.S.$50,000,000 inaggregate principal amount which remains outstanding after the tender offer.

On October 4, 2004, we obtained aU.S.$250 million, five year syndicated senior credit facility, which werefer to as the 2004 Facility, from a syndicate of banks, which consists of aU.S.$150 million senior term loan facility and a U.S.$100 millionsenior revolving credit facility, both with a five-year tenor.  However, on July 28, 2005, we refinancedthis 2004 Facility through a syndicate of five banks which we refer to as the2005 Facility achieving a reduction in the interest rate and eliminating thepartial principal amortizations in years 2008 and 2009 and leaving a bulletpayment at maturity in July 2010, among other minor benefits.  As of June 15, 2007, there was U.S.$150million outstanding under the 2005 Facility with U.S.$100 million of revolvingcredit available.

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The interest rate for the 2005 Facility is LIBOR plus40 basis points during the first year. Thereafter the spread could fluctuate in relation to our leverage andcould fluctuate between 37.5 and 45 basis points.  However, on November 2, 2004, we enteredinto an interest rate swap transaction with five banks with an aggregatenotional amount of U.S.$150 million maturing on April 5, 2008,whereby we fixed the 6-month LIBOR rate associated with the term portion of the2004 Facility at an average rate of 3.2725%. This interest rate swap was modified with respect to its calculationdates to match the 2005 Facility resulting in an average fixed rate of 3.2775%and a maturity on March 30, 2008. The swap transaction provides that the counterparty pay us unless6-month LIBOR reaches 6%, in which case the parties have no obligation to payany amount for the applicable period.

However, in March 8, 2006, we increased this 6%level up to 6.5% and 6.75% for the interest payment dates due in 2007 obtaininga fixed average rate of 3.6175% for 2007. In addition, on December 12, 2005, we entered into a new interestrate swap for the 2005 Facility with a single bank, starting on March 30,2008 and maturing on March 30, 2009, whereby we fixed the 6-month LIBORrate associated with the term portion at an average rate of 4.505%.  The swap transaction provides that thecounterparty pay us unless 6-month LIBOR reaches 7%, in which case the partieshave no obligation to pay any amount for the applicable period.

On December 3, 2004, Gruma S.A.B. de C.V. issuedU.S.$300 million 7.75% senior, unsecured perpetual bonds which were gradedBBB- by Standard & Poor’s Ratings and by Fitch Ratings.  The bonds which have no fixed final maturitydate, have a call option exercisable by GRUMA at any time beginning five yearsafter the issue date.  As ofJune 15, 2007 we had exchange rateforward contracts for part of the interest payments due in 2007 on ourU.S.$300 million 7.75% perpetual bond, for an aggregate notional amount ofU.S.$34.9 million at an average exchange rate of Ps.10.942 per U.S. dollar.

In October 2006, Gruma Corporation entered into aU.S.$100 million 5-year revolving credit facility with a syndicate of financialinstitutions.  The credit facilityreplaced the U.S.$70 million revolving credit facility which matured in June2007 and was terminated upon the closing of the new facility.  The new facility has an interest rate basedon LIBOR rate plus a spread of 0.35% to 0.45% that fluctuates in relation toour leverage and contains less restrictive provisions than those in thefacility replaced.  The terms of the newfacility provide that Gruma Corporation may request that the commitmentsavailable under the facility be increased by up to an additional U.S.$50million.

As of December 31, 2006, we had committed U.S.dollar-denominated long-term lines of credit totaling Ps.2,162million(approximately U.S.$200 million) available from banks in Mexico and the UnitedStates of which we have drawn Ps.119 million (approximately U.S.$11million).  As of the same date, we alsohad uncommitted short-term lines of credit totaling Ps.5,593 million(approximately U.S.$517.4 million) available from Mexican and internationalbanks, of which we had drawn Ps.509.2 million (approximately U.S.$47.1 million).  Should we elect to utilize the uncommittedlines of credit, we would have to negotiate the terms and conditions at thetime of use.

At December 31, 2006, we had total outstandinglong-term debt aggregating approximately Ps.5,605.5 million (approximatelyU.S.$518.5 million).  Almost all of ourlong-term debt at such date was dollar-denominated.  Our long-term debt includes U.S.$50.5million, or Ps.546.4 million, of principal amount of the 7.625% Notes due 2007,which we issued in October 1997, U.S.$150 million or Ps.1,621.5 million ofprincipal amount of the 2005 Facility which we issued in July 2005, andU.S.$300 million, or Ps.3,243 million, of principal amount of the 7.75%Perpetual Bonds, which we issued in December 2004.

Some of our creditagreements contain covenants that require us to maintain:

·                  aratio of consolidated total funded debt to EBITDA of not more than 3.5:1; and

·                  aratio of consolidated EBITDA to consolidated interest charges of not less than2.50:1.

In addition, we may not incur additional indebtednessand may not pay dividends if doing so would violate the terms of thesecovenants.

Gruma Corporation is also subject to covenants whichlimit the amount of dividends that can be paid under certaincircumstances.  Both Gruma, S.A.B. deC.V. and Gruma Corporation are also subject to covenants which 

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limit the amounts thatmay be advanced to, loaned to, or invested in, us under certain circumstances.  In addition, both Gruma, S.A.B. de C.V. andGruma Corporation are required to maintain certain financial ratios andbalances.  Upon the occurrence of anydefault or event of default under its credit and lease agreements, GrumaCorporation generally is prohibited from making any payments to us or our othersubsidiaries or affiliates.  Thecovenants described above and other covenants could limit our and GrumaCorporation’s ability to help support our liquidity and capital resourcerequirements.  Gruma, S.A.B. de C.V. andGruma Corporation are currently in compliance with all of the covenantscontained in the debt and lease agreements.

As of December 31, 2006, Gruma Corporation hadthree sale-leaseback agreements, entered in 1996, of a tortilla productionfacility and various production equipment located at one of the Company’stortilla plants and at one of its corn flour facilities, both in the U.S.  The agreement related to the tortillaproduction facility is, under Mexican GAAP, accounted for as an operatinglease.  Under U.S. GAAP, this arrangementwould have been accounted for as a financing lease because a continuinginvolvement from the seller-lessee is present, and consequently, the risks andbenefits of the property are not transferred to the buyer-lessor.  Average annual rental payments under thislease, expiring in 2011, will be approximately U.S.$3.6 million, based upon thefinancial statements for the year ended December 31, 2006.  The agreement provides Gruma Corporation witha purchase option to acquire the facility at fair market value at theexpiration of the lease, and also an early purchase option, which permits GrumaCorporation to acquire the facility at fair market value at approximately 75%of the lease term.

As of December 31, 2006, we had total cash andcash equivalents of Ps.571 million. Restricted cash is comprised primarily of undistributed proceeds fromtax-exempt industrial development bonds issued by Gruma Corporation held by atrustee available for future purchases of certain plants and equipment.

The following tablepresents our amortization requirements with respect to our total indebtednessas of March 31, 2007. 

| Year                 | ** ** | **In Millions of U.S. Dollars** | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|
| 2007                 |       | 82.6                                                |       |
| 2008                 |       | 16.0                                                |       |
| 2009                 |       | 38.6                                                |       |
| 2010                 |       | 154.1                                               |       |
| 2011 and  thereafter |       | 350.3                                               |       |
| **Total**            |       | U.S.$                                               | 641.6      |   |
|                      |            |                                                     |            |  |

 

The following table sets forth our ratios ofconsolidated debt to total capitalization (i.e., consolidated debt plus totalstockholders’ equity) and consolidated liabilities to total stockholders’ equityas of the dates indicated.  For purposesof these ratios, consolidated debt includes short-term debt.
| Date                    | ** ** | **Ratio of Consolidated Debt  to Total Capitalization** | ** ** | **Ratio of Consolidated  Liabilities to Total  Stockholders’ Equity** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| December 31,  2005 |       | 0.33                                                                             |       | 0.90                                                                                                |       |
| December 31, 2006  |       | 0.28                                                                             |       | 0.77                                                                                                |       |

**Capital Expenditures**

In 2005, we spent approximately U.S.$193 millionon capital expenditures, mainly applied to Gruma Corporation for the expansionof corn flour and tortilla capacity, including the two European acquisitions,the acquisition of a tortilla plant in Las Vegas and general facilitiesupgrades in our U.S. plants.  Theinvestments were made to accommodate the continuous growth in our business.  In 2006, we invested approximately U.S.$225 million,which were mainly applied to Gruma Corporation and GIMSA.  In Gruma Corporation capital expenditureswere applied mostly for expansion and upgrades of existing facilities, theconstruction of a new tortilla plant in Pennsylvania, the acquisition of onesmall tortilla plant in San Francisco, California and the tortilla assets ofCHS which consisted of three plants (Forth Worth, Texas, Phoenix, Arizona andNew Brighton, Minnesota).  In GIMSA, mostof the capital expenditures were applied for the acquisition of Agroinsa.  In 2006, we spent 

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approximately U.S.$225million on capital expenditures, most of which was applied to GrumaCorporation, in: (i) the expansion of tortilla capacity and upgrades inexisting and new plants within Gruma Corporation; (ii) the acquisition ofPride Valley Foods, a company based in Newcastle, England, that manufacturestortillas, pita bread, chapatti, and naan, for an acquisition cost ofapproximately U.S.$33 million; (iii) the construction of a tortillaplant in Shanghai, China, for a total investment of approximatelyU.S.$7 million; (iv) the acquisition of Rositas Investments Pty Ltd,a tortilla company based in Australia, for approximately U.S.$13 million;(v) the acquisition of Oz-Mex Foods Pty Ltd, a tortilla companybased in Australia, for approximately U.S.$4 million, and; (vi) thepurchase of the remaining 49% ownership interest in Nuova DeFranceschi & Figli, a corn flour company based in Italy, in which wepreviously held a 51% ownership interest. To a lesser extent, investments were also applied to capacity expansionsin GIMSA and Gruma Centroamérica.  Wehave budgeted approximately U.S.$250 millionfor capital expenditures in 2007.  Thisincludes approximately U.S.$45 million spent during the first quarter of2007, most of which was applied to Gruma Corporation for the expansion oftortilla capacity and, to a lesser extent, for the expansion of corn flourcapacity in GIMSA at our Mérida and Mexicali plants. The investments were madeto accommodate the continuing growth of business.  This capital expenditures budget does notinclude any potential acquisitions.

We expect to be able tofund our capital expenditures primarily from funds from operations as well asthrough the sale of GFNorte shares throughout the year.  We believe that funds from operations andfrom the sale of GFNorte shares will be sufficient to meet our anticipatedcapital expenditures through the end of this year.

**Concentrationof Credit Risk**

Our regular operationsexpose us to potential defaults when our suppliers and counterparties areunable to comply with their financial or other commitments. We seek to mitigatethis risk by entering into transactions with a diverse pool of counterparties.However, we continue to remain subject to unexpected third party financialfailures that could disrupt our operations.

We are also exposed torisk in connection with our cash management activities and temporaryinvestments, and any disruption that affects our financial intermediaries couldalso adversely affect our operations.

Our exposure to risk due to trade receivables islimited given the large number of our customers located in different parts ofMexico, United States, Central America, Venezuela and Europe. However, we stillmaintain reserves for potential credit losses.

Our operations in Venezuela represented approximately10% of our sales in 2006.  The severepolitical and economic situation in Venezuela presents a risk to our businessthat we cannot control and that cannot be accurately measured or estimated.  Our financial condition and results ofoperations could be adversely affected due to the fact that (i) our salesare denominated in bolívares, (ii) Gruma Venezuela produces products thatare subject to price controls and (iii) we may have difficultiesrepatriating dividends from Gruma Venezuela and importing some of our rawmaterial requirements because of the foreign exchange controls.  In the case of some of our raw materials, wemay also face increasing costs due to the implementation of import tariffs.  See “Item 3.  Risk Factors – Risks Related to Venezuela –Venezuela Presents Significant Economic Uncertainty and Political Risk, WhichMay in the Future Have an Adverse Impact on Our Operations and FinancialPerformance.”

**RESEARCH AND DEVELOPMENT**

We continuously engage inresearch and development activities that focus on, among other things:  increasing the efficiency of our proprietarycorn flour and corn/wheat tortilla production technology; maintaining highproduct quality; developing new and improved products and manufacturingequipment; improving the shelf life of certain corn and wheat products;improving and expanding our information technology system; engineering, plantdesign and construction; and compliance with environmental regulations. We haveobtained 56 patents in the United States since 1968, four of which wereobtained during the last three years. Twenty-one of these patents are in force and effect in the United Statesas of the date hereof and the remaining 35 have expired. We currently have sixnew patents in process, four in the United Sates and two in othercountries.  Additionally, nine of ourregistered patents are currently in the process of being published in othercountries.

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Our research anddevelopment is conducted through our subsidiaries INTASA, Tecnomaíz andCIASA.  Through Tecnomaíz, we engage inthe design, manufacture and sale of machines for the production of corn/wheattortillas and tortilla chips.  We carryout proprietary technological research and development for corn milling andtortilla production as well as all engineering, plant design and constructionthrough INTASA and CIASA.  Thesecompanies administer and supervise the design and construction of our newplants and also provide advisory services and training to employees of our cornflour and tortilla manufacturing facilities. We spent Ps.38 million, Ps.40 million and Ps.56 million onresearch and development in 2004, 2005 and 2006, respectively.

**TREND INFORMATION**

Our financial results will likely continue to beinfluenced by factors such as changes in the level of consumer demand fortortillas and corn flour, government policies regarding the Mexican tortillaand corn flour industry, and the cost of corn, wheat and wheat flour.  In addition, we expect our financial resultsin 2007 to be influenced by:

·                  volatilityin corn and wheat prices;

·                  theMexican government’s agreement to stabilize tortilla prices, as a result ofwhich GIMSA cannot pass on its higher cost of corn through its corn flourprices;

·                  increasedcompetition from tortilla manufacturers, especially in the U.S.;

·                  increasesin the Hispanic population in the United States,

·                  increasesin Mexican food consumption by the non-Hispanic population in the UnitedStates; as well as projected increases in Mexican food consumption and use oftortillas in non-Mexican cuisine as tortillas continue to be assimilated intomainstream cuisine in the U.S., Europe, Asia and Oceania, each of which couldincrease sales;

·                  volatilityin energy costs;

·                  increasedcompetition in the corn flour business in Venezuela;

·                  exchangerate fluctuations, particularly increases and decreases in the value of theMexican peso relative to the Venezuelan bolívar and U.S. dollar; and

·                  civiland political unrest in Venezuela which may negatively affect the profitabilityof Gruma Venezuela.

**OFF-BALANCE SHEETARRANGEMENTS**

As of December 31, 2006 we do not have anyoutstanding off-balance sheet arrangements.

**CONTRACTUAL OBLIGATIONSAND COMMERCIAL COMMITMENTS**

On November 2,2004, we entered into an interest rate swap transaction with five banks with anaggregate notional amount of U.S.$150 million which became effective onApril 5, 2005 and matures on April 5, 2008, whereby we fixed the6-month LIBOR rate associated with the term portion of the 2004 facility at anaverage rate of 3.2725%.  The swaptransaction provides that the counterparty pay us unless 6-month LIBOR reaches6%, in which case the parties have no obligation to pay any amount for the applicableperiod.  On September 30,2005, this interest rate swap was modified resulting in an average fixed rateof 3.2775% and matures on March 30, 2008. The swap transaction provides that the counterparty pay us unless6-month LIBOR reaches 6%, in which case the parties have no obligation to payany amount for the applicable period. However, on March 8, 2006 we modified this 6% level up to 6.5% and6.75% for the interest payment dates due in 2007 obtaining a fixed average rateof 3.6175% for this year.  In addition,on December 12, 2005 we entered into a new interest rate swap for the 2005Facility with a single bank, starting on March 30, 2008 and maturing onMarch 30, 2009, whereby we fixed the 6-month LIBOR rate associated withthe term portion at an average rate of 4.505%. The swap transaction provides that the counterparty pay us unless6-month LIBOR reaches 7%, in which case the parties have no obligation to payany amount for the applicable period. For a description of our debt, see Note 10 to our financial statements.

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Additionally, during 2005, weentered into exchange rate forward and option contracts for part of theinterest payments due in 2006 and 2007 (corresponding to ourU.S.$300 million 7.75% perpetual bond), for an aggregate notional amountof U.S.$34.9 million outstanding as of June 15, 2007 at an averageexchange rate of Ps.10.942 per U.S. dollar. In April 2001, we entered into an interest rate swapconverting the interest payments on our U.S.$250,000,000 7.625% Notes Due 2007from a fixed rate (7.625%) to a variable rate (LIBOR plus 2.035%).  We immediately entered into a further swapagreement with respect to the interest payments on the same U.S.$250,000,000debt whereby we receive a fixed interest rate of 5.485% and will pay a LIBORrate.  These swaps agreements remain inplace with respect to interest payments on the U.S.$250,000,000 principalamount.  These swap agreements offseteach other effectively leaving us with the original fixed interest rate paymentof 7.625% on the approximately U.S.$50,000,000 in aggregate principal amountwhich remains outstanding after the tender offer.

In addition to the above arrangements, we havecommitments under certain firm contractual arrangements to make future paymentsfor goods and services.  These firmcommitments secure the future rights to various assets to be used in the normalcourse of operations.  For example, weare contractually committed to make certain minimum lease payments for the useof property under operating lease agreements. In accordance with Mexican GAAP, the future rights and obligationspertaining to such firm commitments are not reflected as assets and liabilitieson the accompanying consolidated balance sheets.  As of December 31, 2006, GrumaCorporation is a party to three agreements for the sale leaseback of a tortillaproduction facility and various production equipment located at one of theCompany’s tortilla plants and at one of its corn flour facilities, both in theU.S.  The agreement related to thetortilla production facility is, under Mexican GAAP, accounted for as anoperating lease.  Under U.S. GAAP, thisarrangement would have been accounted as a financing lease because a continuinginvolvement from the seller-lessee is present, and consequently, the risks andbenefits of the property are not transferred to the buyer-lessor.  Average annual rental payments under thislease, expiring in 2011, will be approximately U.S.$3.6 million, based upon thefinancial statements for the year ended December 31, 2006.  The agreement provides Gruma Corporation witha purchase option to acquire the facility at fair market value at theexpiration of the lease, and also an early purchase option, which permits GrumaCorporation to acquire the facility at fair market value at approximately 75%of the lease term.  The U.S. GAAP balancesheet as of December 31, 2005 and 2006 would reflect an increase in thefixed assets, net, balance of Ps.76.3****million andPs.41.9****million, respectively (net ofaccumulated depreciation of Ps.82.0****million andPs.88.1****million respectively), and an increasein the long-term debt balance of Ps.158.3 million and Ps.130.0****million, respectively.

The following table summarizesseparately our material firm commitments at December 31, 2006 and thetiming and effect that such obligations are expected to have on our liquidityand cash flow in the future periods.  Inaddition, the table reflects the timing of principal and interest payments onoutstanding debt, which is discussed in “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources—Indebtedness.”  We expect to fund the firm commitments withoperating cash flow generated in the normal course of business.  
| **Contractual Obligations  and  Commercial Commitments** | ** ** | **Total**                                             | ** ** | **Less than  1 Year** | ** ** | **From 1 to 3  Years** | ** ** | **From 3 to 5  Years** | ** ** | **Over 5  Years** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **(in millions of U.S. dollars)** | ** ** |
| Long-term debt  obligations                                        |       | 518.5                                                 |       | —                          |       | 53.5                                  |       | 165.0                                 |       | 300.0                  |       |
| Operating lease  obligations(1)                                    |       | 155.7                                                 |       | 44.0                            |       | 63.5                                  |       | 30.5                                  |       | 17.7                   |       |
| Purchase  obligations(2)                                           |       | 176.1                                                 |       | 176.1                           |       | —                                |       | —                                |       | —                 |       |
| Interest  payments on our indebtedness(3)                          |       | 196.1                                                 |       | 42.1                            |       | 73.5                                  |       | 57.2                                  |       | 23.3                   |       |
| Other  liabilities(4)                                              |       | 81.7                                                  |       | 81.7                            |       | —                                |       | —                                |       | —                 |       |
| Total                                                              |       | 1,128.1                                               |       | 343.9                           |       | 190.5                                 |       | 252.7                                 |       | 341.0                  |       |
| Total in millions of  peso equivalent amounts                      |       | Ps.                                                   | 12,193.8   |                            | Ps.        | 3,717.6                               |       | Ps.                                   | 2,058.8    |                   | Ps.        | 2,731.7 |   | Ps. | 3,685.7 |   |
|                                                                    |            |                                                       |            |                                 |            |                                       |            |                                       |            |                        |            |  |  |  |  |  |

 

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(1)          Operating lease obligations primarilyrelate to minimum lease rental obligations for our real estate and operatingequipment in various locations.

(2)          Purchase obligations relate to ourminimum commitments to purchase commodities, raw materials, machinery and equipment.

(3)          In the determination of our future estimated interestpayments on our floating rate denominated debt, we used the interest rates ineffect as of December 31, 2006.

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(4)          Other relate to short-term bank loans and the currentportion of long-term debt.

**U.S. GAAP RECONCILIATION**

Our consolidated financial statements are prepared inaccordance with Mexican GAAP, which differ in certain significant respects fromU.S. GAAP.  See Note 22****to our auditedconsolidated financial statements for information relating to the nature andeffect of such differences.  Mexican GAAPfinancial statements recognize the effects of inflation, whereas financialstatements prepared under U.S. GAAP are presented on a historical cost basis.  We are not required to reverse many of theMexican inflation accounting adjustments when reconciling Mexican GAAP to U.S.GAAP, as these adjustments provide a means of measuring the effects ofprice-level changes in the inflationary Mexican economy.  Accordingly, these inflation-adjusted figuresare considered a more meaningful presentation than historical cost-basedfinancial reporting for both Mexican and U.S. accounting purposes.

Net income under U.S. GAAP amounted toPs.836 million in 2004, Ps.1,239** **million****in 2005 andPs.1,448 million in 2006, compared with majority net income under MexicanGAAP of Ps.953 million in 2004, Ps.1,239** **million in 2005 and Ps.1,525 million in 2006.

Stockholders’ equityunder U.S. GAAP amounted to Ps.10,893** **million in 2005 and Ps.13,425 million in 2006,compared with stockholders’ equity under Mexican GAAP of Ps.14,725 millionin 2005 and Ps.17,048 million in 2006. See Note 22****to our audited consolidated financial statements for afurther discussion of the adjustments under U.S. GAAP.

**NewAccounting Standards**

***New AccountingPronouncements under Mexican GAAP***

As of January 1,2007, the following Financial Reporting Standards (FRS) issued by the MexicanFinancial Reporting Standards Board became effective.  These Financial Reporting Standards will nothave a material effect on the Company’s financial information.

FRS B-3 Statementof Income – Classifies income, costs and expenses as ordinary or non-ordinary,eliminates the terms “Special Items” and “Extraordinary Items” and establishesemployees’ statutory profit sharing as an ordinary expense as opposed to a taxexpense.

FRS B-13Subsequent Events – Requires that restructurings for assets and liabilities anddisclaimers from creditors to exercise their right to settle debt in the caseof noncompliance be recognized in the period that it occurs.  These issues will only be disclosed in thenotes to financial statements.

FRS C-13 RelatedParties – Extends the definition of related parties and increases thedisclosure requirements in notes to financial statements.

FRS D-6Capitalization of comprehensive financing cost – Establishes the obligation andrules for capitalizing comprehensive financing cost.

***RecentlyIssued U.S. Accounting Standards***

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFASNo. 157 defines fair value, establishes the framework for measuring fair valueunder U.S. GAAP, and expands disclosures about fair value measurements.  SFAS No. 157 applies whenever other standardsrequire assets or liabilities to be measured at fair value. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, with earlier adoption permitted.  The Company is currently evaluating theimpact that SFAS No. 157 will have on its results of operations and financialposition.

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106, and 132(R)” (“SFAS No. 158”).  SFAS No. 158 requires employers torecognize the overfunded or underfunded status of a defined 

56

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benefit postretirement plan as an asset or liabilityin its statement of financial position, recognize through comprehensive incomechanges in that funded status in the year in which the changes occur, andmeasure a plan’s assets and its obligations that determine its funded status asof the end of the employer’s fiscal year. On December 31, 2006, the Company adopted the provisions of SFASNo. 158.  See Note 22-L to ourfinancial statements for a further description of the effect of adopting SFASNo. 158.

In June 2006, the FASBissued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of SFAS 109 — Accounting for Income Taxes” (“FIN No. 48”).  FIN No. 48 clarifies the accounting foruncertainty in income taxes by prescribing the minimum recognition threshold atax position is required to meet before being recognized in the financialstatements. FIN No. 48 is effective for fiscal years beginning afterDecember 15, 2006.  The Company iscurrently in the process of assessing and adopting FIN No. 48.

## **ITEM 6.          Directors,Senior Management and Employees.**

**MANAGEMENT STRUCTURE**

Our management is vestedin our board of directors.  Our day today operations are handled by our executive officers.

**Directors**

Our bylaws require that our board of directors becomposed of a minimum of five and a maximum of twenty-one directors, as decidedat our Ordinary General Shareholders’ Meeting. Pursuant to the Mexican Securities Law, at least 25% of the members ofthe board of directors must be independent. Under our bylaws and the Archer-Daniels-Midland association, as long asArcher-Daniels-Midland owns at least 20% of our capital stock, it will have theright to designate two of our directors and their corresponding alternates.Archer-Daniels-Midland has designated Federico Gorbea, President and ChiefOperating Officer of Archer-Daniels-Midland’s operations in México, and IsmaelRoig, Vice President of Planning and Business Development, as members of ourboard of directors. Archer-Daniels-Midland has elected David J. Smith, its Senior VicePresident, Secretary and General Counsel, and Steve Mills its Group VicePresident and Controller, to serve as alternates for Mr. Gorbea andMr. Roig, respectively.  Inaddition, under Mexican law, any holder or group of holders representing 10% ormore of our capital stock may elect one director and its correspondingalternate.

The board of directors,which was elected at the Ordinary General Shareholders’ Meeting held onApril 27, 2007, currently consists of 15 directors, with each directorhaving a corresponding alternate director. The following table sets forth thecurrent members of our board of directors, their ages, years of service,principal occupations, outside directorships, other business activities andexperience, their directorship classifications as defined in the Code of BestCorporate Practices issued by a committee formed by the *ConsejoCoordinador Empresarial*, or Mexican Entrepreneur Coordinating Board,and their alternates.  The terms of theirdirectorships are for one year, or for up to thirty additional days if nodesignation of their substitute has been made or if the substitute has nottaken office.
| Roberto González Barrera |   | Age:                   |   | 76                                                                                                            |
|-------------------------------|--------|------------------------|--------|---------------------------------------------------------------------------------------------------------------|
|                          |   | Years as Director:     |   | 25                                                                                                            |
|                          |   | Principal Occupation:  |   | Chairman of the Board of GRUMA and GIMSA                                                                      |
|                          |   | Outside Directorships: |   | Chairman of the board of Grupo Financiero Banorte  and Banco Mercantil del  Norte, director of Fondo Chiapas. |
|                          |   | Directorship Type:     |   | Shareholder, related                                                                                          |
|                          |   | Alternate:             |   | Jairo Senise                                                                                                  |

 

57

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| Juan Diez-Canedo Ruiz               |   | Age:                                                                 |   | 56                                                                                                                                                                                                                                                                                           |
|-------------------------------------|--------|----------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |   | Years as Director:                                                   |   | 2                                                                                                                                                                                                                                                                                            |
|                                |   | Principal Occupation:                                                |   | Chief Executive Officer of Fomento y Desarrollo  Comercial                                                                                                                                                                                                                                   |
|                                |   | Outside Directorships:                                               |   | Director of GRUMA and GIMSA, member of the audit and  corporate governance committees of GRUMA and GIMSA, director of Deportes  Martí.                                                                                                                                                  |
|                                |   | Business Experience:                                                 |   | Alternate director of Grupo Financiero Banorte and Banco Mercantil del Norte, Chief  Executive Officer of Cintra, Executive Vice President of GIMSA and Grupo Financiero  Banorte, Banking Director of Grupo Financiero Probursa. Alternate Chief  Executive Officer of Banco Internacional. |
|                                |   | Directorship Type:                                                   |   | Independent                                                                                                                                                                                                                                                                                  |
|                                |   | Alternate:                                                           |   | Felipe Diez-Canedo Ruiz                                                                                                                                                                                                                                                                      |
|                                |   |                                                                 |   |                                                                                                                                                                                                                                                                                         |
| Juan Antonio González Moreno   |   | Age:                                                                 |   | 49                                                                                                                                                                                                                                                                                           |
|                                |   | Years as Director:                                                   |   | 13                                                                                                                                                                                                                                                                                           |
|                                |   | Principal Occupation:                                                |   | Chief Executive Officer of Gruma Asia and Oceania                                                                                                                                                                                                                                            |
|                                |   | Outside Directorships:                                               |   | Alternate director of Grupo Financiero Banorte and  Banco Mercantil del Norte, Chairman and President of Car Amigo USA.                                                                                                                                                                      |
|                                |   | Business Experience:                                                 |   | Senior Vice President of Special Projects of Gruma  Corporation, President of Corn Flour operations of Gruma Corporation, Vice  President of Central and Eastern Regions of Mission Foods, President and Vice  President of Sales of Azteca Milling, Chief Operating Officer of GIMSA.       |
|                                |   | Directorship Type:                                                   |   | Shareholder, related                                                                                                                                                                                                                                                                         |
|                                |   | Alternate:                                                           |   | Roberto González Valdés                                                                                                                                                                                                                                                            |
|                                |   |                                                                 |   |                                                                                                                                                                                                                                                                                         |
| Roberto González Moreno        |   | Age:                                                                 |   | 55                                                                                                                                                                                                                                                                                           |
|                                |   | Years as Director:                                                   |   | 20                                                                                                                                                                                                                                                                                           |
|                                |   | Principal Occupation:                                                |   | Chairman of the Board and President of Corporación  Noble                                                                                                                                                                                                                               |
|                                |   | Other Directorships:                                                 |   | Director of GIMSA and alternate director of Grupo  Financiero Banorte and Banco Mercantil del Norte.                                                                                                                                                                                         |
|                                |   | Business Experience:                                                 |   | Chief Operating Officer of GIMSA, Director of  GRUMA’s former Food Division, President of RGM, Exportaciones El Parián.                                                                                                                                                            |
|                                |   | Directorship Type:                                                   |   | Shareholder, related                                                                                                                                                                                                                                                                         |
|                                |   | Alternate:                                                           |   | José de la Peña y Angelini                                                                                                                                                                                                                                                         |
|                                |   |                                                                 |   |                                                                                                                                                                                                                                                                                         |
|  Federico  Gorbea Quintero     |   | Age:   Years as Director: Principal Occupation: Other Directorships: |   | 44   Since November 2006 President and Chief Operating Officer of ADM México  Chairman of the Board of Terminales de Carga Especializadas, director of  Asociación de Proveedores de Productos Agropecuarios de México.                                                       |
|                                |   | Business Experience:                                                 |   | President and Chief Operating Officer of Compañía  Continental de México.                                                                                                                                                                                                     |
|                                |   | Directorship Type:                                                   |   | Shareholder, independent                                                                                                                                                                                                                                                                     |
|                                |   | Alternate:                                                           |   | Steve Mills                                                                                                                                                                                                                                                                                  |
|                                |   |                                                                 |   |                                                                                                                                                                                                                                                                                         |
| Carlos Hank Rhon                    |   | Age:                                                                 |   | 59                                                                                                                                                                                                                                                                                           |
|                                |   | Years as Director:                                                   |   | 13                                                                                                                                                                                                                                                                                           |
|                                |   | Principal Occupation:                                                |   | Chairman of the Board of Grupo Financiero  Interacciones                                                                                                                                                                                                                                     |
|                                |   | Outside Directorships:                                               |   | Chairman of the Board of Grupo Hermes and Grupo  Coin/La Nacional, Chief Executive Officer of Grupo Hermes.                                                                                                                                                                                  |
|                                |   | Business Experience:                                                 |   | Chairman of the Board of Laredo National Bancshares,  director of Banamex-Accival and Mexican Stock Exchange.                                                                                                                                                                                |
|                                |   | Directorship Type:                                                   |   | Related                                                                                                                                                                                                                                                                                      |
|                                |   | Alternate:                                                           |   | Carlos Hank González                                                                                                                                                                                                                                                                    |
|                                |   |                                                                 |   |                                                                                                                                                                                                                                                                                         |
| Roberto Hernández Ramírez |   | Age:                                                                 |   | 65                                                                                                                                                                                                                                                                                           |

 

58

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|                             |   | Years as Director:     |   | 12                                                                                                                                                                                                                                                                                                                     |
|-----------------------------|--------|------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |   | Principal Occupation:  |   | Chairman of the Board of Banco Nacional de México  and director of Grupo Financiero Banamex                                                                                                                                                                                                                       |
|                        |   | Outside Directorships: |   | Director of Citigroup and Grupo Televisa, member of  the international advisory committee of the Federal Reserve Bank of New York.                                                                                                                                                                                     |
|                        |   | Business Experience:   |   | Chief Executive Officer of Banco Nacional de México,  Chairman of the Board and director of the Mexican Stock Exchange, Chairman of  the Board of the Mexican Bankers Association and Acciones y Valores Banamex.                                                                                                 |
|                        |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                            |
|                        |   | Alternate:             |   | Esteban Malpica Fomperosa                                                                                                                                                                                                                                                                                              |
|                        |   |                   |   |                                                                                                                                                                                                                                                                                                                   |
| Juan Manuel Ley López  |   | Age:                   |   | 74                                                                                                                                                                                                                                                                                                                     |
|                        |   | Years as Director:     |   | 13                                                                                                                                                                                                                                                                                                                     |
|                        |   | Principal Occupation:  |   | Chairman of the Board and Chief Executive Officer of  Grupo Ley                                                                                                                                                                                                                                                        |
|                        |   | Outside Directorships: |   | Chairman of the Board of Casa Ley and director of  Grupo Financiero Banamex-Accival and Telmex.                                                                                                                                                                                                                        |
|                        |   | Business Experience:   |   | Chief Executive Officer of Casa Ley, Chairman of the  Board of the Latin American Association of Supermarkets, Sinaloa-Baja  California Consultant Council of Grupo Financiero Banamex-Accival and  National Association of Supermarket and Retail Stores.                                                             |
|                        |   | Directorship Type:     |   | Related                                                                                                                                                                                                                                                                                                                |
|                        |   | Alternate:             |   | Fernando Aguilar Rosas                                                                                                                                                                                                                                                                                                 |
|                        |   |                   |   |                                                                                                                                                                                                                                                                                                                   |
| Bernardo Quintana Isaac     |   | Age:                   |   | 65                                                                                                                                                                                                                                                                                                                     |
|                        |   | Years as Director:     |   | 12                                                                                                                                                                                                                                                                                                                     |
|                        |   | Principal Occupation:  |   | Chairman of the Board of Empresas ICA.                                                                                                                                                                                                                                                                                 |
|                        |   | Outside Directorships: |   | Director of TELMEX and CEMEX, among others.                                                                                                                                                                                                                                                                            |
|                        |   | Business Experience:   |   | Chief Executive Officer of Empresas ICA.                                                                                                                                                                                                                                                                               |
|                        |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                            |
|                        |   | Alternate:             |   | Diego Quintana Kawage                                                                                                                                                                                                                                                                                                  |
|                        |   |                   |   |                                                                                                                                                                                                                                                                                                                   |
| Juan A. Quiroga García |   | Age:                   |   | 57                                                                                                                                                                                                                                                                                                                     |
|                        |   | Years as Director:     |   | 1                                                                                                                                                                                                                                                                                                                      |
|                        |   | Principal Occupation:  |   | Chief Corporate Officer of GRUMA                                                                                                                                                                                                                                                                                       |
|                        |   | Outside Directorships: |   | Director of GIMSA.                                                                                                                                                                                                                                                                                                     |
|                        |   | Business Experience:   |   | Vice President of Administration of Gruma  Corporation, Chief Administrative and Internal Auditing Officer of Gruma,  Vice President of Operations Control of Gruma Corporation.                                                                                                                                       |
|                        |   | Directorship Type:     |   | Related                                                                                                                                                                                                                                                                                                                |
|                        |   | Alternate:             |   | Raúl A. Peláez Cano                                                                                                                                                                                                                                                                                          |
|                        |   |                   |   |                                                                                                                                                                                                                                                                                                                   |
| Héctor Rangel Domene   |   | Age:                   |   | 59                                                                                                                                                                                                                                                                                                                     |
|                        |   | Years as Director:     |   | 1                                                                                                                                                                                                                                                                                                                      |
|                        |   | Principal Occupation:  |   | Chairman of the Board of Grupo Financiero  BBVA-Bancomer.                                                                                                                                                                                                                                                              |
|                        |   | Outside Directorships: |   | Member of the audit and corporate governance  committees of GRUMA and GIMSA, director of Bancomer, Seguros Bancomer, Afore  Bancomer, Casa de Bolsa Bancomer, Cintra, Alestra and Universidad  Iberoamericana.                                                                                                         |
|                        |   | Business Experience:   |   | Chairman of the Board of the Business Coordinating  Council and The Mexican Bankers Association. Several management positions  within Grupo Financiero Bancomer, advisor of Rangel Domene y Asociados,  Executive Financing Coordinator of PEMEX, Corporate Officer of Banco Mexicano  and Vice President of Citibank. |
|                        |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                            |
|                        |   | Alternate:             |   | Juan Carlos Braniff Hierro                                                                                                                                                                                                                                                                                             |

 

59

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|  Ismael  Roig             |   | Age:   Years as Director: Principal Occupation: |   | 39   Since November 2006 Vice President Planning and Business Development of  Archer Daniels Midland Company                                                                                                                                                                       |
|--------------------------------|--------|-------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   | Outside Directorships:                          |   | None                                                                                                                                                                                                                                                                               |
|                           |   | Business Experience:                            |   | Treasurer and Controller of GM do Brasil, Regional  Treasury Director, GM European Regional Treasury Center, manager, GM Asia  Pacific Regional Treasury Center and GM New York Treasurer’s Office.                                                                           |
|                           |   | Directorship Type:                              |   | Shareholder, independent                                                                                                                                                                                                                                                           |
|                           |   | Alternate:                                      |   | David J. Smith                                                                                                                                                                                                                                                                     |
|                           |   |                                            |   |                                                                                                                                                                                                                                                                               |
| Alfonso Romo Garza             |   | Age:                                            |   | 56                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:                              |   | 13                                                                                                                                                                                                                                                                                 |
|                           |   | Principal Occupation:                           |   | Founder, Chairman of the Board and Chief Executive  Officer of Savia                                                                                                                                                                                                               |
|                           |   | Outside Directorships:                          |   | Director of CEMEX, Synthetic Genomics and Donald  Danforth Plant Science Center, investor at different industries and  companies.                                                                                                                                                  |
|                           |   | Business Experience:                            |   | Director of Strategic Planning and Corporate  Development, VISA-FEMSA.                                                                                                                                                                                                             |
|                           |   | Directorship Type:                              |   | Independent                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:                                      |   | Adrián Rodríguez Macedo                                                                                                                                                                                                                                                  |
|                           |   |                                            |   |                                                                                                                                                                                                                                                                               |
| Adrián Sada González |   | Age:                                            |   | 62                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:                              |   | 13                                                                                                                                                                                                                                                                                 |
|                           |   | Principal Occupation:                           |   | Chairman of the Board of Vitro                                                                                                                                                                                                                                                     |
|                           |   | Outside Directorships:                          |   | Director of ALFA, CYDSA, Regio Empresas, Consejo  Mexicano de Hombres de Negocios, and Grupo de Industriales de Nuevo León.                                                                                                                                                   |
|                           |   | Business Experience:                            |   | Chairman of the Board of Grupo Financiero Serfin,  Chief Executive Officer of Banpais.                                                                                                                                                                                             |
|                           |   | Directorship Type:                              |   | Independent                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:                                      |   | Manuel Güemes de la Vega                                                                                                                                                                                                                                                      |
|                           |   |                                            |   |                                                                                                                                                                                                                                                                               |
| Javier Vélez Bautista     |   | Age:                                            |   | 50                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:                              |   | 5                                                                                                                                                                                                                                                                                  |
|                           |   | Principal Occupation:                           |   | Business consultant on strategic and financial  matters                                                                                                                                                                                                                            |
|                           |   | Outside Directorships:                          |   | Director of GIMSA, Grupo Financiero Banorte, and  Casa de Bolsa Banorte, member of the audit and corporate governance  committees of GRUMA and GIMSA, audit committee member of Grupo Financiero  Banorte, Casa de Bolsa Banorte and British American Tobacco-Mexican  Operations. |
|                           |   | Business Experience:                            |   | Chief Executive Officer of Nacional Monte de Piedad,  Executive Vice President and Chief Financial Officer of GRUMA, project  director at Booz Allen Hamilton.                                                                                                                     |
|                           |   | Directorship Type:                              |   | Independent                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:                                      |   | Jorge Vélez Bautista                                                                                                                                                                                                                                                          |

 

Mr. Roberto GonzálezMoreno and Mr. Juan Antonio González Moreno, members of our board of directorsare the sons of Mr. Roberto González Barrera, the Chairman of our board ofdirectors.  In addition, Mr. Carlos HankRhon, a member of our board of directors, is the son-in-law of Mr. RobertoGonzález Barrera.  Furthermore,Mr. Carlos Hank González, an alternate member of our board of directors,is the son of Carlos Hank Rhon and the grandson of Mr. Roberto GonzálezBarrera.

60

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**Secretary**

The secretary of theboard of directors is Mr. Salvador Vargas Guajardo, and his alternate is Mr.Guillermo Elizondo Ríos. Mr. Vargas Guajardo is not a member of the board ofdirectors.

**SeniorManagement**

The following table sets forth our executive officers,their ages, years of service, current positions, and prior business experience:
| Jairo Senise             |   | Age:                        |   | 52                                                                                                                                                                                                                                                                            |
|--------------------------|--------|-----------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   | Years as Executive Officer: |   | 4                                                                                                                                                                                                                                                                             |
|                     |   | Years at GRUMA:             |   | 4                                                                                                                                                                                                                                                                             |
|                     |   | Current Position:           |   | Chief Executive Officer of GRUMA                                                                                                                                                                                                                                              |
|                     |   | Other Positions:            |   | President and Chief Executive Officer of Gruma  Corporation                                                                                                                                                                                                                   |
|                     |   | Business Experience:        |   | Regional Vice President and Managing Director of  Europe and Eurasia and Regional Vice President of Latin America/South Africa  for the Pillsbury Company/General Mills; positions at CPC International/Best  Foods, Johnson and Colgate-Palmolive.                           |
|                     |   |                        |   |                                                                                                                                                                                                                                                                          |
| Nicolás Constantino |   | Age:                        |   | 59                                                                                                                                                                                                                                                                            |
|                     |   | Years as Executive Officer: |   | 1                                                                                                                                                                                                                                                                             |
|                     |   | Years at Gruma:             |   | 7                                                                                                                                                                                                                                                                             |
|                     |   | Current Position:           |   | Managing Director, Gruma Venezuela                                                                                                                                                                                                                                            |
|                     |   | Business Experience:        |   | Vice President Sales and Exports and National  Commercialization Manager of the Beverage Division of the Polar’s Group,  Director of Sales for the Reynolds Company, National Manager of Sales for  Warner Lambert of Venezuela and for the Aliven Company (Best Foods). |

 
| José de la Peña y Angelini |   | Age:                        |   | 58                                                                                                                                                                                                                  |
|--------------------------------------|--------|-----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   | Years as Executive Officer: |   | 4                                                                                                                                                                                                                   |
|                                 |   | Years at GRUMA:             |   | 4                                                                                                                                                                                                                   |
|                                 |   | Current Position:           |   | Chief Executive Officer, Gruma Latin America                                                                                                                                                                        |
|                                 |   | Business Experience:        |   | Executive Vice President Sales and Marketing of  GRUMA, senior positions at Chrysler de México, President of the Mexico office  of FCB Worldwide.                                                              |
|                                 |   |                        |   |                                                                                                                                                                                                                |
| Leonel Garza Ramírez            |   | Age:                        |   | 57                                                                                                                                                                                                                  |
|                                 |   | Years as Executive Officer: |   | 8                                                                                                                                                                                                                   |
|                                 |   | Years at GRUMA:             |   | 21                                                                                                                                                                                                                  |
|                                 |   | Current Position:           |   | Chief Procurement Officer                                                                                                                                                                                           |
|                                 |   | Business Experience:        |   | Manager of Quality and Corn Procurement and Vice  President of Corn Procurement at GRUMA, Chief Procurement Officer at GAMESA,  Quality Control Manager at Kellogg de México.                                  |
|                                 |   |                        |   |                                                                                                                                                                                                                |
| Roberto González Alcalá    |   | Age:                        |   | 43                                                                                                                                                                                                                  |
|                                 |   | Years as Executive Officer: |   | 5                                                                                                                                                                                                                   |
|                                 |   | Years at GRUMA:             |   | 12                                                                                                                                                                                                                  |
|                                 |   | Current Position:           |   | Managing Director, Gruma México (GIMSA, Molinera de  México and PRODISA).                                                                                                                                 |
|                                 |   | Business Experience:        |   | Several positions within GRUMA’s Central American  operations, including Chief Operating Officer, President of the Tortilla  Division in Costa Rica. President of the Corn Flour Division in Central  America. |

 

61

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| Juan Antonio González Moreno        |   | Age:                                                                                            |   | 49                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |   | Years as Executive Officer:                                                                     |   | 3                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Years at GRUMA:                                                                                 |   | 27                                                                                                                                                                                                                                                                                                                                                                                       |
|                                     |   | Current Position:                                                                               |   | Chief Executive Officer, Gruma Asia and Oceania                                                                                                                                                                                                                                                                                                                                          |
|                                     |   | Business Experience:                                                                            |   | Senior Vice President of Special Projects of Gruma  Corporation, President of Corn Flour Operations of Gruma Corporation, Vice  President of Central and Eastern Regions of Mission Foods, President and Vice  President of Sales of Azteca Milling, Chief Operating Officer of GIMSA.                                                                                                   |
|                                     |   |                                                                                            |   |                                                                                                                                                                                                                                                                                                                                                                                     |
|  Roberto  González Valdés |   | Age:   Years as Executive Officer: Years at GRUMA:   Current Position: Business Experience:     |   | 31   Since April 2007   1   Managing Director, Gruma Centroamérica Special projects manager at Gruma  Centroamérica, Assistant to the Chairman of the Board and Chief Executive  Officer of GRUMA, Founder of SOLIQ, Consultant at Booz Allen Hamilton.                                                                                                                        |
| Sylvia Hernández Benítez       |   | Age:   Years as Executive Officer:   Years at GRUMA:   Current Position:   Business Experience: |   | 42   4   4   Chief Marketing Officer   Senior Vice President of Marketing for Gruma Latin America; Executive Vice  President at FCB Worldwide; different positions at Chrysler de México,  including General Marketing Manager, Marketing Manager for automobiles, Brand  Manager for imported automobiles and MOPAR brand coordinator.                                             |
|                                     |   |                                                                                            |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Homero Huerta Moreno                     |   | Age:                                                                                            |   | 44                                                                                                                                                                                                                                                                                                                                                                                       |
|                                     |   | Years as Executive Officer:                                                                     |   | 5                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Years at GRUMA:                                                                                 |   | 22                                                                                                                                                                                                                                                                                                                                                                                       |
|                                     |   | Current Position:                                                                               |   | Chief Administrative Officer                                                                                                                                                                                                                                                                                                                                                             |
|                                     |   | Business Experience:                                                                            |   | Various positions within GRUMA including Finance and  Administrative Vice President of Gruma Venezuela.                                                                                                                                                                                                                                                                                  |
|                                     |   |                                                                                            |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Heinz Kollmann                           |   | Age:                                                                                            |   | 37                                                                                                                                                                                                                                                                                                                                                                                       |
|                                     |   | Years as Executive Officer:                                                                     |   | 1                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Years at GRUMA:                                                                                 |   | 1                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Current Position:                                                                               |   | Chief Technology  Officer, Wheat Flour Production                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Business Experience:                                                                            |   | Technical Director of MAISCAM in Camerun, Head  miller for BUHLER in Uzwil, Switzerland; Responsible Technician for  Argentina, Uruguay, Paraguay, Peru and Bolivia for BUHLER in its Buenos Aires  branch office; Production Manager and Special Project Manager for GRAMOVEN/  CARGILL in Venezuela; Production Manager and Special Project Manager for  Harinera La Espiga in Mexico. |
|                                     |   |                                                                                            |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Raúl Alonso Peláez Cano        |   | Age:                                                                                            |   | 46                                                                                                                                                                                                                                                                                                                                                                                       |
|                                     |   | Years as Executive Officer:                                                                     |   | 2                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Years at GRUMA:                                                                                 |   | 2                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Current Position:                                                                               |   | Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                  |
|                                     |   | Business Experience:                                                                            |   | Several executive positions at different companies  including Industrias Resistol, General Electric de México, and Banco Nacional  de México.                                                                                                                                                                                                                                  |
|                                     |   |                                                                                            |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Juan Antonio Quiroga García         |   | Age:                                                                                            |   | 57                                                                                                                                                                                                                                                                                                                                                                                       |
| * *                                 |   | Years as Executive Officer:                                                                     |   | 9                                                                                                                                                                                                                                                                                                                                                                                        |
|                                     |   | Years at GRUMA:                                                                                 |   | 34                                                                                                                                                                                                                                                                                                                                                                                       |

 

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|                          |   | Current Position:           |   | Chief Corporate Officer                                                                                                                                                                                                                                                                    |
|--------------------------|--------|-----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   | Other Positions:            |   | Senior Corporate Controller of GIMSA                                                                                                                                                                                                                                                       |
|                     |   | Business Experience:        |   | Vice President of Administration of Gruma  Corporation, Chief Administrative and Internal Auditing Officer of GRUMA,  Vice President of Operations Control of Gruma Corporation.                                                                                                           |
|                     |   |                        |   |                                                                                                                                                                                                                                                                                       |
| Juan Fernando Roche      |   | Age:                        |   | 52                                                                                                                                                                                                                                                                                         |
|                     |   | Years as Executive Officer: |   | 1                                                                                                                                                                                                                                                                                          |
|                     |   | Years at GRUMA:             |   | 1                                                                                                                                                                                                                                                                                          |
|                     |   | Current Position:           |   | Managing Director of Mission Foods                                                                                                                                                                                                                                                         |
|                     |   | Business Experience:        |   | Founding Partner, CEOBOARD LLP, Florida; President  Northern Latin America and President Europe, Middle East & Africa,  Nabisco; Chief Executive Officer of MAVESA in Venezuela. Other positions in  MAVESA: Chief Financial Officer, Supply Chain Management, Group Product  Manager. |
|                     |   |                        |   |                                                                                                                                                                                                                                                                                       |
| Felipe Rubio Lamas       |   | Age:                        |   | 49                                                                                                                                                                                                                                                                                         |
|                     |   | Years as Executive Officer: |   | 5                                                                                                                                                                                                                                                                                          |
|                     |   | Years at GRUMA:             |   | 24                                                                                                                                                                                                                                                                                         |
|                     |   | Current Position:           |   | Chief Technology Officer, Corn Flour and Tortilla  Production                                                                                                                                                                                                                              |
|                     |   | Business Experience:        |   | Several managerial and Vice President positions  within Gruma Corporation related to manufacturing processes and design and  construction of production facilities.                                                                                                                        |
| Salvador Vargas Guajardo |   | Age:                        |   | 54                                                                                                                                                                                                                                                                                         |
| * *                 |   | Years as Executive Officer: |   | 10                                                                                                                                                                                                                                                                                         |
|                     |   | Years at GRUMA:             |   | 10                                                                                                                                                                                                                                                                                         |
|                     |   | Current Position:           |   | General Counsel                                                                                                                                                                                                                                                                            |
|                     |   | Other Positions:            |   | General Counsel of GIMSA                                                                                                                                                                                                                                                                   |
|                     |   | Business Experience:        |   | Positions at Grupo Alfa, Protexa and Proeza, senior  partner of two law firms, including Rojas-González-Vargas-De la Garza y  Asociados.                                                                                                                                              |

 

Mr. Oscar EnriqueUrdaneta Finol is the Chief Operating Officer of DEMASECA.

Mr. Roberto GonzálezAlcalá, Managing Director of Gruma México,and Mr. Juan Antonio González Moreno, Chief Executive Officer of Gruma Asia andOceania, are sons of Mr. Roberto González Barrera. Mr. Roberto GonzálezValdés, Managing Director of Gruma Centroamérica is grandson of Mr. RobertoGonzález Barrera. Mr. Homero Huerta Moreno, our Chief Administrative Officer is nephew of Mr. Roberto González Barrera.

**Auditand Corporate Governance Committees**

As required by the Mexican Securities Law, theSarbanes-Oxley Act of 2002 and our bylaws, an audit committee and a corporategovernance committee were appointed by the Meeting of the Board of Directorsheld on April 25, 2007. Members of the audit and corporate governance committeeswere selected from members of the board of directors. Consequently, as requiredby the Mexican Securities Law and our bylaws, a chairman for each committee waselected by the General Ordinary Shareholders’ Meeting held on April 27,2007, among the members appointed by the board.

  The currentaudit and corporate governance committees are comprised of three members, allof whom are independent directors.  Setforth below are the names of our audit and corporate governance committeesmembers, their positions within the committees, and their directorshiptype:  

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| Javier Vélez Bautista |   | Position:          |   | Chairman of the audit and corporate governance  committees.         |
|----------------------------|--------|--------------------|--------|---------------------------------------------------------------------|
|                       |   | Directorship Type: |   | Independent                                                         |
|                       |   |               |   |                                                                |
| Juan Diez-Canedo Ruiz      |   | Position:          |   | Financial Expert of the audit and corporate  governance committees. |
|                       |   | Directorship Type: |   | Independent                                                         |
|                       |   |               |   |                                                                |
| Héctor Rangel Domene  |   | Position:          |   | Member of the audit and corporate governance  committees.           |
|                       |   | Directorship Type: |   | Independent                                                         |

 

**COMPENSATION OF DIRECTORSAND SENIOR MANAGEMENT**

Members of the board of directors are paid a fee ofPs.18,000 for each board meeting they attend. Additionally, members of theaudit and corporate governance committees are paid a fee of Ps.30,000 for eachcommittee meeting they attend.

For 2006, the aggregate amount of compensation paid toall directors, alternate directors, executive officers and audit and corporategovernance committees members was approximately Ps.212 million (in nominalterms).  The contingent or deferredcompensation reserved as of December 31, 2006 was Ps.38.1 million (innominal terms).

We offer an Executive Bonus Plan that applies tomanagers, vice presidents, and executive officers.  The variable compensation under this plan canrange from 21% to 100% of annual base compensation, depending upon the employee’slevel, his individual performance and the results of our operations.

**EMPLOYEES**

As of December 31, 2006, we had a total of 18,124employees, including unionized (5,605) and non-unionized (12,519) full-and part-time employees.  Of this total,we employed 7,340****persons in Mexico, 6,652****in the United States, 1,701 in Central America, 1,609 inVenezuela, 165 in China and Australia, 508 in England, 27****inItaly, and 122****in The Netherlands.  Total employees for 2004 and 2005 were 15,104and 16,582, respectively.  Of our totalemployees as of December 31, 2006, approximately 32% were white-collar and68% were blue collar.

In Mexico, workers at each of our plants are coveredby a separate contract, under which salary revisions take place once each year,usually in January or February. Non-salary provisions of these contracts are revised bi-annually.We renewed agreements with the three unions that represent our workers in 2006.

In the United States, Gruma Corporation has fourcollective bargaining agreements that represent a total of 468 workers at fourseparate facilities. We renewed and ratified one collective bargainingagreement in July 2006.  A proposed fifthagreement never materialized due to decertification, however the results of achallenged election from 2001 were certified on October 2006 by the NLRB at afifth facility which has a potential for an additional 126 workers. Wages arereviewed during negotiations and increases processed per the terms of theparticular contract as well as non-monetary provision of the contracts. Salaryreviews for non-union employees are done once each year, usually in March forMission Foods and in May for Azteca Milling, L.P.  We believe our current labor relations aresatisfactory.

**SHARE OWNERSHIP**

The following Directorsand Senior Managers have GRUMA shares which in each case represent less than 1%of our capital stock:  Mr. Adrián SadaGonzález, Mr. Jairo Senise, Mr. Juan Antonio Quiroga García, Mr. LeonelGarza Ramírez, and Mr. Juan Carlos Braniff Hierro. In addition,Mr. Roberto González Barrera owns directly and indirectly 211,517,757shares representing approximately 43.8% of our capital stock and Mr. JuanAntonio González Moreno owns 5,758,556 shares representing approximately 1.2%of our capital stock.

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**CORPORATE GOVERNANCEPRACTICES**

The significantdifferences between our corporate governance practices and the New York StockExchange standards can be found on our website, **www.gruma.com**.  The information found at this website is notincorporated by reference into this document.

## **ITEM 7.          MajorShareholders And Related Party Transactions.**

**MAJOR SHAREHOLDERS**

The following table sets forth certain informationregarding the beneficial ownership of our capital stock as of April 27,2007 (which consists entirely of Series B Shares) with respect to Mr. GonzálezBarrera and Archer-Daniels-Midland and its affiliates, the onlyshareholders we know to own beneficially more than 5% of our capital stock, aswell as our directors and executive officers as a group and othershareholders.  See “Item 9.  The Offer and Listing” for a furtherdiscussion of our capital stock.  Withthe exception of Archer-Daniels-Midland’s right to appoint two members of ourboard of directors, and their corresponding alternates, the major shareholdersdo not have different or preferential voting rights with respect to thoseshares they own.  As of April 27,2007 our Series B shares were held by 545 record holders in Mexico.
| **Name**                                      | ** ** | **Number of   Series B Shares** | ** ** | **Percentage of  Outstanding Shares** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| Roberto González  Barrera and family (1) |       | 220,822,677                                         |       | 45.76                                           | %          |
| Archer-Daniels-Midland (2)                    |       | 130,901,630                                         |       | 27.13                                           | %          |
| Directors and Officers  as a Group (3)        |       | 169,255                                             |       | 0.04                                            | %          |
| Other shareholders                            |       | 130,656,389                                         |       | 27.08                                           | %          |
|                                          |       |                                                |       |                                            |       |
| Total                                         |       | 482,549,952                                         |       | 100.00                                          | %          |

 

----

(1)          The shares beneficially owned by Mr.González Barrera and his family include: 181,491,961 shares held directly byMr. González Barrera; 30,025,796 shares held by him through a Mexicancorporation jointly owned with Archer-Daniels-Midland and controlled by him;216 shares held by Ms. Bertha González Moreno; 3,542,948 shares held by Ms.Graciela S. González Moreno; 5,758,556 shares held by Mr. Juan Antonio GonzálezMoreno; and 3,200 shares held by Ms. Mayra A. González Moreno.

(2)          Of the shares beneficially owned byArcher-Daniels-Midland, a portion are held through its Mexican subsidiary, and24,566,561 shares are held through a Mexican corporation jointly owned with Mr.González Barrera and controlled by Mr. González Barrera.  Mr. González Barrera has sole authority todetermine how these shares are voted, and the shares cannot be transferredwithout the consent of both Archer-Daniels-Midland and Mr. González Barrera.

(3)          This group does not include the sharesbeneficially owned by Mr. Roberto González Barrera and Mr. Juan AntonioGonzález Moreno, members of our board of directors.

Mr. González Barrera and his family controlapproximately 50.9% of our capital stock and therefore have the power to electa majority of our 15 directors.  Inaddition, under Mexican law, any holder or group of holders representing 10% ormore of our capital stock may elect one Director.  Under our bylaws and the Archer-Daniels-Midlandassociation, as long as Archer-Daniels-Midland owns at least 20% of our capitalstock, it will have the right to designate two members of our board ofdirectors and their corresponding alternates.

Under the terms of our agreement,Archer-Daniels-Midland may not, without the consent of Mr. Roberto GonzálezBarrera, the Chairman of our board of directors, acquire additional shares ofus.  On September 30, 1999, wecompleted a rights offering to shareholders in Mexico and ADS holders in theUnited States.  With the authorization ofMr. González Barrera, Archer-Daniels-Midland directly and indirectly purchaseda total of 51,408,337 new shares, increasing its direct and indirect ownershipof our outstanding shares from approximately 22% to approximately 29%immediately after that purchase.

We have been informed that Mr. González Barrera haspledged or has been required to pledge part of his shares in our Company ascollateral for loans made to him.  In theevent of a default, should the lenders enforce their rights with respect to theseshares, Mr. González Barrera and his family could lose their controllinginterest in us.  In addition,Mr. González Barrera must give Archer-Daniels-Midland a right of firstrefusal on any sale of his GRUMA shares if at the time of the sale, he owns, oras a result of the sale will own, less than 30% of our outstanding shares.  

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ShouldArcher-Daniels-Midland exercise its right, then it could control us.  Archer-Daniels-Midland must also giveMr. González Barrera a right of first refusal on any sale of our shares.

We are not aware of anysignificant changes in the percentage ownership of any shareholders which held5% or more of our outstanding shares during the past three years.

**RELATEDPARTY TRANSACTIONS**

**Transactions withSubsidiaries**

The transactions set forth below were made in theordinary course of business since we operate as a central treasurer for oursubsidiaries.  We periodically enter intoshort-term credit arrangements with our subsidiaries, where we provide themwith funds for working capital at market interest rates.

At their peak on May 17,****2005,the outstanding balance of loans from GIMSA to GRUMA were Ps.1,531** **million in nominal terms.  As of June 15, 2007, we owed GIMSAPs.501.1 million and U.S$35.5 million. The average interest rate for this year up to June 15 has been 8.33%for loan in pesos and 5.75% for the loan in dollars.

In September 2001,Gruma Corporation started to make loans to us which, at their peak onJune 24, 2004, reached the amount of U.S.$64.0** **million.  However, since 2004, we have lent money toGruma Corporation and Gruma Centroamérica at an average rate of 7.1%, having anoutstanding amount of U.S.$0million as of June 15, 2007.

**Transactions withArcher-Daniels-Midland**

We entered into an association withArcher-Daniels-Midland in September 1996. As a result of this association, we received U.S.$258.0 million incash, 80% partnership interest in Azteca Milling, our combined U.S. corn flouroperations and 60% of the capital stock of Molinera de México,Archer-Daniels-Midland’s wholly-owned Mexican wheat milling operations.  We also gained exclusivity rights fromArcher-Daniels-Midland in specified corn flour and wheat flour markets.  In return, Archer-Daniels-Midland received74,696,314 of our newly issued shares, which represented approximately 22% ofour total outstanding shares, and 20% partnership interest in Azteca Milling,and retained 40% of the capital stock of Molinera de México.  Archer-Daniels-Midland also obtained theright to designate two of our 15 directors and their correspondingalternates.  In addition,Archer-Daniels-Midland acquired 5% of MONACA. Archer-Daniels-Midland has designated Federico Gorbea, President andChief Operating Officer of Archer-Daniels-Midland’s operations in México, andIsmael Roig, Vice President of Planning and Business Development, as members ofour board of directors. Archer-Daniels-Midland has elected David J. Smith, itsSenior Vice President, Secretary and General Counsel, and Steve Mills its GroupVice President and Controller, to serve as alternates for Mr. Gorbea andMr. Roig, respectively.

During 2004, 2005 and2006, we purchased U.S.$103** **million,U.S.$105 million and U.S.$115 million, respectively, of inventory fromArcher-Daniels-Midland Corporation, a shareholder, at market rates andterms.  Additionally, in 2006, wepurchased a 2% stake in MONACA and sold a 3% stake in DEMASECA to ADM.  For more information regarding thesetransactions, please see “Item 4. Information on the Company—Business Overview— Gruma Venezuela.”

**Other Transactions**

We had loans outstanding to the controllingshareholder and related parties which, at their peak on December 31, 2002,aggregated Ps.176.8** **million.  Theseloans were made for personal purposes. All of these loans bore interest at market rates.  These loans have been repaid in full.

As of June 15, 2007 we hold approximately 9.86% of thecapital stock of GFNorte, a Mexican financial institution.  In the normal course of business, we mayobtain financing from GFNorte’s subsidiaries at market rates 

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and terms.  For the past five years, the highestoutstanding loan amount has been Ps.162 million (in nominal terms) with anaverage interest rate of 8.9% in December 2003.

## **ITEM 8.          FinancialInformation.**

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

**LEGALPROCEEDINGS**

In the ordinary course ofbusiness, we are party to various legal proceedings, none of which has had orwe reasonably expect will have a material adverse effect on us.

**Antitrust Lawsuits**

Eighteenmanufacturers of tortillas and other processed food products brought threerelated antitrust lawsuits against Gruma Corporation and Azteca Milling in theUnited States District Court for the Southern District of Texas, GalvestonDivision.  The three suits were:  (i) El Aguila Food Products, Inc., etal. v. Gruma Corporation, et al.; No. G-01-434, in the United States DistrictCourt for the Southern District of Texas, Galveston Division; (ii) GilbertMoreno Enterprises, Inc., et al. v. Gruma Corporation, et al.; C.A. No.G-01-546, in the United States District Court for the Southern District ofTexas, Galveston Division; and (iii) Capistran, Inc., et al. v. GrumaCorporation, et al.; No. G-02-100, in the United States District Court for theSouthern District of Texas, Galveston Division. The three lawsuits were consolidated and later transferred to the UnitedStates District Court for the Southern District of Texas, HoustonDivision.  The plaintiffs alleged thatthe defendants conspired with retailers to restrain trade in the retail sale oftortillas in Texas, California, Arizona and Michigan, used market power toexclude plaintiffs from the retail tortilla market, and otherwise competedunfairly.  The plaintiffs sought damages,including treble damages, “greatly in excess of U.S.$1 million perPlaintiff,” as well as injunctive relief. In December 2003, the trial court, after four weeks of trial,dismissed the suit as being without merit. Plaintiffs filed an appeal.  InMay 2005, the United States Court of Appeals handed down a decisionaffirming the trial court’s dismissal. The decision dismissing this case is now final.

Additionally, inMay 2004 a new lawsuit was filed against Gruma Corporation and fivegrocery retailers on behalf of an alleged consumer class.  The plaintiff alleged that the defendants hadviolated California’s antitrust laws by entering into agreements whichrestricted competition in the retail sale of tortillas.  The plaintiff sought equitable relief and anunspecified amount of damages.  The trialcourt dismissed the claim in March 2005 at the request of the plaintiff, whovoluntarily withdrew the case without receiving any settlement moneys or otherconsideration from GRUMA.

***MexicanAntitrust Litigation***

 On August 24, 2005, GIMSA acquired a 100%interest in Agroinsa, a group of companies that produce corn flour in Celaya,Guanajuato as well as corn flour, wheat flour and other food products inMonterrey, Nuevo León. In accordance with the *Ley Federalde Competencia Económica*, or Mexican Competition Law, GRUMA, GIMSA’sholding company, notified the *Comisión Federal deCompetencia*, or Federal Competition Commission or CFC, of theprospective acquisition through a “notice of concentration.”

On November 21, 2005,GRUMA was notified that the CFC had denied its request to approve the Agroinsaacquisition.

In addition to our beliefthat the decision by the CFC lacked legal and economic merits, on January 16,2006, GRUMA filed an administrative appeal before the CFC arguing that theacquisition should be approved by the CFC under the grounds of *afirmativa ficta*, or implicit approval, in view of the factthat the CFC notified its resolution extemporaneously in accordance with Article21 of the Mexican Competition Law.

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On April 6, 2006, the CFCdenied GRUMA’s appeal and confirmed its decision to reject the acquisition.GRUMA subsequently requested the Thirteenth Federal Court for AdministrativeMatters of Mexico City to overrule the CFC’s resolution. The Federal Courtgranted GRUMA’s request on August 24, 2006 and ordered the CFC to approve theacquisition. On June 14, 2007, following a jurisdictional appeal by the CFCbefore the Third Federal Court of Appeals for Administrative Matters, arguingthat the decision made by the Thirteenth Federal Court for AdministrativeMatters should be overruled, the Third Federal Court of Appeals forAdministrative Matters, relying on certain legal guidelines previously issuedby the Mexican Supreme Court of Justice in this case, ruled that implicitapproval applied to protect GRUMA’s right to acquire Agroinsa. This decision isfinal and non-appealable.

By virtue of the judicialresolution, the CFC is legally bound to promptly issue a new administrativeresolution authorizing GIMSA to acquire Agroinsa under the terms and conditionsthat GRUMA previously presented to the CFC.

**Distributor Arbitrations and Litigations**

In November 2001,one of GRUMA’s distributors filed a putative class action lawsuit against GrumaCorporation.  The case was removed fromCalifornia state court to federal court. In April 2005, the United StatesDistrict Court, based upon a recent U.S. Supreme Court decision, ordered thatthe claims be referred to arbitration in Los Angeles and that the arbitratordecide whether the matter should proceed as a class action. An additionaldistributor subsequently joined the arbitration as a claimant. The arbitratorhas made a preliminary ruling that a class of approximately 1,120 California distributorswill be certified, but a final certification order has not yet beenentered.  The claims, as amended, allegethat: (i) Gruma Corporation breached its agreements with its distributors; (ii)Gruma Corporation’s distributors are actually employees; (iii) GrumaCorporation has failed to make wage and other payments required for employees;(iv) Gruma Corporation has violated California’s labor, antitrust, and unfaircompetition statutes, and; (v) Gruma Corporation has otherwise committed fraudand negligent misrepresentations. The arbitrator subsequently dismissed theantitrust claims. The plaintiffs seek damages and equitable relief, but havenot yet specified the total amount of damages sought. We intend to vigorouslydefend against this action.

On July 28, 2006, anotherof GRUMA’s distributors sought to join the Los Angeles arbitration but wasreferred to arbitration in the State of Washington. An additional distributorsubsequently sought arbitration in the State of Washington and the twoproceedings have been consolidated before an arbitrator in Seattle. The twodistributors on behalf of alleged classes of current and former distributorsassert that: (i) Gruma Corporation breached its agreements with itsdistributors; (ii) Gruma Corporation’s distributors are actually employees;(iii) Gruma Corporation has failed to make wage and other payments required foremployees; (iv) Gruma Corporation has violated California and Washington laborstatues, among others, and; (v) Gruma Corporation has failed to pay federalexcise payments on sales made by the distributors.  The plaintiffs seek damages and equitablerelief, but have not yet specified the total amount of damages sought. Weintend to vigorously defend against this action.

In April 2007, GRUMA wasnamed in a class action suit, Enrique Garza, et al. v. Mission Foods, Inc. dbaGruma Corporation, filed in the United States District Court for the NorthernDistrict of California, San Jose Division. Although we have not yet been served with the complaint, the plaintiffsassert that they were induced to enter into distributor agreements and to payfor routes by false statements and that GRUMA breached the distributoragreements by arbitrarily taking their routes, shuffling around the routes,reselling the routes to others, and failing to adequately compensate theplaintiffs.  The plaintiffs also assert aRICO violation under 18 U.S. Code §§ 1962 *et seq*.  Plaintiffs seek an unspecified amount ofdamages and injunctive relief. We intend to vigorously defend against thisaction.

**Drivers’ Class Action**

In October 2005, GRUMA was named in a classaction suit, Ramon Moreno et al. v. Guerrero Mexican Food Products, Inc. andGruma Corporation, filed in the United States District Court for the CentralDistrict of California, Los Angeles County. This is a putative wage and hour class action alleging amisclassification of the Teamster represented employee drivers as exempt, andseeking overtime for all hours worked in excess of eight in a day and forty ina week.  The plaintiffs also contend that the class members have beendenied state-mandated meal periods and are due penalties under California LaborCode Section 226.7.  The plaintiffs subsequently amended thecomplaint to add a second plaintiff who had been an employee. GRUMA has filedan answer and a third-party 

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complaint againstTeamsters Local 63. The trial court has issued an order certifying a class ofapproximately 290 former California employee sales drivers who were employedfrom October 2001 through February 2007. The case is set for trial in November2007.  Plaintiffs seek an unspecifiedamount of damages. We intend to vigorously defend against this action.

**Water Discharge Assessments**

Certain subsidiaries ofGIMSA were notified by the National Water Commission of fee assessments duefrom various prior years.  Theseassessments mainly arose from the CNA’s determination that sewage water hadbeen discharged on public property that was being used for receiverfacilities.  Nevertheless, the subsidiaries use the water derived fromthe production process, previously treated, to irrigate certain of the Company’sproperty through a sprinkler system.  Theassessments imposed by the CNA were subsequently been resolved in the Company’sfavor, except for two assessments that are still pending resolution.  With respect to the Ps.14.2 millionassessment, the Company obtained a favorable ruling from the *Sala Superior del Tribunal de Justicia Fiscal y Administrativa,*orSuperior Chamber of the Federal Tax and Administrative Court, overruling theassessment.  The CNA has filed an appealwith the Federal Court of Appeals for Administrative Matters, which isstill pending.  With respect to thePs.699 thousand assessment, resolution is still pending in the Superior Chamberof the Federal Tax and Administrative Court.

According to the Company’slawyers, a reasonable basis exists to obtain a favorable resolution for the twopending assessments due to, among other things, the fact that the water inquestion is treated and then used to irrigate certain of the Company’slandscaping, such that the water is not discharged on public property and doesnot contaminate the ground soil. Consequently, the Company’s management determined that it wasunnecessary to recognize a liability for this matter.

**Mexican Tax Claim**

**The *Secretaría de Hacienda y Crédito Público,*or Ministry ofFinance and Public Credit, has lodged several tax assessments against theCompany for an amount of: (i) Ps.340.7 million in connection to our asset taxreturns for the years 1994, 1996, 1997, 1999 and 2000; (ii) Ps.29.9 million forallegedly withholding taxes at a lower rate from the payment of interests toour foreign creditors for the years 2000, 2001 and 2002, and; (iii) Ps.93million for wheat imports initiated by Molinera de México during the year 2003,which according to the Mexican tax authorities were incorrectly classifiedunder the harmonized system. The Company has filed several appeals to obtain anannulment of all of these assessments and intends to vigorously defend againstthese actions. The Company believes the resolution of these proceedings willnot have a material effect on the Company’s financial position and results ofoperation.**

**Venezuelan Tax Claim**

The Venezuelan tax authorities have lodged certainassessments against Molinos Nacionales, C.A., or MONACA, one of our Venezuelansubsidiaries, related to income tax returns for the years 1998 and 1999, whichamounted to U.S.$1.4million plus tax debts presumably omitted in the amount of U.S.$66,344. The case has been appealed and isawaiting a final decision. The resolution of these claims will beassumed by the previous shareholder, International Multifoods Corporation, inaccordance with the purchase agreement of our subsidiary in Venezuela, MONACA.

**Venezuelan Labor Lawsuits**

**Our subsidiary MONACA has been named in eight laborlawsuits and one extrajudicial claim, claiming damages in the amount ofU.S.$2,934,031. The lawsuits and claims relate to issues and rights such asprofit sharing, social security, vacations, overtime hours, seniority andindemnity payments. The “caleteros” who brought the claims are workers who helpfreighters to unload goods. They are not part of the unionized working force ofMONACA, so they should be considered independent contractors.  However, some labor courts may deem them tobe employees of our subsidiary.  MONACAhas reserved U.S.$1,735,349 for potential damages and has taken steps ensurethat no further “caleteros” and freighters are contracted in order to mitigateany presumption or circumstance**

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**whichmay give rise to a claim that an employment relationship exists with oursubsidiary. We intend to vigorously defend against this action.**

## **ITEM 9.          TheOffer And Listing.**

**TRADING HISTORY**

Our Series B Shares have been traded on the *Bolsa Mexicana de Valores, S.A. de C.V.*, or Mexican StockExchange, since 1994.  The ADSs, eachrepresenting four Series B Shares, commenced trading on the New York StockExchange in November 1998.  OnDecember 31, 2006, 482,549,952****Series BShares were outstanding (of which 77,235,272****Series BShares were represented by 19,984,818****ADSs held by13 record holders in the United States).

In January 2006, we issued 30,000,000 of ourseries B common stock, class I, no par value shares in an offering insideand outside of Mexico at Ps.38.250 per share for a combined offering total ofPs.1,147,500,000.  The proceeds of theoffering were allocated to increases in production capacity in GrumaCorporation.  This equity offeringincreased the float of GRUMA’s stock from 19% to 26% and improved itsliquidity.

GIMSA terminated its ADR program inSeptember 2005 and effective November 10, 2005, GIMSA ADSs ceased tobe traded on the New York Stock Exchange. On November 30, 2005, the delisting of the ADSs from the New YorkStock Exchange became effective.  OnJune 21, 2006, the deregistration of the Series B Shares and ADSs becameeffective.  The delisting of GIMSA’s ADSsis a component of our longer-term strategy of increasing the trading volume andliquidity of our shares.

**PRICE HISTORY**

The following table sets forth, for the periodsindicated, the annual high and low closing sale prices for the Series B Sharesand the ADSs as reported by the Mexican Stock Exchange and the New York StockExchange, respectively.
| ** **                  | ** ** | **Mexican Stock Exchange** | ** ** | **NYSE**                      | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **Common Stock**                | ** ** | **ADS(2)**                    | ** ** |
| ** **                  | ** ** | **High**                             | ** ** | **Low**                       | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                  | ** ** | **(Ps. per share(1))**     | ** ** | **(U.S.$ per ADS)** | ** ** |
| **Annual Price History**    |       |                                 |       |                          |       |   |   |   |   |
| 2002                        |       | 13.00                                |       | 8.00                          |       | 5.70 |   | 3.50 |   |
| 2003                        |       | 15.30                                |       | 9.20                          |       | 5.62 |   | 3.20 |   |
| 2004                        |       | 26.48                                |       | 15.7                          |       | 9.50 |   | 5.40 |   |
| 2005                        |       | 36.00                                |       | 20.64                         |       | 13.35 |   | 7.63 |   |
| 2006                        |       | 41.16                                |       | 26.53                         |       | 15.26 |   | 9.41 |   |
| **Quarterly Price History** | ** ** | ** **                           | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005                        |       |                                 |       |                          |       |   |   |   |   |
| 1st Quarter            |       | 28.30                                |       | 24.73                         |       | 10.31 |   | 8.75 |   |
| 2nd Quarter            |       | 25.40                                |       | 20.64                         |       | 9.49 |   | 7.63 |   |
| 3rd Quarter            |       | 28.00                                |       | 23.50                         |       | 10.38 |   | 8.70 |   |
| 4th Quarter            |       | 36.00                                |       | 26.72                         |       | 13.35 |   | 9.80 |   |
| 2006                        |       |                                 |       |                          |       |   |   |   |   |
| 1st Quarter            |       | 39.44                                |       | 31.83                         |       | 15.05 |   | 11.60 |   |
| 2nd Quarter            |       | 34.68                                |       | 26.53                         |       | 13.59 |   | 9.50 |   |
| 3rd Quarter            |       | 35.40                                |       | 30.75                         |       | 12.78 |   | 11.20 |   |
| 4th Quarter            |       | 41.16                                |       | 32.52                         |       | 15.26 |   | 11.94 |   |
| 2007                        |       |                                 |       |                          |       |   |   |   |   |
| 1st Quarter            |       | 39.12                                |       | 32.73                         |       | 13.75 |   | 11.94 |   |
| 2nd Quarter(3)         |       | 39.02                                |       | 34.61                         |       | 14.60 |   | 12.66 |   |
| **Monthly Price History**   | ** ** | ** **                           | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 2006          |       | 41.16                                |       | 37.69                         |       | 15.26 |   | 13.54 |   |
| January 2007           |       | 39.12                                |       | 32.73                         |       | 13.75 |   | 11.94 |   |
| February 2007          |       | 37.40                                |       | 33.60                         |       | 13.72 |   | 12.23 |   |
| March 2007             |       | 35.67                                |       | 34.52                         |       | 12.94 |   | 12.40 |   |
| April 2007             |       | 36.67                                |       | 34.61                         |       | 13.45 |   | 12.66 |   |
| May 2007               |       | 39.02                                |       | 36.68                         |       | 14.60 |   | 13.42 |   |
| June 2007(3)           |       | 37.97                                |       | 35.48                         |       | 14.14 |   | 13.11 |   |

 

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(1)           Pesos per share reflect nominal priceat trade date.

(2)           Price per ADS in U.S.$; one ADSrepresents four Series B Shares.

(3)           ThroughJune 15, 2007.

On June 15, 2007,the reported last sale price of the B Shares on the Mexican Stock Exchange wasPs.35.72 per B Share.  On June 15,2007, the reported last sale price of the ADSs on the New York Stock Exchangewas U.S.$13.35 per ADS.

**MEXICAN STOCK EXCHANGE**

The Mexican Stock Exchange, the *BolsaMexicana de Valores, S.A. de C. V.*, located in Mexico City, is theonly stock exchange in Mexico.  Foundedin 1907, it is organized as a corporation whose shares are held by brokeragefirms, which are exclusively authorized to trade on the exchange.  Trading on the Mexican Stock Exchange takesplace principally through automated systems and is open between the hours of8:30 a.m. and 3:00 p.m.  MexicoCity time, each business day.  Trades insecurities listed on the Mexican Stock Exchange can also be performed off theexchange.  The Mexican Stock Exchangeoperates a system of automatic suspension of trading in shares of a particularissuer as a means of controlling excessive price volatility, but under currentregulations this system does not apply to securities such as the Series BShares that are directly or indirectly (for example, through ADSs) quoted on astock exchange (including for these purposes the New York Stock Exchange)outside Mexico.

Settlement is effectedthree business days after a share transaction on the Mexican StockExchange.  Deferred settlement, even bymutual agreement, is not permitted without the approval of the *Comisión Nacional Bancaria y de Valores* (the MexicanNational Banking and Securities Commission, or CNBV).  Most securities traded on the Mexican StockExchange, including ours, are on deposit with *S.D. IndevalInstitución para el Depósito de Valores, S.A. de C.V.*, or Indeval, aprivately owned securities depositary that acts as a clearinghouse for MexicanStock Exchange transactions.

As of June 1, 2001,the Mexican Securities Law requires issuers to increase the protections offeredto minority shareholders and to impose corporate governance controls on Mexicanlisted companies in line with international standards.  The Mexican Securities Law expressly permitsMexican listed companies, with prior authorization from the CNBV, to include intheir bylaws antitakeover defenses such as shareholder rights plans, or poisonpills.  Our bylaws include certain ofthese protections.  See “AdditionalInformation—Bylaws—Antitakeover Protections.”

## **ITEM 10.       AdditionalInformation.**

**BYLAWS**

Set forthbelow is a brief summary of certain significant provisions of our bylaws,according to their last comprehensive amendment. This description does notpurport to be complete and is qualified by reference to our bylaws, which areincorporated as an exhibit to this Annual Report.

The new Mexican Securities Law of 2006 included provisions seekingto improve the applicable regulations on disclosure of information, minorityshareholder rights and corporate governance of the issuers, among othermatters. It also imposes additional duties and liabilities on the members ofthe board of directors as well as senior officers. Thus, we were required tocarry out a comprehensive amendment of our bylaws through an extraordinarygeneral shareholders’ meeting held on November 30, 2006.

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**Incorporationand Register**

We wereincorporated in Monterrey, Mexico on December 24, 1971 as a corporation (*Sociedad Anónima de Capital Variable*) under the MexicanCorporations Law, for a term of 99 years. On November 30, 2006 we became apublicly held corporation (*Sociedad AnónimaBursátil de Capital Variable*),a special corporate form for all Mexican publicly traded companiespursuant to the regulations of the new Mexican Securities Law.

**CorporatePurpose**

Our maincorporate purpose, as fully described in Article Second of our bylaws, isto serve as a holding company and to engage in various activities such as:(i) purchasing, selling, importing, exporting, and manufacturing all typesof goods and products, (ii) issuing any kind of securities and taking allactions in connection therewith (iii) creating, organizing and managingall types of companies, (iv) acting as an agent or representative,(v) purchasing, selling and holding real property, (vi) performing orreceiving professional, technical or consulting services,(vii) establishing branches, agencies or representative offices,(viii) acquiring, licensing, or using intellectual or industrial property,(ix) granting and receiving loans, (x) subscribing, issuing andnegotiating all types of credit instruments, and (xi) performing any actsnecessary to accomplish the foregoing.

**Directors**

Our bylaws provide thatour management shall be vested in the board of directors and our ChiefExecutive Officer. Each director is elected by a simple majority of the shares.Under Mexican law and our bylaws, any holder or group of holders owning 10% ormore of our capital stock may elect one director and its correspondingalternate. The board of directors must be comprised of a minimum of five and amaximum of twenty-one directors, as determined by the shareholders at theannual ordinary general shareholders’ meeting. Additionally, under the MexicanSecurities Law, at least 25% of the members of the board of directors must beindependent. Currently, our board of directors consists of 15 members.

The board of directorsshall meet at least four times a year. These meetings can be called by theChairman of the board of directors, the Chairman of the Audit and CorporateGovernance Committees, or by 25% of the members of the board of directors. Thedirectors serve for a one year term, or for up to 30 (thirty) additional days,if no designation of their substitute has been made or if the substitute hasnot taken office. Directors receive compensation as determined by theshareholders at the annual ordinary general shareholders’ meeting. The majorityof directors are needed to constitute quorum, and board resolutions must bepassed by a majority of the votes present at any validly constituted meeting orby unanimous consent if no meeting is convened.

Under the terms of ourassociation with Archer-Daniels-Midland, it has the right to appoint two of ourdirectors and their corresponding alternates as long as it owns at least 20% ofour capital stock.

Our bylaws provide thatthe board of directors has the authority and responsibility to: (i) set thegeneral strategies for the business of the company; (ii) oversee theperformance and conduction of business of the company; (iii) oversee themain risks encountered by the company, identified by the information submittedby the committees, the Chief Executive Officer and the firm providing theexternal auditing services; (iv) approve the information and communicationpolicies with shareholders and the market; and (v) instruct the ChiefExecutive Officer to disclose to the investor public any material informationwhen known.

Additionally, the boardof directors has the authority and responsibility to approve, with the previousopinion of the corresponding Committee: (i) the policies for the use of thecompany’s assets by any related party; (ii) related party transactionsother than those occurring in the ordinary course of business, those ofinsignificant amount, and those deemed as done within market prices;(iii) the purchase or sale of 5% or more of our corporate assets;(iv) granting of warranties or the assumption of liabilities for more than5% of our corporate assets; (v) the appointment, and in its case,destitution of the Chief Executive Officer and his integral compensation, asthe designation of integral compensation policies for all other seniorofficers; (vi) internal control and internal audit guidelines; (vii) thecompany’s accounting guidelines; (viii) the company’s financialstatements; and (ix) the hiring 

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of the firm providingexternal audit services and, in its case, any services additional orsupplemental to the external audit. The approval of the board in all of thesematters is non-delegable.

See “Item 6. Directors,Senior Management and Employees” for further information about the board ofdirectors.

**Audit andCorporate Governance Committees**

Under our bylaws and inaccordance with the Mexican Securities Law, the board of directors, through theAudit and Corporate Governance Committees as well as through the firmperforming the external audit, shall be in charge of the surveillance of thecompany. Such Committees should be exclusively comprised by independentdirectors and by a minimum of three members, elected by the board of directorsat the proposal of the Chairman of the Board. The Chairman of such Committeesshall be exclusively designated and/or removed from office by the annualordinary general shareholders’ meeting.

For the performance ofits duties, the Corporate Governance Committee shall: (i) render itsopinion to the board of directors, pursuant to the Mexican Securities Law;(ii) request the opinion of independent experts, when deemed convenient;(iii) convene shareholders meetings and include issues in the agenda theydeem appropriate; (iv) assist the board of directors when making theannual reports; and (v) be responsible of any other activity provided bylaw or our bylaws.

Likewise, for theperformance of its duties, the Audit Committee shall: (i) render its opinion tothe board of directors, pursuant to the Mexican Securities Law; (ii) requestthe opinion of independent experts when deemed convenient; (iii) conveneshareholders meetings and include issues in the agenda they deem appropriate;(iv) assess the performance of the external auditing firm, as well asanalyze the opinions and reports rendered by the external auditor;(v) discuss the financial statements of the company and if, appropriate,recommend its approval to the board of directors; (vi) inform the board ofdirectors of the condition of the internal controls and internal auditingsystems, including any irregularities detected therein; (vii) prepare theopinion of the report rendered by the Chief Executive Officer; (viii) assistthe board of directors when making the annual reports; (ix) request from thesenior officers and from other employees, reports relevant to the preparationof the financial information and of any other kind deemed necessary for theperformance of their duties; (x) investigate possible irregularities within thecompany, as well as to carry out the actions deemed appropriate; (xi) requestmeetings with senior officers in connection with the internal control andinternal audit; (xii) inform the board of directors about the materialirregularities detected while exerting their duties, and in its case, notifythe corrective measures thereof; (xiii) oversee that the Chief ExecutiveOfficer complies with the resolutions taken by the Shareholders’ Meetings andby the board of directors; (xiv) oversee the establishment of internal controlsin order to verify that the transactions of the company conform to the legalapplicable regulations; and (xv) be responsible of any other activity providedby law or our bylaws.

**Fiduciary Duties - Duty ofDiligence**

Our bylaws and theMexican Securities Law provide that the directors shall act in good faith andin our best interest. In order to fulfill its duty, our directors may:(i) request information about us that is reasonably necessary to takeactions; (ii) require the presence of any officers or other key employees,including the external auditors, that may contribute elements for takingactions at board meetings; (iii) postpone board meetings when a directorhas not been given sufficient notice of the meeting or in the event that adirector has not been provided with the information provided to the otherdirectors; and (iv) discuss and vote any item requesting, if deemedconvenient, the exclusive presence of the members and the secretary of theboard of directors.

Our directors may be liable for damages caused when breachingtheir duty of diligence if such failure causes economic damage to the companyor our subsidiaries, as well if the director: (i) fails to attend board orcommittee meetings and, as a result of such absence, the board was unable totake action, unless such absence is approved by the shareholders meeting;(ii) fails to disclose the board of directors or the committees materialinformation necessary to reach a decision; and/or (iii) fails to complywith its duties imposed by the Mexican Securities Law or our bylaws. Members ofthe board of directors may not represent shareholders at any shareholders’meeting.

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**Fiduciary Duties - Duty of Loyalty**

Our bylaws andthe Mexican Securities Law provide that the directors and secretary of theboard shall keep confidential any non-public information and matters aboutwhich they have knowledge as a result of their position. Also, directors mustabstain from participating, attending or voting at meetings related to matterswhere they have or may have a conflict of interest.

The directors and secretary of the board of directors will bedeemed to have violated their duty of loyalty and will be liable for anydamages when they, directly or through third parties, obtain an economicbenefit by virtue of their position without legitimate cause. Furthermore, thedirectors will fail to comply with their duty of loyalty if they: (i) voteat a board meeting or take any action where there is a conflict of interest;(ii) fail to disclose a conflict of interest they may have during a boardmeeting; (iii) knowingly favor a particular shareholder of the companyagainst the interests of other shareholders; (iv) approve related partytransactions without complying with the requirements of the Mexican SecuritiesLaw; (v) use company assets infringing the policies approved by the boardof directors; (vi) unlawfully use material non-public information of thecompany; and/or (vii) usurp a corporate business opportunity for their ownbenefit, or the benefit of a third party, without the prior approval of theboard of directors. Our directors may be liable for damages when breachingtheir duty of loyalty if such failure causes economic damage to the company orour subsidiaries.

**CivilActions Against Directors**

Under Mexican law,shareholders can initiate actions for civil liabilities against directorsthrough resolutions passed by a majority of the shareholders at a generalordinary shareholders’ meeting. In the event the majority of the shareholdersdecide to bring such action, the director against whom such action is broughtwill immediately cease to be a member of the board of directors. Additionally,shareholders representing not less than 5% of our outstanding shares maydirectly bring such action against directors. Any recovery of damages withrespect to such action will be for our benefit and not for the benefit of theshareholders bringing the action.

**ChiefExecutive Officer**

According to our bylawsand the Mexican Securities Law, the Chief Executive Officer shall be in chargeof running, conducting and executing the company’s business, complying with thestrategies, policies and guidelines approved by the board of directors.

For the performance ofits duties the Chief Executive Officer shall: (i) submit, for the approvalof the board of directors, the business strategies of the company;(ii) execute the resolutions of the Shareholders’ Meetings and of theboard of directors; (iii) propose to the Audit Committee, the internalcontrol system and internal audit guidelines of the company, as well as executethe guidelines approved thereof by the board of directors; (iv) disclose anymaterial information and events that should be disclosed to the investorpublic; (v) comply with the provisions relevant to the repurchase andplacement transactions of the company’s own stock; (vi) exert anycorresponding corrective measures and liability suits; (vii) assure thatadequate accounting, registry and information systems are maintained by thecompany; (viii) prepare and submit to the board of directors its annualreport; (ix) establish mechanisms and internal controls permitting tocertify that the actions and transactions of the company conform to theapplicable regulations; and (x) exert the liability suits referred to inthe Mexican Securities Law against related parties or third parties thatallegedly cause damage to the company.

**Voting Rightsand Shareholders’ Meetings**

Each share entitles theholder thereof to one vote at any general meeting of our shareholders.Shareholders may vote by proxy. At the ordinary general shareholders’ meeting,any shareholder or group of shareholders representing 10% or more of theoutstanding common stock has the right to appoint one director and itscorresponding alternate, with the remaining directors being elected by majorityvote.

General shareholders’meetings may be ordinary or extraordinary. Extraordinary general shareholders’meetings are called to consider matters specified in Article 182 of theMexican Corporations Law, including, 

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principally, changes inthe authorized fixed share capital and other amendments to the bylaws, theissuance of preferred stock, the liquidation, merger and spin-off of thecompany, changes in the rights of security holders, and transformation from onecorporate form to another. All other matters may be approved by an ordinarygeneral shareholders’ meetings. Ordinary general shareholders’ meetings must becalled to consider and approve matters specified in Article 181 of theMexican Corporations Law, including, principally, the appointment of themembers of the board of directors and the Chairman of the Audit and Corporate GovernanceCommittees, the compensation paid to the directors, the distribution of ourprofits for the previous year, and the annual reports presented by the board ofdirectors and the Chief Executive Officer. Our shareholders establish thenumber of members that will serve on our board of directors at the ordinarygeneral shareholders’ meeting.

A general ordinaryshareholders’ meeting must be held during the first four months after the endof each fiscal year. In order to attend a general shareholders’ meeting, theday before the meeting shareholders must deposit the certificates representingtheir common stock or other appropriate evidence of ownership either with thesecretary of our board of directors, with a credit institution, or withIndeval. The secretary, credit institution or Indeval will hold thecertificates until after the general shareholders’ meeting has taken place.

Under our bylaws, thequorum for an ordinary general shareholders’ meeting is at least 50% of theoutstanding common stock, and action may be taken by the affirmative vote ofholders representing a majority of the shares present. If a quorum is notpresent, a subsequent meeting may be called at which the shareholders present,whatever their number, will constitute a quorum and action may be taken by amajority of the shares present. A quorum for extraordinary general shareholders’meetings is at least 75% of the outstanding common stock, but if a quorum isnot present, a subsequent meeting may be called. A quorum for the subsequent meetingis at least 50% of the outstanding shares. Action at an extraordinary generalshareholders’ meeting may only be taken by a vote of holders representing atleast 50% of the outstanding shares.

Shareholders’ meetingsmay be called by the board of directors, the Chairman of the Audit and/orCorporate Governance Committees, or a court. The Chairman of the board ofdirectors or the Chairman of the Audit or Corporate Governance Committees maybe required to call a shareholders’ meeting if holders of at least 10% of ouroutstanding share capital request a meeting in writing, or at the writtenrequest of any shareholder if no shareholders’ meeting has been held for twoconsecutive years, or if, during a period of two consecutive years, the boardof directors’ annual report for the previous year and the company’s financialstatements were not presented to the shareholders, or if the shareholders didnot elect directors.

Notice of shareholders’meetings must be published in the Federal Official Gazette or in a newspaper ofgeneral circulation in Monterrey, Nuevo Léon at least 15 days prior to themeeting. Shareholders’ meetings may be held without such publication providedthat 100% of the outstanding shares are represented. Shareholders’ meetingsmust be held within the corporate domiciles in Monterrey, Nuevo Léon.

UnderMexican law, holders of 20% of our outstanding capital stock may have anyshareholder action set aside by filing a complaint with a Mexican court ofcompetent jurisdiction within 15 days after the close of the meeting atwhich such action was taken, by showing that the challenged action violatesMexican law or our bylaws. Relief under these provisions is only available toholders who were entitled to vote on the challenged shareholder action and whoseshares were not represented when the action was taken or, if represented, votedagainst it.

**DividendRights and Distribution**

Withinthe first four months of each year, the board of directors must submit ourcompany’s financial statements for the preceding fiscal year to theshareholders for their approval at the ordinary general shareholders’ meeting.They are required by law to allocate 5% of any new profits to a legal reservewhich is not thereafter available for distribution until the amount of the legalreserve equals 20% of our capital stock (before adjusting for inflation).Amounts in excess of those allocated to the legal reserve fund may be allocatedto other reserve funds as the shareholders determine, including a reserve forthe repurchase of our shares. The remaining balance of new profits, if any, isavailable for distribution as dividends. Cash dividends on the shares heldthrough Indeval will be distributed by us through Indeval. Cash dividends onthe shares evidenced by physical certificates will be paid when the relevantdividend coupon registered in the name of its holder is delivered to us. Nodividends may be paid, 

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however, unlesslosses for prior fiscal years have been paid up or absorbed. See “Item 3.Key Information—Dividends.”

**Liquidation**

Upon our dissolution, oneor more liquidators must be appointed by an extraordinary shareholders’ generalmeeting to wind up its affairs. If the extraordinary general shareholders’meeting does not make said appointment, a Civil or District Judge can do so atthe request of any shareholder. All fully paid and outstanding common stockwill be entitled to participate equally in any distribution upon liquidationafter the payment of the company’s debts, taxes and the expenses of theliquidation. Common stock that has not been paid in full will be entitled tothese proceeds in proportion to the paid-in amount.

If theextraordinary general shareholders’ meeting does not give express instructionson liquidation, the bylaws stipulate that the liquidators will(i) conclude all pending matters they deem most convenient,(ii) prepare a general balance and inventory, (iii) collect allcredits and pay all debts by selling assets necessary to accomplish this task,(iv) sell assets and distribute income, and (v) distribute theremnant, if any, pro rata among the shareholders.

**Changesin Capital Stock**

Our outstanding capitalstock consists of Class I and Class II series B shares. Class Ishares are the fixed portion of our capital stock and have no par value.Class II shares are the variable portion of our capital stock and have nopar value. The fixed and capital portion of our capital stock cannot bewithdrawn. The issuance of variable capital shares, unlike the issuance offixed capital shares, does not require an amendment of the bylaws, although itdoes require approval at an ordinary general shareholders’ meeting. The fixedportion of our capital stock may only be increased or decreased by resolutionof an extraordinary general shareholders’ meeting and an amendment to ourbylaws, whereas the variable portion of our capital stock may be increased ordecreased by resolution of an ordinary general shareholders’ meetings.Currently, our outstanding capital stock consists only of fixed capital.

Anincrease of capital stock may generally be made through the issuance of newshares for payment in cash or in kind, by capitalization of indebtedness or bycapitalization of certain items of shareholders’ equity. An increase of capitalstock generally may not be made until all previously issued and subscribedshares of capital stock have been fully paid. A reduction of capital stock maybe effected to absorb losses, to redeem shares, to repurchase shares in themarket or to release shareholders from payments not made.

As of December 31,2005, GRUMA’s outstanding common stock consisted of 452,549,952 shares ofSeries “B”, with no par value, fully subscribed and paid, and no shares held inTreasury. As of December 31, 2006, GRUMA’s outstanding common stockconsisted of 482,549,952 shares of Series “B”, with no par value, fullysubscribed and paid, and no shares held in Treasury. In January 2006, weissued 30,000,000 of our series B common stock, class I, no par valueshares. As of April 27, 2007 GRUMA’s outstanding common stock consisted of482,549,952 shares Series “B”, with no par value, fully subscribed and paid.

**PreemptiveRights**

In the event of a capitalincrease through the issuance of shares, other than in connection with a publicoffering of newly issued shares or treasury stock, a holder of existing sharesof a given series at the time of the capital increase has a preferential rightto subscribe for a sufficient number of new shares of the same series tomaintain the holder’s existing proportionate holdings of shares of that series.Preemptive rights must be exercised within the period and under the conditionsestablished for such purpose by the shareholders at the correspondingshareholders’ meeting. Under Mexican law and our bylaws, the exercise periodmay not be less than 15 days following the publication of notice of thecapital increase in the Federal Official Gazette or following the date of theshareholders’ meeting at which the capital increase was approved if allshareholders were represented; otherwise such rights will lapse.

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Furthermore, shareholderswill not have preemptive rights to subscribe for common stock issued inconnection with mergers, upon the conversion of convertible debentures, or inthe resale of treasury stock as a result of repurchases on the Mexican StockExchange.

UnderMexican law, preemptive rights may not be waived in advance by a shareholder,except under limited circumstances, and cannot be represented by an instrumentthat is negotiable separately from the corresponding share. Holders of ADRs maybe restricted in their ability to participate in the exercise of preemptiverights. See “Item 3. Key Information—Risk Factors—Risks Relating to OurControlling Shareholders and Capital Structure—Holders of ADSs May Not Be Ableto Participate in Any Future Preemptive Rights Offering and as a Result May BeSubject to a Dilution of Equity Interest.”

**RestrictionsAffecting Non-Mexican Shareholders**

Foreign investment incapital stock of Mexican corporations is regulated by the 1993 ForeignInvestment Law and by the 1998 Foreign Investment Regulations to the extentthey are not inconsistent with the Foreign Investment Law. The Ministry ofEconomy and the National Commission on Foreign Investment are responsible forthe administration of the Foreign Investment Law and the Foreign InvestmentRegulations.

Our bylaws do notrestrict the participation of non-Mexican investors in our capital stock.However, approval of the National Foreign Investment Commission must beobtained for foreign investors to acquire a direct or indirect participation inexcess of 49% of the capital stock of a Mexican company that has an aggregateasset value that exceeds, at the time of filing the corresponding notice ofacquisition, an amount determined annually by the National Foreign InvestmentCommission.

As required by Mexicanlaw, our bylaws provide that any non-Mexicans who acquire an interest orparticipation in our capital at any time will be treated as having Mexicannationality for purposes of their interest in us, and with respect to theproperty, rights, concessions, participations or interests that we may own orrights and obligations that are based on contracts to which we are a party withthe Mexican authorities. Such shareholders cannot invoke the protection oftheir government under penalty of forfeiting to the Mexican State the ownershipinterest that they may have acquired.

Underthis provision, a non-Mexican shareholder is deemed to have agreed not toinvoke the protection of his own government with respect to his rights as ashareholder, but is not deemed to have waived any other rights it may have withrespect to its investment in us, including any rights under U.S. securitieslaws. If a shareholder should invoke governmental protection in violation ofthis provision, its shares could be forfeited to the Mexican government.Mexican law requires that such a provision be included in the bylaws of allMexican companies unless such bylaws prohibit ownership of shares bynon-Mexicans. See “Item 3. Key Information—Risk Factors—Risks Relating toOur Controlling Shareholders and Capital Structure—Our Bylaws Restrict theAbility of Non-Mexican Shareholders to Invoke the Protection of TheirGovernments with Respect to Their Rights as Shareholders.”

**Registrationand Transfer**

Our sharesare evidenced by certificates in registered form. We maintain a stock registryand, in accordance with Mexican law, only those persons whose names arerecorded on the stock registry are recognized as owners of the series B shares.

**Other Provisions**

***AppraisalRights***

UnderMexican law, whenever the shareholders approve a change of corporate purpose,change of our nationality or transformation from one type of corporate form toanother, any shareholder entitled to vote on such change or transformation who hasvoted against it has the right to tender its shares and receive the amountattributable to its shares, provided such shareholder exercises its right towithdraw within 15 days following the adjournment of the meeting at whichthe change or transformation was approved. Under Mexican law, the amount whicha withdrawing shareholder is entitled to receive is equal to its proportionateinterest in our capital stock 

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according to ourmost recent balance sheet approved by an ordinary general shareholders’ meeting.The reimbursement may have certain tax consequences.

***ShareRepurchases***

We may repurchase ourcommon stock on the Mexican Stock Exchange at any time at the then marketprice. The repurchase of shares will be made charging our equity, in which casewe may keep them without reducing our capital stock, or charging our capitalstock, in which case we must convert them into unsubscribed treasury stock. Theordinary general shareholders’ meeting shall determine the maximum amount offunds to be allocated for the repurchase of shares, which amount shall notexceed our total net profits, including retained earnings.

Repurchased common stockwill either be held by us or kept in our treasury, pending future sales thereofthrough the Mexican Stock Exchange. If the repurchased shares are kept in ourtreasury, we may not exercise their economic and voting rights, and such shareswill not be deemed to be outstanding for purposes of calculating any quorum orvoting at any shareholders’ meeting. The repurchased shares held by us asoutstanding shares may not be represented at any shareholder meeting. Thedecrease or increase of our capital stock as a result of the repurchase doesnot require the approval of a shareholders’ meeting or of the board ofdirectors.

UnderMexican securities regulation, our directors, officers, external auditors, thesecretary of the board of directors and holders of 10% or more of ouroutstanding common stock may not sell common stock to us, or purchaserepurchased common stock from us, unless the sale or purchase is made through atender offer. The repurchase of common stock representing 3% or more of ouroutstanding share capital in any 20 trading-day period must be conductedthrough a public tender offer.

***Repurchasein the Event of Delisting***

In theevent of the cancellation of the registration of our shares at the *Registro Nacional de Valores,*or**NationalRegistry of Securities or RNV, whether at our request or at the request of theCNBV, under our bylaws and the regulations of the CNBV, our controllingshareholders will be obligated to make a tender offer to purchase all of ourshares prior to the cancellation. Such tender offer shall be made at least atthe greater price of the following: (i) the closing sale price under theterms of the following paragraph, or (ii) the book value of the sharesaccording to the most recent quarterly report submitted to the CNBV and theMexican Stock Exchange.

Thequoted share price on the Mexican Stock Market referred to in the precedingparagraph shall be the weighted average share price as quoted on the Mexican Stock Exchange for the last30 days in which our shares were traded, in a period not greater than sixmonths, prior to the date of the public tender offer. If the number of days in which our shares havetraded during the period referred to above is less than 30, then only theactual number of days in which our shares have traded during such period willbe taken into account. If shares have not been exchanged during such period,then the tender offer shall be made at a price equal to at least the book valueof the shares.

Inconnection with any such cancellation of the registration of our shares, wewill be required to deposit sufficient funds into a trust account for at leastsix months following the date of cancellation to ensure adequate resources topurchase at the public tender offer price any remaining outstanding shares fromshareholders that did not participate in the offer.

If weask the RNV to cancel the registration of our shares, we will be exempt fromcarrying out a public tender offer, provided that: (i) we have the consent ofthe holders of at least 95% of our outstanding common shares, by a resolutionat a shareholders’ meeting; (ii) the aggregate amount offered for thesecurities in the market is less than 300,000 investment units (UDIs);(iii) the trust referred to in the preceding paragraph is executed, and(iv) notice is given to the CNBV of the execution and cancellation of thetrust through the established electronic means.

Withinten business days of the commencement of a public tender offer, our board ofdirectors must prepare and disclose to public investors its opinion withrespect to the reasonableness of the tender offer price as 

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well asany conflicts of interest that its members may have in connection with thetender offer. The opinion of the board of directors may be accompanied byanother opinion issued by an independent expert that we may hire.

The shareholders required to make the tender offer referredto above may request the approval from the CNBV to use different criteria todetermine the price of the shares. The CNBV shall take into account ourfinancial situation in considering whether to grant such approval. Inrequesting such approval, the following must be submitted to the CNBV:(i) the resolution of the board of directors approving such request,(ii) the opinion of the Corporate Governance Committee addressing thereasons why it deems appropriate the use of a different price, and (iii) areport from an independent expert indicating that the price is consistent withthe terms of the Mexican Securities Law.

***Shareholder’sConflicts of Interest***

Anyshareholder that has a direct or indirect conflict of interest with respect toany transaction must abstain from voting thereon at the relevant shareholders’meeting. A shareholder that votes on a business transaction in which itsinterest conflicts with ours may be liable for damages if the transaction wouldnot have been approved without such shareholder’s vote.

***Rightsof Shareholders***

The protections affordedto minority shareholders under Mexican law are different from those in theUnited States and other jurisdictions. The law concerning duties andresponsibilities of directors and controlling shareholders has not been thesubject of extensive judicial interpretation in Mexico, unlike the UnitedStates where judicial decisions have been issued regarding the duties ofdiligence and loyalty, which more effectively protect the rights of minorityshareholders. In addition, Mexican civil procedure does not contemplate classactions or shareholder derivative actions, which permit shareholders in U.S.courts to bring actions on behalf of other shareholders or to enforce rights ofthe corporation itself. Shareholders cannot challenge corporate action taken ata shareholders’ meeting unless they meet certain procedural requirements.

Inaddition, under U.S. securities laws, as a foreign private issuer we are exemptfrom certain rules that apply to domestic U.S. issuers with equity securitiesregistered under the Exchange Act, including the proxy solicitation rules, therules requiring disclosure of share ownership by directors, officers andcertain shareholders. We are also exempt from certain of the corporategovernance requirements of the New York Stock Exchange, including certainrequirements concerning audit committees and independent directors. A summaryof significant ways in which our corporate governance standards differ fromthose followed by U.S. companies pursuant to NYSE listing standards isavailable on our website at **www.gruma.com**.

As a result of thesefactors, in practice it may be more difficult for our minority shareholders toenforce rights against us or our directors or controlling shareholders than itwould be for shareholders of a U.S. company. See “Item 3. KeyInformation—Risk Factors—Risks Relating to Our Controlling Shareholders andCapital Structure—The Protections Afforded to Minority Shareholders in MexicoAre Different From Those in the United States.”

***AntitakeoverProtections***

Ourbylaws provide that, subject to certain exceptions as explained below, priorwritten approval from the board of directors shall be required for any person(as defined hereunder), or group of persons to acquire, directly or indirectly,any of our common shares or rights to our common shares, by any means or underany title whether in a single event or in a set of consecutive events, suchthat its total shares or rights to shares would represent 5% or more of ouroutstanding shares.

Priorapproval from the board of directors must be obtained each time such ownershipthreshold (and multiples thereof) is intended to be exceeded, except forpersons who, directly or indirectly, are competitors (as such term is definedbelow) of the company or of any of its subsidiaries, who must obtain the priorapproval of the board of directors for future acquisitions where a threshold of2% (or multiples thereof) of our common shares is intended to be exceeded.

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Pursuantto our bylaws, a “person” is defined as any natural person, corporate entity,trust or similar form of venture, vehicle, entity, corporation or economic ormercantile association or any subsidiaries or affiliates of any of the formeror, as determined by the board of directors, any group of persons who may beacting jointly, coordinated or as a whole; and a “competitor” is defined as anyperson engaged, directly or indirectly, in (i) the business of productionand/or marketing of corn or wheat flour, and/or (ii) any other activitycarried on by the company or by any of its subsidiaries or affiliates.

Personsthat acquire our common shares in violation of these requirements will not beconsidered the beneficial owners of such shares under our bylaws and will notbe able to vote such shares or receive any dividends, distributions or otherrights in respect of these shares. In addition, pursuant to our bylaws, theseholders will be obligated to pay us a penalty in an amount equal to the greaterof (i) the market value of the shares such party acquired withoutobtaining the prior approval of the board of directors and (ii) the marketvalue of shares representing 5% of our capital stock.

*Board Notices, Meetings, Quorum Requirementsand Approvals.* To obtain the prior approval of our board ofdirectors, a potential acquirer must properly deliver a written applicationcomplying with the applicable requirements set forth in our bylaws. Suchapplication shall state, among other things: (i) the number and class ofour shares the person beneficially owns or to which such person has any right,(ii) the number and class of shares the Person intends to acquire,(iii) the number and class of shares with respect to which such Personintends to acquire any right, (iv) the percentage that the shares referredto in (i) represent of our total outstanding shares and of the class orseries to which such shares belong, (v) the percentage that the sharesreferred to in (ii) and (iii) represent of our total outstandingshares and of the class or series to which such shares belong, (vi) theperson’s identity, or in the case of an acquiror which is a corporation, trustor legal entity, its shareholders, partners or beneficiaries as well as theidentity and nationality of each person effectively controlling suchcorporation, trust or legal entity, (vii) the reasons and purpose behindsuch acquisition, (viii) if such person is, directly or indirectly, acompetitor of the company or any of its subsidiaries or affiliates, and if suchperson has the authority to legally acquire the shares pursuant to our bylawsand Mexican law, (ix) its source of financing the intended acquisition,(x) if the Person is part of an economic group, formed by one or more ofits related parties, which intends to acquire shares of our common stock orrights to such shares, (xi) if the person has obtained any financing fromone of its related parties for the payment of the shares, (xii) theidentity and nationality of the financial institution, if any, that will act asthe underwriter or broker in connection with any tender offer, and(xiii) the person’s address for receiving notices.

Eitherthe Chairman, the Secretary or the Alternate Secretary of our board ofdirectors must call a meeting of the board of directors within 10 business daysfollowing the receipt of the written application. The notices for the meetingof the board of directors shall be in writing and sent to each of the directorsand their alternates at least 45 calendar days prior to the meeting. Action byunanimous written consent is not permitted.

Any acquisition of commonshares representing at least 2% or 5%, as the case may be, of our outstandingcapital stock, must be approved by at least the majority of the members of ourboard of directors present at a meeting at which at least the majority of themembers is present. Such acquisitions must be resolved by our board ofdirectors within 60 calendar days following the receipt of the writtenapplication described above, unless the board of directors determines that itdoes not have sufficient information upon which to base its decision. In suchcase, the board of directors shall deliver a written request to the potentialacquiror for any additional information that it deems necessary to make its determination.The 60 calendar days referred to above will commence following the receipt ofthe additional information from the potential acquiror.

*MandatoryTender Offers in the Case of Certain Acquisitions.*If our board of directors authorizes anacquisition of common shares which increases the acquirer’s ownership to 30% ormore, but not more than 50%, of our capital stock, then the acquiror musteffect its acquisition by way of a cash tender offer for a specified number ofshares equal to the greater of (i) the percentage of common sharesintended to be acquired or (ii) 10% of our outstanding capital stock, inaccordance with the applicable Mexican securities regulations.

No approval of the boardof directors will be required if the acquisition would increase the acquirer’sownership to more than 50% of our capital stock or results in a change ofcontrol, in which case the acquiror must effect its acquisition by way of atender offer for 100% minus one of our total outstanding capital stock, whichtender shall be made pursuant to applicable Mexican laws.

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The aforementioned tenderoffers must be made simultaneously in the Mexican and US stock markets.Furthermore, an opinion issued by the board of directors regarding any suchtender offer must be made available to the public through the authorized meansof communication within 10 days after commencement of the tender offer. Inthe event of any tender offer, the shareholders shall have the right to hearmore competitive offers.

*Notices.*In addition to the aforementioned approvals,if a person increases its beneficial ownership by 1% in the case ofcompetitors, or 2% in the case of non-competitors, written notice must besubmitted to the board of directors within five days of reaching or exceedingsuch thresholds.

*Exceptions.*The provisions ofour bylaws summarized above will not apply to: (i) transfers of shares byoperation of the laws of succession; (ii) acquisitions of shares by(a) any person who, directly or indirectly, has the authority orpossibility of appointing the majority of the directors of our board ofdirectors, (b) any company, trusts or similar form of venture, vehicle,entity, corporation or economic or mercantile association, which may be underthe control of the aforementioned person, (c) the heirs of theaforementioned person, (d) the aforementioned person when such person isrepurchasing the shares of any corporation, trust or similar form of venture,vehicle, entity, corporation or economic or mercantile association referred toin the item (b) above, and (e) the company or by trusts created bythe company; (iii) any person(s) that as of December 4, 2003 hold(s),directly or indirectly, more than 20% of the shares representing the company’scapital stock, and; (iv) any other exceptions provided for in the MexicanSecurities Law and other legal dispositions derived from said law.

**MATERIALCONTRACTS**

**Archer-Daniels-Midland**

We entered into an association withArcher-Daniels-Midland in September 1996. We believe that this association has improved our position in the U.S.corn flour market by combining our proprietary corn flour technology, ourleading position in the corn flour industry in Mexico, the United States,Central America and Venezuela and our operational expertise withArcher-Daniels-Midland’s logistical resources and financial strength.

As a result of this association, we receivedU.S.$258.0 million in cash, 80% partnership interest in Azteca Milling,our combined U.S. corn flour operations and 60% of the capital stock ofMolinera de México, Archer-Daniels-Midland’s wholly-owned Mexican wheatmilling operations.  We also gainedexclusivity rights from Archer-Daniels-Midland in specified corn flour andwheat flour markets.  In return, Archer-Daniels-Midlandreceived 74,696,314 of our newly issued shares, which represented approximately22% of our total outstanding shares, and 20% partnership interest in AztecaMilling and retained 40% of the capital stock of Molinera de México.  Archer-Daniels-Midland also obtained theright to designate two of the 15 members of our board of directors and theircorresponding alternates.

Under the terms of this association,Archer-Daniels-Midland may not, without the consent of Mr. Roberto GonzálezBarrera, the Chairman of our board of directors or our board of directors,acquire additional shares of us.  In1999, Mr. González Barrera authorized Archer-Daniels-Midland to acquireadditional shares of us issued as a result of an increase in capital stock andsubsequent rights offering to our shareholders. In connection with the rights offering on August 19, 1999,Archer-Daniels-Midland directly and indirectly purchased a total of 51,408,337new shares, increasing its ownership of our outstanding shares to approximately29.2%, directly and indirectly.  As ofJune 15, 2007, Archer-Daniels-Midland owns, directly and indirectly,approximately 27.13% of our outstanding shares. A total of 24,566,561 of these new shares are held by Archer-DanielsMidland through a Mexican corporation jointly owned with Mr. González Barreraand controlled by him.  Furthermore,Archer-Daniels-Midland must give Mr. González Barrera a right of firstrefusal on any sale of our shares.  Mr.González Barrera must give Archer-Daniels-Midland a similar right on anysale of his shares in us if at the time of the sale, he owns, or as a result ofthe sale will own, less than 30% of our outstanding shares.  See “Item 7.  Major Stockholders and Related PartyTransactions—Related Party Transactions.”

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The documents whichdetail the terms of the association include the Shareholders Agreement by andamong us, Roberto González Barrera, Archer-Daniels-Midland and ADMBioproductos, S.A. de C.V., the Asset Contribution Agreement among GrumaCorporation, Gruma Holding, Inc., ADM Milling Co., Valley Holding, Inc.,GRUMA-ADM, and Azteca Milling, L.P., and the Investment Agreement by andbetween us and Archer-Daniels-Midland, all dated as of August 21, 1996, aswell as Amendment No. 1 and Amendment No. 2 to the Shareholders Agreement,dated as of September 13, 1996 and August 18, 1999,respectively.  See “Item 19.  Exhibits.”

**BBVABancomer**

On July 28, 2005**,**we obtained a U.S.$250 million, five-year syndicatedsenior credit facility, which we refer to as the 2005 Facility, from a group offive banks, led by BBVA Bancomer, which consists of a U.S.$150 millionsenior term loan facility and a U.S.$100 million revolving creditfacility, both with a five-year tenor and bullet payment.  Funds from the 2005 Facility were used torepay in full the outstanding balance of U.S.$244 million under ournow-terminated 2004 Facility. As of June 15, 2007, there was U.S.$150million outstanding under the term facility with U.S.$100 million of revolvingcredit available.  The interest rate forthe facility is LIBOR plus 40 basis points for the first year.  Thereafter, the spread could fluctuate inrelation to our leverage and could be between 37.5 and 45 basis points.  This Loan Agreement was executed in July 22,2005 among us, the Lenders party thereto, BBVA Securities Inc. as Bookrunner andDocumentation Agent, and BBVA Bancomer, S.A. as Administrative Agent.  See “Item 19.  Exhibits.”

**PerpetualBond**

We issued U.S.$300 million 7.75% perpetual bondsunder an indenture dated as of December 3, 2004, among Gruma, S.A.B. deC.V., and JP Morgan Chase Bank, N.A. as trustee.  Pursuant to the indenture, the bonds have nostated maturity, have a call option exercisable by GRUMA at any time beginningfive years after the issue date and will bear interest at a fixed rate of 7.75%per annum from the date of issuance. Interest on the bonds will be paid quarterly in arrears on March 3,June 3, September 3 and December 3 of each year, commencing onMarch 3, 2005, to the person in whose name such bond (or any predecessorbond) is registered at the close of business on the preceding February 15,May 15, August 15 or November 15, as the case may be.  Interest on the bonds will be computed on thebasis of a 360-day year of twelve 30-day months.  The Bonds will constitute direct seniorunsecured obligations of Gruma S.A.B. de C.V. and will rank at least *pari passu*in priority of payment with all other present andfuture unsecured and unsubordinated indebtedness of Gruma S.A.B. de C.V.  See “Item 19.  Exhibits.”

The indenture describescovenants with which we must comply, including:

·                  limitationson liens;

·                  limitationswith respect to consolidations, mergers or transfer of property; and

·                  limitationson certain sale and lease-back transactions.

These covenants are subject to a number of importantqualifications and exceptions as described in the indenture.

The indenture containscertain events of default, consisting of, among others, the following:

·                  failureto pay interest and other amounts within 30calendar days of the due date; and

·                  breachby us of any covenant or agreement in the indenture or any of the otherrelevant transaction documents.

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**SupplementalIndenture**

In connection with Gruma S.A.B. de C.V.’s offer topurchase its outstanding $250,000,000 aggregate principal amount of 7.625%Notes Due 2007 and the related solicitation of consents, Gruma S.A.B. de C.V.executed and delivered a supplemental indenture setting forth amendments to theoriginal indenture governing the $250,000,000 7.625% Notes Due 2007.  The supplemental indenture amends certainterms and covenants in the original indenture. See “Item 19.  Exhibits.”

**RevolvingCredit Facility**

In October 2006, Gruma Corporation entered into aU.S.$100 million 5-year revolving credit facility with a syndicate offinancial institutions.  The creditfacility replaced the U.S.$70 million revolving credit facility which wasscheduled to mature in June 2007.  Thenew facility has an interest rate based on LIBOR rate plus a spread of 0.35% to0.45% that fluctuates in relation to our leverage and contains less restrictiveprovisions than those in the facility replaced. The terms of the new facility provide that Gruma Corporation may requestthat the commitments available under the facility be increased by up to anadditional U.S.$50 million.

**EXCHANGE CONTROLS**

Mexican law does notrestrict our ability to remit dividends and interest payments, if any, tonon-Mexican holders of our securities. Payments of dividends to equity-holders generally will not be subject toMexican withholding tax.  See “—Taxation—Mexican Tax Considerations—Payment ofDividends.”  Mexico has had a freemarket for foreign exchange since 1991, and the government has allowed the pesoto float freely against the U.S. dollar since December 1994.

Our ability to repatriatedividends from Gruma Venezuela may be adversely affected by exchange controlsand other recent events.  See “Item 3.  Risk Factors—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”

**TAXATION**

The following summary contains a description ofcertain Mexican federal and U.S. federal income tax consequences of theacquisition, ownership and disposition of B Shares or B Share ADSs (which areevidenced by ADRs), but it does not purport to be a comprehensive descriptionof all of the tax considerations that may be relevant to a decision to purchaseor hold B Shares or ADSs, such as the tax treatment of holders that are dealersor that own (actually or constructively under rules prescribed in the InternalRevenue Code of 1986, as amended, or the Code), 10% or more of the votingshares of GRUMA.

The Convention for the Avoidance of Double Taxationand a Protocol thereto, or the Tax Treaty, between the United States and Mexicoentered into force on January 1, 1994. The United States and Mexico have also entered into an agreementconcerning the exchange of information with respect to tax matters.

The summary is based upontax laws of the United States and Mexico as in effect on the date of thisdocument, which are subject to change, including changes that may haveretroactive effect.  Holders of B Sharesor ADSs should consult their own tax advisers as to the Mexican, U.S. or othertax consequences of the purchase, ownership and disposition of shares or ADSs,including, in particular, the effect of any foreign, state or local tax laws.

**MexicanTax Considerations**

The following is a general summary of the principalconsequences under the *Ley del Impuesto sobre laRenta*, or Mexican Income Tax Law, and rules and regulationsthereunder, as currently in effect, of an investment in Shares or ADSs by aholder that is not a resident of Mexico and that will not hold shares or ADSsor a beneficial 

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interest therein inconnection with the conduct of a trade or business through a permanentestablishment or fixed base in Mexico.

For purposes of Mexicantaxation, a natural person is a resident of Mexico for tax purposes if he hasestablished his home in Mexico, unless he has resided in another country formore than 183 days, whether consecutive or not, in any one calendar yearand can demonstrate that he has become a resident of that country for taxpurposes, and a legal entity is a resident of Mexico if it was incorporated inMexico or maintains the principal administration of its business or theeffective location of its management in Mexico. A Mexican citizen is presumed to be a resident of Mexico unless suchperson can demonstrate the contrary.  Ifa non-resident of Mexico is deemed to have a permanent establishment or fixedbase in Mexico for tax purposes, all income attributable to such permanentestablishment or fixed base will be subject to Mexican taxes, in accordancewith applicable tax laws.

***Tax Treaties***

Provisions of the Tax Treaty that may affect thetaxation of certain U.S. holders are summarized below.  The United States and Mexico have alsoentered into an agreement that covers the exchange of information with respectto tax matters.

Mexico has also entered into and is negotiatingseveral other tax treaties that may reduce the amount of Mexican withholdingtax to which payment of dividends on shares or ADSs may be subject.  Holders of shares or ADSs should consulttheir own tax advisors as to the tax consequences, if any, of such treaties.

Under the Mexican IncomeTax Law, in order for any benefits from the Tax Treaty or any other taxtreaties to be applicable, residence for tax purposes must be demonstrated.

***Paymentof Dividends***

Under the Mexican Income Tax Law, dividends, either incash or in kind, paid with respect to shares represented by ADSs are not subjectto Mexican withholding tax.  A Mexicancorporation will not be subject to any tax if the amount of declared dividendsdoes not exceed the net tax profit account (*cuenta de utilidad fiscalneta,*or**CUFIN).

If we paya dividend in an amount greater than our CUFIN balance (which may occur in ayear when net profits exceed the balance in such accounts), then we arerequired to pay 28% income tax on an amount equal to the product of the portionof the grossed-up amount which exceeds such balance multiplied by 1.3889.

***Taxation of Dispositions***

The sale or other disposition of ADSs by anon-resident holder will not be subject to Mexican tax.  Deposits of shares in exchange for ADSs andwithdrawals of shares in exchange for ADSs will not give rise to Mexican tax ortransfer duties.

The sale of shares by a non-resident holder will notbe subject to any Mexican tax if the transaction is carried out through theMexican Stock Exchange or other securities markets approved by the MexicanMinistry of Finance.  Sales or otherdispositions of shares made in other circumstances generally would be subjectto Mexican tax, regardless of the nationality or residence of the transferor.

Under the Mexican Income Tax Law, gains realized by anonresident holder of shares on the sale or disposition of shares not conductedthrough a recognized stock exchange generally are subject to a Mexican tax at arate of 25% of the gross sale price. However, if the holder is a resident of a country which (i) is notconsidered to be a low tax rate country, (ii) its legislation does notcontain territorial taxation, and (iii) such income is not subject to apreferential tax regime, the holder may elect to designate a resident of Mexicoas its representative, in which case taxes would be payable at a 28% rate onthe gain on such disposition of shares.

Pursuant to the Tax Treaty, gains realized byqualifying U.S. holders from the sale or other disposition of shares, even ifthe sale is not conducted through a recognized stock exchange, will not be subjectto Mexican income tax except that Mexican taxes may apply if:

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·                  50%or more of our assets consist of fixed assets situated in Mexico;

·                  suchU.S. holder owned 25% or more of the shares representing the capital stock ofGRUMA (including ADSs), directly or indirectly, during the 12-month periodpreceding such disposition; or

·                  thegain is attributable to a permanent establishment or fixed base of the U.S.holder in Mexico.

***Other Mexican Taxes***

A non-resident holder will not be liable for estate,inheritance or similar taxes with respect to its holdings of shares or ADSs;provided, however, that gratuitous transfers of shares may in certaincircumstances result in imposition of a Mexican tax upon the recipient.  There are no Mexican stamp, issue registrationor similar taxes payable by a non-resident holder with respect to shares orADSs.

Reimbursement of capitalpursuant to a redemption of shares will be tax exempt up to an amountequivalent to the adjusted contributed capital corresponding to the shares thatwill be redeemed.  Any excessdistribution pursuant to a redemption will be considered a dividend for taxpurposes and we may be taxed as described above.

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

The following is a summary of certain U.S. federalincome tax consequences to U.S. holders (as defined below) of the acquisition,ownership and disposition of B Shares or ADSs. This summary is based upon the federal income tax laws of the UnitedStates as in effect on the date of this Annual Report, including the provisionsof the Tax Treaty, all of which are subject to change, possibly withretroactive effect in the case of U.S. federal income tax law.

The summary does not purport to be a comprehensivedescription of all of the tax consequences of the acquisition, ownership ordisposition of B Shares or ADSs.  Thesummary applies only to U.S. holders that will hold their B Shares or ADSs ascapital assets and does not apply to special classes of holders such as dealersin securities or currencies, holders with a functional currency other than theU.S. dollar, holders of 10% or more of our voting shares (whether held directlyor through ADSs or both), tax-exempt organizations, financial institutions,holders liable for the alternative minimum tax, securities traders electing toaccount for their investment in their B Shares or ADSs on a mark-to-marketbasis, and persons holding their B Shares or ADSs in a hedging transaction oras part of a straddle or conversion transaction.

For purposes of thisdiscussion, a “U.S. holder” is a beneficial owner of B Shares or ADSs that is:

·                  acitizen or resident of the United States of America;

·                  acorporation or partnership organized in or under the laws of the United Statesof America or any state thereof or the District of Columbia;

·                  anestate the income of which is subject to United States federal taxationregardless of its source;

·                  atrust if a court within the U.S. is able to exercise primary supervision overthe administration and one or more U.S. persons have the authority to controlall substantial decisions of the trust; or

·                  otherwisesubject to U.S. federal income taxation on a net income basis with respect tothe shares or ADSs.

A holder of B Shares orADSs that is a partnership, and partners in such partnership, should consulttheir tax advisors about the United States federal income tax consequences ofholding and disposing of the B Shares or the ADSs, as the case may be.

Prospective investors inthe B Shares or ADSs should consult their own tax advisors as to the U.S.federal, Mexican or other tax consequences of the purchase, ownership anddisposition of the B Shares or ADSs, including, in particular, the effect ofany foreign, state or local tax laws and their entitlement to the benefits, ifany, afforded by the Tax Treaty.

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***Treatment of ADSs***

In general, a U.S. holderof ADSs will be treated as the beneficial owner of the B Shares represented bythose ADSs for U.S. federal income tax purposes.  Deposits or withdrawals of B Shares by U.S.holders in exchange for the ADSs will not result in the realization of gain orloss for U.S. federal income tax purposes. U.S. holders that withdraw any shares should consult their own taxadvisors regarding the treatment of any foreign currency gain or loss on anypesos received in respect of such shares.

***Taxation of Distributions***

In this discussion, the term “dividends” is used tomean distributions paid out of our current or accumulated earnings and profits(calculated for U.S. federal income tax purposes) with respect to B Shares orADSs.  In general, the gross amount ofany dividends will be includible in the gross income of a U.S. holder asordinary income on the day on which the dividends are received by the U.S.holder in the case of shares, or by the depositary in the case of ADSs.  Dividends paid by us will not be eligible forthe dividends-received deduction allowed to corporations under the Code.  To the extent that a distribution exceeds theamount of our earnings and profits (calculated for U.S. federal income taxpurposes), it will be treated as a non-taxable return of capital to the extentof the U.S. holder’s basis in the B Shares or ADSs, and thereafter ascapital gain (provided that the B Shares or ADSs are held as capitalassets).  Distributions will be paid inpesos and will be includible in the income of a U.S. holder in a U.S. dollaramount calculated by reference to the exchange rate in effect on the day thatthey are received by the U.S. holder in the case of shares, or by thedepositary in the case of ADSs.  U.S.holders should consult their own tax advisors regarding the treatment offoreign currency gain or loss, if any, on any pesos received by a U.S. holderor depositary that are converted into U.S. dollars on a date subsequent toreceipt.

Distributions of additional shares or ADSs to U.S.holders with respect to their shares or ADSs that are made as part of a prorata distribution to all of our shareholders generally will not be subject toU.S. federal income tax.

Dividends paid on shares or ADSs generally will betreated for U.S. foreign tax credit purposes as foreign source passive categoryincome.  In the event Mexican withholdingtaxes are imposed on such dividends, any such withheld taxes would be treatedas part of the gross amount of the dividend includible in income of a U.S.holder for U.S. federal income tax purposes (to the extent of current oraccumulated earnings and profits), and such taxes may be treated as a foreignincome tax eligible, subject to generally applicable limitations and conditionsunder U.S. federal income tax law, for credit against a U.S. holder’s U.S.federal income tax liability or, at the U.S. holder’s election, for deductionfrom gross income in computing the U.S. holder’s taxable income.  The calculation and availability of foreigntax credits and, in the case of a U.S. holder that elects to deduct foreigntaxes, the availability of deductions, involves the application of rules thatdepend on a U.S. holder’s particular circumstances.  In the event Mexican withholding taxes areimposed, U.S. holders should consult their own tax advisors regarding theavailability of foreign tax credits.

***Qualified Dividend Income***

Notwithstanding theforegoing, certain dividends received by individual U.S. holders thatconstitute “qualified dividend income” will be subject to a reduced maximummarginal U.S. federal income tax rate. Qualified dividend income generally includes, among other dividends,dividends received during the taxable year from “qualified foreigncorporations.”  In general, the term “qualifiedforeign corporation” includes a foreign corporation that is eligible for thebenefits of a comprehensive income tax treaty with the United States which theU.S. Treasury Department determines to be satisfactory, and which includes anexchange of information program.  Inaddition, a foreign corporation is treated as a qualified foreign corporationwith respect to any dividend paid by the corporation with respect to stock ofthe corporation that is readily tradable on an established securities market inthe United States.  For this purpose, ashare is treated as readily tradable on an established securities market in theUnited States if an ADR backed by such share is so traded.

Notwithstanding theprevious rule, dividends received from a foreign corporation that is a passiveforeign investment company (as defined in section 1297 of the Code) willnot constitute qualified dividend income. In addition, the term “qualified dividend income” will not include,among other dividends, any (i) dividends on any share of stock or ADSwhich is held by a taxpayer for 60 days or less during the 120-day periodbeginning on the 

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date which is60 days before the date on which such share or the shares backing the ADSbecome ex-dividend with respect to such dividends (as measured undersection 246(c) of the Code) or (ii) dividends to the extent that thetaxpayer is under an obligation (whether pursuant to a short sale or otherwise)to make related payments with respects to positions in substantially similar orrelated property.  Moreover, specialrules apply in determining a taxpayer’s foreign tax credit limitation undersection 904 of the Code in the case of qualified dividend income.

Individual U.S. holdersshould consult their own tax advisors to determine whether or not amountsreceived as dividends from us will constitute qualified dividend income subjectto a reduced maximum marginal U.S. federal income tax rate and, in such case,the effect, if any, on the individual U.S. holder’s foreign tax credit.

***Taxation of Dispositions***

Gain or loss realized bya U.S. holder on the sale, redemption or other disposition of B Shares or ADSswill be subject to U.S. federal income taxation as capital gain or loss in anamount equal to the difference between such U.S. holder’s adjusted basis in theB Shares or the ADSs and the amount realized on the disposition (including anyamounts withheld in respect of Mexican withholding tax).  Gain (including gain that arises because theU.S. holder’s basis in the B Shares or ADSs has been reduced because adistribution is treated as a return of capital rather than as a dividend) andloss realized by a U.S. holder on a sale, redemption or other disposition of BShares or ADSs generally will be treated as U.S. source income or loss for U.S.foreign tax credit purposes.

The availability of U.S.foreign tax credits or any deduction from gross income for any Mexican taxesimposed on the sale, redemption or other disposition is subject to certainlimitations and involves the application of rules that depend on a U.S. holder’sparticular circumstances.  U.S. holdersshould consult their own tax advisors regarding the application of the foreigntax credit rules to their investment in, and disposition of, B Shares or ADSs.

***Tax Return Disclosure Regulations***

Pursuant to U.S. Treasuryregulations (the “Disclosure Regulations”), any taxpayer that hasparticipated in a “reportable transaction” and who is required to file a U.S.Federal income tax return must generally attach a disclosure statement disclosingsuch taxpayer’s participation in the reportable transaction to the taxpayer’stax return for each taxable year for which the taxpayer participates in thereportable transaction.  The DisclosureRegulations provide that, in addition to certain other transactions, “losstransactions” and “transactions involving a brief asset holding period”constitute “reportable transactions.”  “Losstransactions” include transactions that produce a foreign currency exchangeloss in an amount equal to or in excess of certain threshold amounts.  “Transactions involving a brief asset holdingperiod” are generally transactions resulting in the taxpayer claiming a taxcredit in excess of $250,000 if the underlying asset giving rise to the creditis held by the taxpayer for 45 days or less.  U.S. holders should consult their ownadvisors concerning the implications of the tax return disclosure requirementsin light of their particular circumstances.

***Information Reporting andBackup Withholding***

Dividends on, and proceeds from the sale or otherdisposition of, the B Shares or ADSs paid to a U.S. holder generally maybe subject to the information reporting requirements of the Code and may besubject to backup withholding at the applicable rate unless the holder:

·                  establishesthat it is a corporation or other exempt holder; or

·                  providesan accurate taxpayer identification number on a properly completed InternalRevenue Service Form W-9 and certifies that no loss of exemption frombackup withholding has occurred.

The amount of any backupwithholding from a payment to a holder will be allowed as a credit against theU.S. holder’s U.S. federal income tax liability and may entitle such holder toa refund, provided that certain required information is furnished to theInternal Revenue Service.

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***U.S. Tax Consequences forNon-U.S. Holders***

*Distributions:*

A holder of shares or ADSs that is, with respect tothe United States, a foreign corporation or a non-resident alien individual (a “non-U.S.holder”) generally will not be subject to U.S. federal income or withholdingtax on dividends received on shares or ADSs, unless such income is effectivelyconnected with the conduct by the holder of a U.S. trade or business.

*Dispositions:*

A non-U.S. holder ofshares or ADSs will not be subject to U.S. federal income or withholding tax ongain realized on the sale of shares or ADSs, unless:

·                  suchgain is effectively connected with the conduct by the holder of a U.S. trade orbusiness, or

·                  inthe case of gain realized by an individual holder, the holder is present in theUnited States for 183 days or more in the taxable year of the sale andcertain other conditions are met.

*Information Reporting andBackup Withholding:*

Although non-U.S. holdersgenerally are exempt from backup withholding, a non-U.S. holder may be requiredto comply with certification and identification procedures in order toestablish its exemption from information reporting and backup withholding.

**DOCUMENTS ON DISPLAY**

We are subject to theinformation requirements of the Exchange Act and, in accordance therewith, weare required to file reports and other information with the SEC.  These materials, including thisForm 20-F and the exhibits thereto, may be inspected and copied at the SEC’sPublic Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.  The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

## **ITEM 11.       QuantitativeAnd Qualitative Disclosures About Market Risk.**

The following information includes “forward-lookingstatements” that involve risk and uncertainties.  Actual results could differ from thosepresented.  All information below ispresented on a Mexican GAAP basis in pesos of constant purchasing power as ofDecember 31, 2006.

We are exposed to marketrisks arising from changes in interest rates, foreign exchange rates, equityprices and commodity prices.  We usederivative instruments, on a selective basis, to manage these risks.  We maintain and control our treasuryoperations and overall financial risk through practices approved by our seniormanagement and board of directors.

**INTEREST RATE RISK**

We depend upon debt financing transactions, includingdebt securities, bank and vendor credit facilities and leases, to finance ouroperations.  These transactions expose usto interest rate risk, with the primary interest-rate risk exposure resultingfrom changes in the relevant base rates (mostly LIBOR and to a lesser extent,Prime, TIIE and *Tasa Promedio Poderada*in Venezuela) which are used to determine the interest rates that areapplicable to borrowings under our credit facilities.  We are also exposed to interest rate risk inconnection with refinancing of maturing debt. We had approximately U.S.$378.7****million(Ps.4,094 million) of fixed rate debt and approximately U.S.$221.5 million(Ps.2,394 million) in floating rate debt at December 31, 2006.

We enter into interest rate swaps with theintention of hedging our exposure to increases in interestrates.  However, from an accountingperspective some of these contracts might not eligible to be treated as hedgingtransactions as described in Note 18-B to our financial statements.  In April 2001, we entered into aninterest rate 

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swap converting theinterest payments on our U.S.$250,000,000 7.625% Notes Due 2007 from a fixedrate (7.625%) to a variable rate (LIBOR plus 2.035%).  We immediately entered into a further swapagreement with respect to the interest payments on the same U.S.$250,000,000debt whereby we paid a fixed interest rate of 5.485% and received a LIBOR ratethrough 2007.  These swaps agreementsremain in place with respect to interest payments on the U.S.$250,000,000principal amount.  These swap agreementsoffset each other effectively leaving us with the original fixed interest ratepayment of 7.625% on the approximately U.S.$50,000,000 in aggregate principalamount which remains outstanding after the tender offer.

On November 2, 2004, we entered into an interestrate swap transaction with five banks with an aggregate notional amount ofU.S.$150 million maturing on April 5, 2008, whereby we fixed the6-month LIBOR rate associated with the term portion of the 2004 Facility at anaverage rate of 3.2725%.  OnSeptember 30, 2005, this interest rate swap was modified resulting in aaverage fixed rate of 3.2775% and a maturity date of March 30, 2008.  The swap transaction provides that thecounterparty pay us unless 6-month LIBOR reaches 6%, in which case the partieshave no obligation to pay any amount for the applicable period.

However, in March 8, 2006 we modified this 6%level up to 6.5% and 6.75% for the interest payment dates due in 2007 obtaininga fixed average rate of 3.6175% for this year. In addition, in December 12, 2005 we entered into a new interestrate swap for the 2005 Facility with a single bank, starting on March 30,2008 and maturing on March 30, 2009, whereby we fixed the 6-month LIBORrate associated with the term portion at an average rate of 4.505%.  The swap transaction provides that thecounterparty pay us unless 6-month LIBOR reaches 7%, in which case the partieshave no obligation to pay any amount for the applicable period.  For a description of our debt, see Note 10 toour financial statements.

The following table sets forth, as ofDecember 31, 2006, the interest rate and maturity profile of our debtportfolio. 
| ** **          | ** ** | **Maturity Dates**                                                                                                                                               | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **2007**                                                                                                                                                              | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| ** **          | ** ** | **(in millions of pesos of constant purchasing power  as of December 31, 2006, except percentages)** | ** ** |
| Liabilities         |       |                                                                                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                |       |                                                                                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed Rate (Ps.)    |       | 686                                                                                                                                                                   |       | 151 |   | 300 |   | 41 |   | 2 |   | 3,243 |   | 4,423 |   | 4,439 |   |
| Average Rate        |       | 7.13                                                                                                                                                                  | %          | 7.20 | % | 7.21 | % | 6.43 | % | 8.40 | % | 7.75 | % | — |   | — |   |
| Floating Rate (Ps.) |       | 197                                                                                                                                                                   |       | 14 |   | 114 |   | 1,622 |   | 119 |   | — |   | 2,065 |   | 2,065 |   |
| Average Rate        |       | 6.02                                                                                                                                                                  | %          | 5.69 | % | 5.52 | % | 7.04 | % | 8.25 | % | — |   | — |   | — |   |

 

In thecase of our cash and short-term investments, declines in interest ratesdecrease the interest return on floating rate cash deposits and short-terminvestments.  A hypothetical 100 basispoint (1.0%) decrease in interest rates would not have a significanteffect on our results of operations.  Weuse derivative financial instruments such as interest rate swaps for purposesof hedging a portion of our long-term debt, in order to reduce the risk frominterest rate fluctuations.

**FOREIGN EXCHANGE RATERISK**

Our net sales are denominated in U.S. dollars, Mexicanpesos and other currencies.  During 2006,approximately 49% of our revenues were generated in U.S. dollars, andapproximately 31% in pesos.  In addition,as of December 31, 2006, approximately 53% of our total assets weredenominated in currencies other than Mexican pesos, particularly U.S.dollars.  A significant portion of ouroperations is financed through U.S. dollar-denominated debt.

We believe that we have natural foreign exchange hedgesincorporated in our balance sheet, in significant part because we havesubsidiaries outside Mexico, and the peso-denominated value of our equity inthese 

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subsidiaries is alsoexposed to fluctuations in exchange rates. Changes in the peso value of equity in our subsidiaries caused bymovements in foreign exchange rate are recognized as a component ofequity.  See Note 13****toour financial statements.

Fluctuations in exchange rates relative to the Mexicanpeso expose us to foreign-currency exchange rate risk, principally with regardto our debt.  As of June 15, 2007 we had exchange rate forward contracts for partof the interest payments due in 2007 and 2008 on our U.S.$300 million7.75% perpetual bond, for an aggregate notional amount of U.S.$ 34.9 million atan average exchange rate of Ps.10.942 per U.S. dollar.

Our primary foreign exchange rate risk relates to oursubstantial U.S. dollar-denominated debt for our non-U.S.subsidiaries.  As of December 31,2006, approximately 93% of our debt obligations was denominated in U.S.dollars.  The following table sets forthinformation concerning our U.S. dollar-denominated debt as of December 31,2006.  The table does not reflect ourU.S. dollar sales or our U.S. dollar-denominated assets.
| ** **                                 | ** ** | **Expected Maturity or Transaction Date**                                                                           | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| **U.S. dollar-denominated debt** | ** ** | **2007**                                                                                                                                | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| ** **                                 | ** ** | **(in millions of pesos of constant purchasing power  as of December 31, 2006)** | ** ** |
| 7.75% Perpetual  bond                      |       |                                                                                                                                    |       |   |   |   |   |   |   |   |   | 3,243 |   | 3,243 |   | 3,420 |   |
| Credit Facility                            |       |                                                                                                                                    |       |   |   |   |   | 1,622 |   |   |   |   |   | 1,622 |   | 1,622 |   |
| 7.625% notes due  2007                     |       | 546                                                                                                                                     |       |   |   |   |   |   |   |   |   |   |   | 546 |   | 553 |   |
| Revolving credit  facility                 |       |                                                                                                                                    |       |   |   |   |   |   |   | 119 |   |   |   | 119 |   | 119 |   |
| 7.96% senior  notes                        |       | 16                                                                                                                                      |       | 17 |   | 114 |   |   |   |   |   |   |   | 147 |   | 147 |   |
| Other*                                     |       | 320                                                                                                                                     |       | 148 |   | 301 |   | 41 |   | 2 |   |   |   | 812 |   | 812 |   |
|                                       |       | 882                                                                                                                                     |       | 165 |   | 414 |   | 1,663 |   | 121 |   | 3,243 |   | 6,488 |   | 6,673 |   |

 

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* Includes debt in Euros,Mexican Pesos and Bolívares

**COMMODITY AND DERIVATIVEPRICE RISK**

The availability and price of corn and otheragricultural commodities are subject to wide fluctuations due to factorsoutside our control, such as weather, plantings, government (domestic andforeign) farm programs and policies, changes in global demand/supply and globalproduction of similar and competitive crops. We hedge a portion of our production requirements through commodity futuresand options contracts in order to reduce the risk created by price fluctuationsand supply of corn, wheat, natural gas and soy oils which exist as part ofongoing business operations.  The openpositions for hedges of purchases do not exceed the maximum productionrequirements for a one-year period.

During 2006, we entered into short-term hedgetransactions through commodity futures and options for a portion of ourrequirements.  For cash-flow hedgetransactions, changes in the fair value of the derivative financial instrumentare included as other comprehensive income in stockholders’ equity, based onthe evaluation of the hedge effectiveness, and are reclassified to income inthe periods when the hedged commitment or projected transaction is effected. Hedgecontracts other than cash flow are recognized at fair value and their valuationgain or loss is recognized in income. As of December 31, 2006, we had anunfavorable effect due to changes in the fair value of cash flow hedgesamounting to Ps.3.1 million net of taxes (which was recognized as comprehensiveincome within stockholders’ equity). We expect to reclassify the effectsinitially registered as stockholders’ equity to income within the following12 months. As of December 31, 2006, we have outstanding fair valuehedge contracts of natural gas for Ps.202.6 million.  From time to time we hedge commodity pricerisks utilizing futures and options strategies that do not qualify for hedgeaccounting. As a result of non-qualification, these derivative financialinstruments are recognized at their estimated fair values and are marked tomarket with the associated effect recorded in current period earnings. For theyear ended December 31, 2006, we had an unfavorable effect of approximatelyPs.133 million from these contracts. Additionally, as of December 31,2006, we recognized a favorable effect of approximately Ps.1.1 million for thevaluation of these contracts that did not qualify for hedge accounting, whichwere marked to market and recognized in current period earnings.

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**EQUITY PRICE RISK**

We classify our equity investments, consistingprimarily of shares of GFNorte, a Mexican financial services holding company,as long-term assets.  Since theseinvestments are accounted for using the equity method, we do not believe ourexposure to a hypothetical 10% decrease in the value of these equityinvestments would have a material effect on our results.  For additional information concerning ourinvestment in GFNorte, see “Item 4. Information on the Company—Description of Business—Miscellaneous—BanorteInvestment.”  We did not enter into anyequity swap agreements in 2006.

**COUNTERPARTY RISK**

We maintain centralized treasury operations in Mexicofor our Mexican operations and in the United States for our U.S. operations.  Liquid assets are invested primarily ingovernment bonds and short-term debt instruments with a minimum “A1/P1” ratingfor our U.S. operations and “A” for our Mexican operations.  We face credit risk from the potentialnon-performance by the counterparties in respect of the financial instrumentsthat we utilize.  Substantially all ofthese financial instruments are unsecured. We do not anticipate non-performance by the counterparties, which areprincipally licensed commercial banks and investment banks with long-termcredit ratings.  For our Central Americanoperations and Gruma Venezuela, we only invest cash reserves with well-knownlocal banks and local branches of international banks.  In addition, we also keep small investmentsabroad.

The above discussion ofthe effects on us of changes in interest rates, foreign exchange rates,commodity prices and equity prices is not necessarily indicative of our actualresults in the future.  Future gains andlosses will be affected by actual changes in interest rates, foreign exchangerates, commodity prices, equity prices and other market exposures, as well aschanges in the actual derivative instruments employed during any period.

## **ITEM 12.       Description Of Securities Other ThanEquity Securities.**

Not applicable.

# **PART II**

## **ITEM 13.       Defaults,Dividend Arrearages And Delinquencies.**

None.

## **ITEM 14.       MaterialModifications To The Rights Of Security Holders And Use Of Proceeds.**

None.

## **ITEM 15.       Controlsand Procedures.**

**EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

**DisclosureControls and Procedures**

The conclusions of ourChief Executive Officer and Chief Corporate Officer about the effectiveness ofour disclosure controls and procedures (as such term is defined under Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)based on their evaluation of these controls and procedures as ofDecember 31, 2006, are as follows:

Our disclosure controlsand procedures are designed to ensure that information required to be disclosedby us is recorded, processed, summarized and reported within requiredtimeframes.  Our disclosure controls andprocedures include controls and procedures designed to ensure that informationrequired to be disclosed is accumulated and communicated to our management,including our Chief Executive Officer and Chief Corporate Officer, asappropriate to allow timely decisions regarding required disclosure.  Based on their assessments of our disclosurecontrols and procedures, our Chief Executive Officer and Chief CorporateOfficer have concluded that 

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the disclosure controlsand procedures are effective as of December 31, 2006, and that theconsolidated financial statements fairly present our consolidated financialposition and the results of operations for the period presented.

**Management’s Annual Report onInternal Control over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  Internal controlover financial reporting is defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934, as amended, as a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles and includes those policies andprocedures that: (i) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being made onlyin accordance with authorizations of management and directors of the Company,and; (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Projections of anyevaluation of effectiveness to future periods are subject to the risks that controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Our management assessedthe effectiveness of our internal control over financial reporting as ofDecember 31, 2006 based on the framework in Internal Control – IntegratedFramework issued by COSO.  Based on theassessment of our internal control over financial reporting, our ChiefExecutive Officer and Chief Corporate Officer have concluded that the Company’sinternal control over financial reporting is effective.

In August 2006, the SECgranted relief from section 404(b) of the Sarbanes-Oxley Act of 2002 forforeign accelerated filers (Release 2006-136). These companies will have theircompliance deadline extended for an additional year, so we are not required toprovide an auditor’s attestation report on internal control over financialreporting until our 20-F report for fiscal year endedDecember 31, 2007.

**Changesin Internal Control over Financial Reporting**

During the period coveredby this report, there have not been any changes in our internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended) that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**ITEM 16A.            FinancialExpert**

As required by the Mexican Securities Law and ourbylaws, Javier Vélez Bautista, Juan Diez-Canedo Ruiz, and Héctor Rangel Domene,were appointed as members of the audit committee and corporate governancecommittee by the Meeting of the Board of Directors held on April 25, 2007. JuanDiez-Canedo Ruiz was designated as the “Audit and Corporate GovernanceCommittees Financial Expert” within the meaning of this Item 16A. Althoughunder Mexican law the determination of the Board of Directors is binding on ourcompany, this designation was confirmed by the General Ordinary Shareholders’Meeting held on April 27, 2007

**ITEM 16B.            Codeof Ethics**

We have adopted a code of ethics, as defined inItem 16B of Form 20-F under the Securities Exchange Act of 1934, asamended.  Our code of ethics applies toour Chief Executive Officer, Chief Financial Officer and persons performingsimilar functions as well as to our directors and other officers andemployees.  Our code of ethics isavailable on our web site at **www.gruma.com**.  If we amend the provisions of our code ofethics that apply to our 

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Chief Executive Officer,Chief Financial Officer and persons performing similar functions, or if wegrant any waiver of such provisions, we will disclose such amendment or waiveon our web site at the same address.

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

**Auditand Non-Audit Fees**

The following tablesummarizes the aggregate fees billed to us by PricewaterhouseCoopers, duringthe fiscal years ended December 31, 2005 and 2006: 

|                     | ** ** | **Year ended December 31,**      | ** ** |
|---------------------|------------|-------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(thousands of Mexican pesos)** | ** ** |
| Audit fees          |       | Ps.                                             | 37,233     |   | Ps. | 29,996 |   |
| Audit-related  fees |       | —                                          |       | — |   |
| Tax fees            |       | 5,776                                           |       | 7,222 |   |
| Other fees          |       | 32                                              |       | 95 |   |
| Total fees          |       | Ps.                                             | 43,041     |   | Ps. | 37,313 |   |

*Auditfees*.  Audit fees inthe above table are the aggregate fees billed by PricewaterhouseCoopers, inconnection with the audit of our annual financial statements and statutory andregulatory audits.

*Audit-related Fees*.  Audit-related fees in the above table are theaggregate fees billed by PricewaterhouseCoopers, for financial accounting andreporting consultations.

*Tax Fees*.  Tax fees in the above table are fees billedby PricewaterhouseCoopers for services such as tax filings, value-added taxreturn, transfer pricing and requests for technical advice from taxingauthorities.

*Other Fees*.  Other fees in the above table are fees billedby PricewaterhouseCoopers, for non-audit services.  As a percentage of total fees billed toGRUMA, other fees represent 0.07% and 0.25% for 2006 and 2005, respectively.

**AuditCommittee Pre-Approval Policies and Procedures**

We have adopted pre-approval policies and proceduresunder which all audit and non-audit services provided by our external auditorsmust be pre-approved by the audit committee. Any service proposals submitted by external auditors need to bediscussed and approved by the audit committee during its meetings, which takeplace at least four times a year.  Oncethe proposed service is approved, we or our subsidiaries formalize theengagement of services.  The approval ofany audit and non-audit services to be provided by our external auditors isspecified in the minutes of our audit committee.  In addition, the members of our board ofdirectors are briefed on matters discussed in the meetings of the auditcommittee.

**ITEM 16D.****            Exemptionsfrom the Listing Standards for Audit Committees**

**Not Applicable**

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**ITEM 16E.             Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

The following table setsout certain information concerning purchases of our shares by us and ouraffiliates during 2006. 

**Issuer Purchases of Equity Securities(for the fiscal year ended December 31, 2006)**
| **Period** | ** ** | **Total Number of  Shares (or Units)  Purchased** | ** ** | **Average Price Paid  per Share (or Unit)** | ** ** | **Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares (or  Units) that May Yet be  Purchased Under the  Plans or Programs** | ** ** |
|------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January    |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| February   |       | 90,500                                                                |       | Ps.                                                                  | 34.48      |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |   |
| March      |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| April      |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| May        |       | 20,000                                                                |       | Ps.                                                                  | 27.76      |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |   |
| June       |       | 358,400                                                               |       | Ps.                                                                  | 27.35      |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |   |
| July       |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| August     |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| September  |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| October    |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| November   |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |
| December   |       |                                                                  |       |                                                                 |       |                                                                                                                                                  |       |                                                                                                                                                                                                   |       |

 

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# **PART III**

## **ITEM 17.       FinancialStatements.**

Not applicable.

## **ITEM 18.       FinancialStatements.**

See pages F-1 throughF-185, incorporated herein by reference.

## **ITEM 19.       Exhibits. **

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                   |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       | * *                                                                                                                                                                                                                                                                                     |
| 1                |       | Our bylaws*(estatutos sociales)*  as amended through November 30, 2006, together with an English  translation.                                                                                                                                                                          |
|             |       | * *                                                                                                                                                                                                                                                                                     |
| 2(a)(1)          |       | Deposit Agreement, dated as of September 18,  1998, by and among us, Citibank, N.A. as Depositary and the Holders and  Beneficial Owners of American Depositary Shares Evidenced by American  Depositary Receipts Issued Thereunder (including form of American Depositary  Receipt).** |
|             |       |                                                                                                                                                                                                                                                                                         |
| 2(b)(1)          |       | Indenture, dated as of October 9, 1997, between  us and The Chase Manhattan Bank, as Indenture Trustee representing up to  U.S.$250,000,000 of our 7.625% Notes due 2007.***                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                         |
| 2(b)(2)          |       | Supplemental Indenture, dated as of  November 30, 2004, between us and JPMorgan Chase Bank, N.A., a national  banking association (as successor to JPMorgan Chase Bank), as Indenture  Trustee under the Indenture referred to above.*****                                              |
|             |       |                                                                                                                                                                                                                                                                                         |
| 2(b)(3)          |       | Registration Rights Agreement by and among us,  Lehman Brothers Inc., Bear Stearns International Limited, and AFIN Securities  International Ltd., dated October 9, 1997.***                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                         |
| 2(b)(4)          |       | Indenture, dated as of December 3, 2004,  between us and JPMorgan Chase Bank, N.A., as Indenture Trustee representing  up to U.S.$300,000,000 of our 7.75% Perpetual Bonds. *****                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                         |
| 2(b)(5)          |       | U.S.$250 million Loan Agreement among us, the  Lenders party thereto, BBVA Securities Inc. as Bookrunner and Documentation  Agent, and BBVA Bancomer, S.A. as Administrative Agent dated July, 22,  2005.******                                                                         |
|             |       |                                                                                                                                                                                                                                                                                         |
| 2(b)(6)          |       | U.S.$100 million five year revolving credit facility  among us, the Lenders party thereto, Bank of America, N.A., as Administrative  Agent, Documentation Agent and Letter of Credit Issuer, dated October 30,  2006.                                                                        |
|             |       |                                                                                                                                                                                                                                                                                         |
| 4(a)(1)          |       | Shareholders Agreement by and among us, Roberto  González Barrera, Archer Daniels-Midland Company and ADM Bioproductos, S.A.  de C.V., dated August 21, 1996. ***                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                         |
| 4(a)(2)          |       | Amendment No. 1 to Shareholders Agreement by and  among us, Roberto González Barrera, Archer Daniels-Midland Company and ADM  Bioproductos, S.A. de C.V., dated September 13, 1996.****                                                                                            |

 

95

----

 
| Exhibit No. | ** ** | ** **                                                                                                                                                                                     |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       | * *                                                                                                                                                                                       |
| 4(a)(3)          |       | Amendment No. 2 to Shareholders Agreement by and  among us, Roberto González Barrera, Archer Daniels-Midland Company and ADM  Bioproductos, S.A. de C.V., dated August 18, 1999.**** |
|             |       |                                                                                                                                                                                           |
| 4(a)(4)          |       | Asset Contribution Agreement among Gruma  Corporation, Gruma Holding, Inc., ADM Milling Co., Valley Holding, Inc.,  GRUMA-ADM, and Azteca Milling, L.P., dated August 21, 1996.***        |
|             |       |                                                                                                                                                                                           |
| 4(a)(5)          |       | Investment Agreement by and between us and  Archer-Daniels-Midland Company, dated August 21, 1996. ***                                                                                    |
|             |       |                                                                                                                                                                                           |
| 8                |       | List of Principal Subsidiaries.                                                                                                                                                                |
|             |       |                                                                                                                                                                                           |
| 12(a)(1)         |       | CEO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002, dated June 29, 2007.                                                                                   |
|             |       |                                                                                                                                                                                           |
| 12(a)(2)         |       | CFO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002, dated June 29, 2007.                                                                                   |
|             |       |                                                                                                                                                                                           |
| 13               |       | Officer Certifications pursuant to Section 906  of the Sarbanes-Oxley Act of 2002, dated June 29, 2007.                                                                              |

 

----

| **     |   | Previously filed in Registration Statement on  Form F-6 (File No. 333-9282), originally filed with the SEC on  August 13, 1998. Incorporated herein by reference.  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ***    |   | Previously filed in Registration Statement on  Form F-4 (File No. 333-8266), originally filed with the SEC on  January 28, 1998. Incorporated herein by reference. |
| ****   |   | Previously filed in Annual Report on Form 20-F  (File No. 1-14852), originally filed with the SEC on July 1, 2002.  Incorporated herein by reference.              |
| *****  |   | Previously filed in Annual Report on Form 20-F  (File No. 1-14852), originally filed with the SEC on June 30, 2005.  Incorporated herein by reference.             |
| ****** |   | Previously filed in Annual Report on Form 20-F (File  No. 1-14852), originally filed with the SEC on June 30, 2006. Incorporated  herein by reference.                       |

 

96

----

**SIGNATURE**

The registrant, Gruma,S.A.B. de C.V., hereby certifies that it meets all of the requirements forfiling on Form 20-F and that it has duly caused and authorized theundersigned to sign this annual report on its behalf.
|   | GRUMA, S.A.B. de C.V.                            |
|--------|--------------------------------------------------|
|   |                                             |
|   | /s/ Juan Antonio  Quiroga García            |   |
|   |                                             |
|   | Name:  Juan Antonio Quiroga García     |
|   | Title:    Chief Corporate Officer |

 

Dated: June 29, 2007

97

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**GRUMA,S.A.B. DE C.V. AND SUBSIDIARIES**

**INDEXTO REPORTS OF INDEPENDENT REGISTERED PUBIC ACCOUNTING FIRMS AND CONSOLIDATEDFINANCIAL STATEMENTS 2004, 2005 AND 2006**
| Report of Independent  Registered Public Accounting Firm                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                        |   |
| Consolidated  Balance Sheets as of December 31, 2005 and 2006                                                               |   |
|                                                                                                                        |   |
| Consolidated  Statements of Income for the Years Ended December 31, 2004, 2005 and  2006                               |   |
|                                                                                                                        |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended  December 31, 2004, 2005 and 2006 |   |
|                                                                                                                        |   |
| Consolidated  Statements of Changes in Financial Position for the Years Ended  December 31, 2004, 2005 and 2006        |   |
|                                                                                                                        |   |
| Notes  to Consolidated Financial Statements                                                                                 |   |

 

**GRUPOFINANCIERO BANORTE, S.A. DE C.V.(1)**

**INDEX TO REPORTS OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRMS AND CONSOLIDATED FINANCIAL STATEMENTS 2004,2005 and 2006**
| Table of Contents                                                                                                     |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                  |   |
| Reports of Independent Registered Public Accounting  Firms                                                            |   |
|                                                                                                                  |   |
| Consolidated Balance Sheets as of December 31, 2005  and 2006                                                         |   |
|                                                                                                                  |   |
| Consolidated Statements of Income for the Years Ended  December 31, 2004, 2005 and 2006                               |   |
|                                                                                                                  |   |
| Consolidated Statements of Changes in Stockholders’  Equity for the Years Ended December 31, 2004, 2005 and 2006 |   |
|                                                                                                                  |   |
| Consolidated Statements of Changes in Financial  Position for the Years Ended December 31, 2004, 2005 and 2006        |   |
|                                                                                                                  |   |
| Notes to Consolidated Financial Statements                                                                            |   |

 

----

(1)           Theaccompanying consolidated balance sheets of Grupo Financiero Banorte, S. A. deC.V. and subsidiaries as of December 31, 2005 and 2006, and the relatedconsolidated statements of income, of changes in stockholders’ equity, ofchanges in financial position and of cash flows for the years endedDecember 31, 2004, 2005 and 2006 are presented herein as required byRule 3-09 of Regulation S-X.

F-1

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To theStockholders of Gruma, S.A.B. de C.V. (formerly Gruma, S.A. de C.V.):

Inour opinion, based on our audits and the report of the other auditors, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, changes in stockholders’ equity and changes in financialposition present fairly, in all material respects, the financial position ofGruma, S.A.B. de C.V. and subsidiaries (formerly Gruma, S.A. de C.V.),collectively “the Company”, at December 31, 2006 and 2005, and the results oftheir operations and changes in their financial position for each of the threeyears ended December 31, 2006, in conformity with Mexican Financial ReportingStandards. These consolidated financial statements are the responsibility ofthe management of Gruma, S.A.B. de C.V. (formerly Gruma, S.A. de C.V.); ourresponsibility is to express an opinion on these financial statements based onour audits. We did not audit the 2006 and 2005 financial statements of GrupoFinanciero Banorte, S.A. de C.V. and subsidiaries, an equity method associatedcompany, which investment as of December 31, 2006 and 2005 represents 9% and8%, respectively, of the 2006 and 2005 consolidated total assets, and whoseequity in their earnings represents 39% and 47% of the 2006 and 2005consolidated net income, respectively. Those statements were audited by otherauditors whose report thereon has been furnished to us, and our opinionexpressed herein, insofar as it relates to the amounts included for theassociated company mentioned above, is based solely on the report of the otherauditors. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States ofAmerica), which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits and the report of the otherauditors provide a reasonable basis for the opinion expressed above.

EffectiveJanuary 1, 2005, the Company adopted the amendments to Statement D-3, “LaborObligations”, issued by the Mexican Institute of Public Accountants. Theseamendments provide additional valuation and disclosure rules for recognizingseverance payments due to causes other than from restructuring activities. Theadoption of these amendments resulted the recognition of an initial liabilityeffect related to the cost of the services of prior years and a cumulativeeffect charge to income for the year, net of taxes, in the amount of Ps.56,319thousands.

MexicanFinancial Reporting Standards vary in certain significant respects fromaccounting principles generally accepted in the United States of America (U.S.GAAP). Information relating to the nature and effect of such differences ispresented in Note 22 to the consolidated financial statements.  We did not audit the 2006 and 2005 U.S. GAAPequity method adjustment related to Grupo Financiero Banorte, S. A. de C. V.and subsidiaries described in Note 22-M. The 2006 and 2005 impact of the U.S.GAAP adjustment related to this equity method investee represents 1.0% and 1.7%of the consolidated stockholders’ equity, respectively, and 1.3% and 0.4% ofconsolidated net income, for the years ended December 31, 2006 and 2005,respectively, both on a U.S. GAAP basis. These adjustments were audited by other auditors whose report thereonhas been furnished to us, and our opinion expressed herein, insofar as itrelates to the U.S. GAAP amounts related to Grupo Financiero Banorte, S. A. deC. V. and subsidiaries in 2006 and 2005 is based solely on the report of theother auditors.

PricewaterhouseCoopers,S.C.

Monterrey, N. L., Mexico

June 25, 2007

F-2

----

**GRUMA, S.A.B. DE C.V. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OF DECEMBER 31, 2005 AND 2006**

**(Expressed in thousands ofMexican pesos of constant purchasing power as of**

**December 31, 2006)**

**(Notes 1and 3)**
| ** **                                                                                                                        | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                                        |       |        |       |        |       |
| Current:                                                                                                                          |       |        |       |        |       |
| Cash                                                                                                                              |       | Ps.         | 243,264    |        | Ps.        | 375,388 |   |
| Temporary  investments (Note 3-G)                                                                                                 |       | 98,333      |       | 195,401     |       |
| Accounts  receivable, net (Note 4)                                                                                                |       | 3,605,413   |       | 4,539,712   |       |
| Refundable taxes  (Note 4)                                                                                                        |       | 541,925     |       | 573,688     |       |
| Inventories  (Note 5)                                                                                                             |       | 3,768,689   |       | 3,821,305   |       |
| Prepaid expenses                                                                                                                  |       | 281,514     |       | 332,218     |       |
| Total current  assets                                                                                                             |       | 8,539,138   |       | 9,837,712   |       |
| Investment in common  stock of associated companies (Note 6)                                                                      |       | 2,453,071   |       | 2,722,742   |       |
| Property, plant and  equipment, net (Note 7)                                                                                      |       | 14,354,891  |       | 14,821,192  |       |
| Intangible assets, net  (Note 8)                                                                                                  |       | 1,223,651   |       | 936,904     |       |
| Excess of cost over  book value of subsidiaries acquired, net                                                                     |       | 1,322,551   |       | 1,792,118   |       |
| Other assets (Note 9)                                                                                                             |       | 73,281      |       | 126,837     |       |
| **Total  assets**                                                                                                                 |       | Ps.         | 27,966,583 |        | Ps.        | 30,237,505 |   |
| **Liabilities**                                                                                                                   |       |        |       |        |       |
| Current:                                                                                                                          |       |        |       |        |       |
| Bank loans (Note  10)                                                                                                             |       | Ps.         | 448,543    |        | Ps.        | 172,164 |   |
| Current portion  of long-term debt (Note 10)                                                                                      |       | 88,551      |       | 710,533     |       |
| Trade accounts  payable                                                                                                           |       | 2,069,940   |       | 2,311,162   |       |
| Accrued  liabilities and other accounts payable                                                                                   |       | 1,609,441   |       | 2,014,982   |       |
| Employees’  statutory profit sharing payable                                                                                 |       | 31,821      |       | 46,865      |       |
| Total current  liabilities                                                                                                        |       | 4,248,296   |       | 5,255,706   |       |
| Long-term debt (Note 10)                                                                                                          |       | 6,680,257   |       | 5,605,464   |       |
| Deferred income taxes  (Note 15-B)                                                                                                |       | 1,558,576   |       | 1,713,461   |       |
| Deferred employees’  statutory profit sharing (Note 15-D)                                                                    |       | 19,093      |       | 3,180       |       |
| Other liabilities                                                                                                                 |       | 735,409     |       | 611,553     |       |
| Total long-term  liabilities                                                                                                      |       | 8,993,335   |       | 7,933,658   |       |
| **Total liabilities**                                                                                                             |       | 13,241,631  |       | 13,189,364  |       |
| Contingencies and  commitments (Note 12)                                                                                          |       |        |       |        |       |
| **Stockholders’ Equity**                                                                                                     |       |        |       |        |       |
| Majority interest (Note  13):                                                                                                     |       |        |       |        |       |
| Common stock                                                                                                                      |       | 4,575,894   |       | 4,880,142   |       |
| Restatement of  common stock                                                                                                      |       | 7,944,661   |       | 7,954,822   |       |
|                                                                                                                              |       | 12,520,555  |       | 12,834,964  |       |
| Additional  paid-in capital                                                                                                       |       | 3,829,890   |       | 4,666,087   |       |
|                                                                                                                              |       | 16,350,445  |       | 17,501,051  |       |
| Deficit from  restatement                                                                                                         |       | (14,372,999 | )          | (14,577,180 | )          |
| Derivative  financial instruments                                                                                                 |       | 92          |       | 6,404       |       |
| Cumulative  effect of a change in an accounting principle for deferred income taxes and  employees’ statutory profit sharing |       | (218,116    | )          | (218,116    | )          |
| Retained  earnings (Note 13-B):                                                                                                   |       |        |       |        |       |
| Prior years                                                                                                                       |       | 9,903,142   |       | 10,658,371  |       |
| Net income for  the year                                                                                                          |       | 1,238,754   |       | 1,524,738   |       |
| Foreign currency  translation adjustments (Note 13-D)                                                                             |       | (1,165,485  | )          | (769,475    | )          |
| Total majority  interest                                                                                                          |       | 11,735,833  |       | 14,125,793  |       |
| Minority interest                                                                                                                 |       | 2,989,119   |       | 2,922,348   |       |
| **Total  stockholders’ equity**                                                                                              |       | 14,724,952  |       | 17,048,141  |       |
| ** **                                                                                                                        |       | Ps.         | 27,966,583 |        | Ps.        | 30,237,505 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-3

----

**GRUMA, S.A.B. DE C.V. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31,2004, 2005 AND 2006**

**(Expressed in thousands ofMexican pesos of constant purchasing power as of**

**December 31, 2006, except shareand per share amounts)**

**(Notes 1 and 3)**
| ** **                                                                                                                                                                                     | ** ** | **2004**    | ** **       | **2005**    | ** ** | **2006**         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------------|-------------|------------|------------------|------------|
|                                                                                                                                                                                           | ** ** | ** **  |             |        |       |             |       |
| Net sales                                                                                                                                                                                      |       | Ps.         |  25,799,740 |        | Ps.        |  27,862,898 |       | Ps. |  30,654,178 |   |
| Cost of sales                                                                                                                                                                                  |       | (16,552,730 | )                | (18,197,650 | )          | (19,974,480      | )          |
| Gross profit                                                                                                                                                                                   |       | 9,247,010   |             | 9,665,248   |       | 10,679,698       |       |
|                                                                                                                                                                                           |       |        |             |        |       |             |       |
| Selling, general and  administrative expenses                                                                                                                                                  |       | (7,244,431  | )                | (8,032,119  | )          | (8,897,173       | )          |
| Operating income                                                                                                                                                                               |       | 2,002,579   |             | 1,633,129   |       | 1,782,525        |       |
|                                                                                                                                                                                           |       |        |             |        |       |             |       |
| Comprehensive financing  cost, net:                                                                                                                                                            |       |        |             |        |       |             |       |
| Interest expense                                                                                                                                                                               |       | (502,436    | )                | (596,588    | )          | (573,579         | )          |
| Loss from valuation  and liquidation of financial instruments                                                                                                                                  |       | —      |             | —      |       | (139,694         | )          |
| Interest income                                                                                                                                                                                |       | 235,772     |             | 55,739      |       | 78,099           |       |
| Monetary  position gain, net                                                                                                                                                                   |       | 250,668     |             | 314,385     |       | 320,499          |       |
| Foreign exchange  loss, net (Note 16-A)                                                                                                                                                        |       | (53,003     | )                | (53,476     | )          | (18,441          | )          |
|                                                                                                                                                                                           |       | (68,999     | )                | (279,940    | )          | (333,116         | )          |
| Other expenses, net  (Note 14)                                                                                                                                                                 |       | (296,091    | )                | (147,134    | )          | (14,068          | )          |
| Income before  income taxes, employees’ statutory profit sharing, equity in earnings of  associated companies, cumulative effect of change in accounting principle and  minority interest |       | 1,637,489   |             | 1,206,055   |       | 1,435,341        |       |
| Income taxes (Note 15):                                                                                                                                                                        |       |        |             |        |       |             |       |
| Current                                                                                                                                                                                        |       | (418,177    | )                | (548,584    | )          | (338,869         | )          |
| Deferred                                                                                                                                                                                       |       | (369,864    | )                | 162,159     |       | (72,680          | )          |
|                                                                                                                                                                                           |       | (788,041    | )                | (386,425    | )          | (411,549         | )          |
| Employees’ statutory  profit sharing (Note 15):                                                                                                                                           |       |        |             |        |       |             |       |
| Current                                                                                                                                                                                        |       | (15,558     | )                | (29,175     | )          | (48,720          | )          |
| Deferred                                                                                                                                                                                       |       | 6,027       |             | 8,487       |       | 16,019           |       |
|                                                                                                                                                                                           |       | (9,531      | )                | (20,688     | )          | (32,701          | )          |
| Income before  equity in earnings of associated companies, cumulative effect of change in  accounting principle and minority interest                                                          |       | 839,917     |             | 798,942     |       | 991,091          |       |
| Equity in earnings of  associated companies (Note 6)                                                                                                                                           |       | 291,313     |             | 650,232     |       | 612,626          |       |
| Cumulative effect of  change in accounting principle, net of taxes of Ps.21,832                                                                                                                |       | —      |             | (56,536     | )          | —           |       |
| Income before  minority interest                                                                                                                                                               |       | 1,131,230   |             | 1,392,638   |       | 1,603,717        |       |
| Minority interest                                                                                                                                                                              |       | (178,230    | )                | (153,884    | )          | (78,979          | )          |
| Majority net  income for the year                                                                                                                                                              |       | Ps.         | 953,000          |        | Ps.        | 1,238,754        |       | Ps. | 1,524,738 |   |
|                                                                                                                                                                                           |       |        |             |        |       |             |       |
| Earnings per share (in  pesos):                                                                                                                                                                |       |        |             |        |       |             |       |
| Income from  continuing operations                                                                                                                                                             |       | Ps.         | 2.12             |        | Ps.        | 2.87             |       | Ps. | 3.18 |   |
| Cumulative effect  of change in accounting principle                                                                                                                                           |       | —      |             | (0.13       | )          | —           |       |
| Net income                                                                                                                                                                                     |       | Ps.         | 2.12             |        | Ps.        | 2.74             |       | Ps. | 3.18 |   |
| Weighted average shares  outstanding (thousands)                                                                                                                                               |       | 450,306     |             | 451,446     |       | 480,007          |       |

 

The accompanyingnotes are an integral part of these consolidated financial statements

F-4

----

**GRUMA, S.A.B. DE C.V. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDER ́S EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2004, 2005 AND 2006**

**(Expressedin thousands of Mexican pesos of constant purchasing power as of December 31, 2006, except share and per share amounts)(Notes 1 and 3)**
| ** **                                              | ** ** | **Common stock  (Note 13-A)** | ** ** | ** ** | ** ** | ** **                       | ** ** | **Derivative**                     | ** ** | **Cumulative effect of  deferred income taxes** | ** **  |
|---------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|----------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------|-------------|
| ** **                                              | ** ** | **Number of  shares  (thousands)** | ** ** | **Amount** | ** ** | **Additional  paid-in  capital** | ** ** | **Deficit from  restatement** | ** ** | **financial  instru-  ments**                                       | ** **  | **and employee’s  statutory profit  sharing** | ** ** |
| **Balances at December 31, 2003**                       |       | 450,133                                 |       | Ps.        | 12,332,416 |                             | Ps.        |  3,640,993                    |       | Ps.                                                                 | (13,485,462 | ) | Ps. | — |   | Ps. | (218,116 | ) |
|                                                    |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Appropriation of prior  year net income                 |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Contributions by  minority interest                     |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Decrease of minority  interest                          |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Dividends paid ($0.78  per share)                       |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Net purchases and sales  of Company’s common stock |       | 1,916                                   |       | 175,529    |       | 174,614                          |       |                               |       |                                                                |        |   |   |
|                                                    |       | 1,916                                   |       | 175,529    |       | 174,614                          |       | —                             |       | —                                                              |        | — |   |
| Comprehensive income  (loss):                           |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Recognition  of inflation effects for the year          |       |                                    |       |       |       |                             |       | (623,456                           | )          |                                                                |        |   |   |
| Foreign  currency translation adjustments               |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Derivative  financial instruments, net of taxes         |       |                                    |       |       |       |                             |       |                               |       | 21,075                                                              |        |   |   |
| Net  income for the year                                |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Comprehensive  income of the year                       |       | —                                  |       | —     |       | —                           |       | (623,456                           | )          | 21,075                                                              |        | — |   |
|                                                    |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| **Balances at December 31, 2004**                       |       | 452,049                                 |       | 12,507,945 |       | 3,815,607                        |       | (14,108,918                        | )          | 21,075                                                              |        | (218,116 | ) |
| ** **                                              |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Appropriation of prior  year net income                 |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Decrease of minority interest                           |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Dividends paid (Ps. 0.85  per share)                    |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Net purchases and sales  of Company’s common stock |       | 501                                     |       | 12,610     |       | 14,283                           |       |                               |       |                                                                |        |   |   |
|                                                    |       | 501                                     |       | 12,610     |       | 14,283                           |       |                               |       |                                                                |        |   |   |
| Comprehensive  income (loss):                           |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Recognition  of inflation effects for the year          |       |                                    |       |       |       |                             |       | (264,081                           | )          |                                                                |        |   |   |
| Foreign  currency translation adjustments               |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Derivative  financial instruments, net of taxes         |       |                                    |       |       |       |                             |       |                               |       | (20,983                                                             | )           |   |   |
| Net  income for the year                                |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| Comprehensive  income of the year                       |       |                                    |       |       |       |                             |       | (264,081                           | )          | (20,983                                                             | )           |   |   |
|                                                    |       |                                    |       |       |       |                             |       |                               |       |                                                                |        |   |   |
| **Balances at December 31, 2005**                       |       | 452,550                                 |       | 12,520,555 |       | 3,829,890                        |       | (14,372,999                        | )          | 92                                                                  |        | (218,116 | ) |
|                                                         |            |                                         |            |            |            |                                  |            |                                    |            |                                                                     |             |  |  |  |  |  |  |  |

 
| ** **                                              | ** ** | **Retained earnings  (Note 13-B)** | ** ** | **Foreign  currency  translation**          | ** ** | **Total**                         | ** ** | ** **             | ** **     | **Total**              | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------|------------|------------------------|----------------|------------------------|------------|
| ** **                                              | ** ** | **Prior  years**                             | ** ** | **Net income  for the year** | ** ** | **adjustments  (Note 13-D)** | ** ** | **majority  interest** | ** **     | **Minority  interest** | ** ** | **stockholders'  equity** | ** ** |
| **Balances at December 31, 2003**                       |       | Ps.                                          | 8,412,757  |                                        | Ps.        |  516,883                     |       | Ps.                    |  (648,954 | )                      | Ps.        | 10,550,517 |   | Ps. |  3,001,151 |   | Ps. | 13,551,668 |   |
|                                                    |       |                                         |       |                                        |       |                              |       |                   |           |                   |       |   |   |
| Appropriation  of prior year net income                 |       | 516,883                                      |       | (516,883                                    | )          |                              |       | —                 |           |                   |       | — |   |
| Contributions  by minority interest                     |       |                                         |       |                                        |       |                              |       |                   |           | 97,168                 |       | 97,168 |   |
| Decrease  of minority interest                          |       |                                         |       |                                        |       |                              |       |                   |           | (30,532                | )          | (30,532 | ) |
| Dividends  paid ($0.78 per share)                       |       | (350,607                                     | )          |                                        |       |                              |       | (350,607               | )              | (233,431               | )          | (584,038 | ) |
| Net  purchases and sales of Company’s common stock |       | (44,941                                      | )          |                                        |       |                              |       | 305,202                |           |                   |       | 305,202 |   |
|                                                    |       | 121,335                                      |       | (516,883                                    | )          | —                            |       | (45,405                | )              | (166,795               | )          | (212,200 | ) |
| Comprehensive income  (loss):                           |       |                                         |       |                                        |       |                              |       |                   |           |                   |       |   |   |
| Recognition  of inflation effects for the year          |       | 334,168                                      |       |                                        |       |                              |       | (289,288               | )              | 15,300                 |       | (273,988 | ) |
| Foreign  currency translation adjustments               |       |                                         |       |                                        |       | 4,820                             |       | 4,820                  |           | (17,207                | )          | (12,387 | ) |
| Derivative  financial instruments, net of taxes         |       |                                         |       |                                        |       |                              |       | 21,075                 |           |                   |       | 21,075 |   |
| Net  income for the year                                |       |                                         |       | 953,000                                     |       |                              |       | 953,000                |           | 178,230                |       | 1,131,230 |   |
| Comprehensive  income of the year                       |       | 334,168                                      |       | 953,000                                     |       | 4,820                             |       | 689,607                |           | 176,323                |       | 865,930 |   |
|                                                    |       |                                         |       |                                        |       |                              |       |                   |           |                   |       |   |   |
| **Balances at December 31, 2004**                       |       | 8,868,260                                    |       | 953,000                                     |       | (644,134                          | )          | 11,194,719             |           | 3,010,679              |       | 14,205,398 |   |
| ** **                                              |       |                                         |       |                                        |       |                              |       |                   |           |                   |       |   |   |
| Appropriation of prior  year net income                 |       | 953,000                                      |       | (953,000                                    | )          |                              |       | —                 |           |                   |       | — |   |
| Decrease of minority  interest                          |       |                                         |       |                                        |       |                              |       | —                 |           | (1,566                 | )          | (1,566 | ) |
| Dividends paid (Ps. 0.85  per share)                    |       | (381,441                                     | )          |                                        |       |                              |       | (381,441               | )              | (175,828               | )          | (557,269 | ) |
| Net purchases and sales  of Company’s common stock |       | (3,994                                       | )          |                                        |       |                              |       | 22,899                 |           |                   |       | 22,899 |   |
|                                                    |       | 567,565                                      |       | (953,000                                    | )          |                              |       | (358,542               | )              | (177,394               | )          | (535,936 | ) |
| Comprehensive income  (loss):                           |       |                                         |       |                                        |       |                              |       |                   |           |                   |       |   |   |
| Recognition  of inflation effects for the year          |       | 467,317                                      |       |                                        |       |                              |       | 203,236                |           | 48,587                 |       | 251,823 |   |
| Foreign  currency translation adjustments               |       |                                         |       |                                        |       | (521,351                          | )          | (521,351               | )              | (36,598                | )          | (557,949 | ) |
| Derivative  financial instruments, net of taxes         |       |                                         |       |                                        |       |                              |       | (20,983                | )              | (10,039                | )          | (31,022 | ) |
| Net  income for the year                                |       |                                         |       | 1,238,754                                   |       |                              |       | 1,238,754              |           | 153,884                |       | 1,392,638 |   |
| Comprehensive  income of the year                       |       | 467,317                                      |       | 1,238,754                                   |       | (521,351                          | )          | 899,656                |           | 155,834                |       | 1,055,490 |   |
|                                                    |       |                                         |       |                                        |       |                              |       |                   |           |                   |       |   |   |
| **Balances at December 31, 2005**                       |       | 9,903,142                                    |       | 1,238,754                                   |       | (1,165,485                        | )          | 11,735,833             |           | 2,989,119              |       | 14,724,952 |   |
|                                                         |            |                                              |            |                                             |            |                                   |            |                        |                |                        |            |  |  |  |  |  |  |  |  |

 

F-5

----

 
| ** **                                              | ** ** | **Common stock  (Note 13-A)** | ** ** | ** ** | ** ** | ** **                       | ** ** | **Derivative**                     | ** ** | **Cumulative effect   of deferred income  taxes and** | ** **        |
|---------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------|-------------------|
| ** **                                              | ** ** | **Number of  shares  (thousands)** | ** ** | **Amount** | ** ** | **Additional  paid-in  capital** | ** ** | **Deficit from  restatement** | ** ** | **financial  instru-  ments**                                                  | ** **        | **employee’s  statutory profit  sharing** | ** ** |
| Appropriation of prior  year net income                 |       |                                    |       |       |       |                             |       |                               |       |                                                                           |              |   |   |
| Stock issuance                                          |       | 30,000                                  |       | 314,254    |       | 833,882                          |       |                               |       |                                                                           |              |   |   |
| Contributions by  minority interest                     |       |                                    |       |       |       |                             |       |                               |       |                                                                           |              |   |   |
| Dividends paid (Ps. 0.88  per share)                    |       |                                    |       |       |       |                             |       |                               |       |                                                                           |              |   |   |
| Net purchases and sales  of Company’s common stock |       |                                    |       | 155        |       | 2,315                            |       |                               |       |                                                                           |              |   |   |
|                                                    |       | 30,000                                  |       | 314,409    |       | 836,197                          |       |                               |       |                                                                           |              |   |   |
| Comprehensive income  (loss):                           |       |                                    |       |       |       |                             |       |                               |       |                                                                           |              |   |   |
| Recognition of  inflation effects for the year          |       |                                    |       |       |       |                             |       | (204,181                           | )          |                                                                           |              |   |   |
| Foreign currency  translation adjustments               |       |                                    |       |       |       |                             |       |                               |       |                                                                           |              |   |   |
| Derivative  financial instruments, net of taxes         |       |                                    |       |       |       |                             |       |                               |       | 6,312                                                                          |              |   |   |
| Net income for  the year                                |       |                                    |       |       |       |                             |       |                               |       |                                                                           |              |   |   |
| Comprehensive  income for the year                      |       |                                    |       |       |       |                             |       | (204,181                           | )          | 6,312                                                                          |              |   |   |
| **Balances at December 31, 2006**                       |       | 482,550                                 |       | Ps.        | 12,834,964 |                             | Ps.        |  4,666,087                    |       | Ps.                                                                            |  (14,577,180 | ) | Ps. | 6,404 |   | Ps. | (218,116 | ) |
|                                                         |            |                                         |            |            |            |                                  |            |                                    |            |                                                                                |                   |  |  |  |  |  |  |  |

 
| ** **                                              | ** ** | **Retained earnings  (Note 13-B)** | ** ** | **Foreign  currency  translation**          | ** ** | ** **                        | ** ** | ** **                        | ** ** | **Total**              | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **Prior  years**                             | ** ** | **Net income  for the year** | ** ** | **adjustments  (Note 13-D)** | ** ** | **Total  majority interest** | ** ** | **Minority  interest** | ** ** | **stockholder’s  equity** | ** ** |
| Appropriation of prior  year net income                 |       | 1,238,754                                    |       | (1,238,754                                  | )          |                              |       | —                            |       |                   |       | — |   |
| Stock issuance                                          |       |                                         |       |                                        |       |                              |       | 1,148,136                         |       |                   |       | 1,148,136 |   |
| Contributions by  minority interest                     |       |                                         |       |                                        |       |                              |       | —                            |       | 94,024                 |       | 94,024 |   |
| Dividends paid (Ps. 0.88  per share)                    |       | (424,394                                     | )          |                                        |       |                              |       | (424,394                          | )          | (235,075               | )          | (659,469 | ) |
| Net purchases and sales  of Company’s common stock |       | 144                                          |       |                                        |       |                              |       | 2,614                             |       |                   |       | 2,614 |   |
|                                                    |       | 814,504                                      |       | (1,238,754                                  | )          |                              |       | 726,356                           |       | (141,051               | )          | 585,305 |   |
| Comprehensive income  (loss):                           |       |                                         |       |                                        |       |                              |       |                              |       |                   |       |   |   |
| Recognition of  inflation effects for the year          |       | (59,275                                      | )          |                                        |       |                              |       | (263,456                          | )          | 61,453                 |       | (202,003 | ) |
| Foreign currency  translation adjustments               |       |                                         |       |                                        |       | 396,010                           |       | 396,010                           |       | (76,191                | )          | 319,819 |   |
| Derivative  financial instruments, net of taxes         |       |                                         |       |                                        |       |                              |       | 6,312                             |       | 10,039                 |       | 16,351 |   |
| Net income for  the year                                |       |                                         |       | 1,524,738                                   |       |                              |       | 1,524,738                         |       | 78,979                 |       | 1,603,717 |   |
| Comprehensive  income for the year                      |       | (59,275                                      | )          | 1,524,738                                   |       | 396,010                           |       | 1,663,604                         |       | 74,280                 |       | 1,737,884 |   |
| **Balances at December 31, 2006**                       |       | Ps.                                          | 10,658,371 |                                        | Ps.        | 1,524,738                         |       | Ps.                               | (769,475   | )                      | Ps.        | 14,125,793 |   | Ps. | 2,922,348 |   | Ps. | 17,048,141 |   |
|                                                         |            |                                              |            |                                             |            |                                   |            |                                   |            |                        |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-6

----

**GRUMA, S.A.B. DE C.V. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEARS ENDED DECEMBER 31,2004, 2005 AND 2006**

**(Expressed in thousands of Mexican pesos ofconstant purchasing power as of December 31, 2006)**
| ** **                                                                                            | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Operating activities:                                                                                 |       |       |       |       |       |       |       |
| Majority net  income for the year                                                                     |       | Ps.        | 953,000    |       | Ps.        | 1,238,754  |       | Ps. | 1,524,738 |   |
| Minority  interest                                                                                    |       | 178,230    |       | 153,884    |       | 78,979     |       |
| Consolidated net  income                                                                              |       | 1,131,230  |       | 1,392,638  |       | 1,603,717  |       |
|                                                                                                  |       |       |       |       |       |       |       |
| Adjustments to  reconcile consolidated net income to net resources provided by operating  activities: |       |       |       |       |       |       |       |
| Depreciation and  amortization                                                                        |       | 1,089,535  |       | 1,159,940  |       | 1,202,078  |       |
| Impairment of long-lived  assets                                                                      |       | 235,049    |       | 41,212     |       | 465,608    |       |
| Equity in  earnings of associated companies, net of dividends received                                |       | (234,170   | )          | (577,761   | )          | (534,680   | )          |
| Deferred income  taxes and employees’ statutory profit sharing                                   |       | 363,832    |       | (170,647   | )          | 56,661     |       |
| Net gain from sale  of subsidiaries’ shares                                                      |       | —     |       | —     |       | (137,971   | )          |
| Net gain from  sale of associated company’s shares                                               |       | —     |       | —     |       | (380,572   | )          |
| Write-off of  debt issuance costs due to early extinguishment of debt                                 |       | 24,558     |       | —     |       | —     |       |
| Cumulative  effect of change in accounting principle, net of taxes                                    |       | —     |       | 56,536     |       | —     |       |
| Seniority  premiums and other long-term accrued liabilities                                           |       | 9,086      |       | 45,986     |       | 9,015      |       |
|                                                                                                  |       | 2,619,120  |       | 1,947,904  |       | 2,283,856  |       |
| Changes in  working capital:                                                                          |       |       |       |       |       |       |       |
| Restricted cash                                                                                       |       | 668        |       | 503        |       | —     |       |
| Accounts  receivable, net                                                                             |       | (536,867   | )          | (141,425   | )          | (1,093,398 | )          |
| Inventories                                                                                           |       | (547,672   | )          | 88,032     |       | 132,870    |       |
| Prepaid expenses                                                                                      |       | (31,490    | )          | (37,500    | )          | (55,051    | )          |
| Trade accounts  payable                                                                               |       | 545,827    |       | 530,193    |       | 195,478    |       |
| Accrued  liabilities and other accounts payables                                                      |       | (30,107    | )          | (496,172   | )          | 420,117    |       |
| Income taxes and  employees’ statutory profit sharing payable                                    |       | 6,936      |       | (17,249    | )          | (10,141    | )          |
|                                                                                                  |       | (592,705   | )          | (73,618    | )          | (410,125   | )          |
| Net resources  provided by operating activities                                                       |       | 2,026,415  |       | 1,874,286  |       | 1,873,731  |       |
|                                                                                                  |       |       |       |       |       |       |       |
| Financing activities:                                                                                 |       |       |       |       |       |       |       |
| Proceeds from  bank loans and long-term debt                                                          |       | 4,431,040  |       | 2,485,214  |       | 2,335,863  |       |
| Repayment of  bank loans and long-term debt                                                           |       | (4,619,256 | )          | (2,014,461 | )          | (3,061,511 | )          |
| Proceeds from  (repayment of) long-term notes payable                                                 |       | —     |       | 393,747    |       | (48,213    | )          |
| Proceeds from  stock issuance                                                                         |       | —     |       | —     |       | 1,148,136  |       |
| Contributions  (decrease) by minority interest                                                        |       | 66,636     |       | (1,566     | )          | 94,024     |       |
| Net purchases  and sales of Company’s common stock and derivative financial operations           |       | 326,277    |       | (8,123     | )          | 18,965     |       |
| Dividends paid                                                                                        |       | (584,038   | )          | (557,269   | )          | (659,469   | )          |
| Other                                                                                                 |       | (30,978    | )          | (76,977    | )          | 12,042     |       |
| Net resources  (used in) provided by financing activities                                             |       | (410,319   | )          | 220,565    |       | (160,163   | )          |
|                                                                                                  |       |       |       |       |       |       |       |
| Investing activities:                                                                                 |       |       |       |       |       |       |       |
| Acquisition of  property, plant and equipment                                                         |       | (930,083   | )          | (1,289,188 | )          | (2,221,388 | )          |
| Acquisition of  subsidiaries, net of cash acquired                                                    |       | (396,628   | )          | (1,104,611 | )          | (570,587   | )          |
| Sale of  property, plant and equipment                                                                |       | 196,037    |       | 180,855    |       | 748,590    |       |
| Intangible  assets                                                                                    |       | (379,500   | )          | (10,505    | )          | (15,694    | )          |
| Resources  received from sale of subsidiaries’ shares                                            |       | —     |       | —     |       | 137,971    |       |
| Resources  received from sale of associated company’s shares                                     |       | —     |       | —     |       | 588,854    |       |
| Other                                                                                                 |       | 12,290     |       | (31,140    | )          | (152,122   | )          |
| Net resources  used in investing activities                                                           |       | (1,497,884 | )          | (2,254,589 | )          | (1,484,376 | )          |
| Net increase (decrease)  in cash and temporary investments                                            |       | 118,212    |       | (159,738   | )          | 229,192    |       |
| Cash and temporary  investments at beginning of year                                                  |       | 383,123    |       | 501,335    |       | 341,597    |       |
| Cash and temporary investments at end of year                                                         |       | Ps.        | 501,335    |       | Ps.        | 341,597    |       | Ps. | 570,789 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-7

----

**GRUMA,S.A.B. DE C.V. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31,2004, 2005 AND 2006**

**(Expressed in thousands of Mexican pesos ofconstant purchasing power as of December 31, 2006, except where otherwise indicated)**

**1.****             ENTITY AND NATURE OFBUSINESS**

Gruma, S.A.B. de C.V. (formerly Gruma, S.A. de C.V.),a Mexican corporation, is a holding company whose subsidiaries are located inMexico, the United States of America, Central America, Venezuela, Europe, Asiaand Oceania. These subsidiaries are primarily engaged in manufacturing anddistributing corn flour, tortillas, wheat flour and other related products.Gruma, S.A.B. de C.V. and its subsidiaries are herein collectively referred toas “the Company”.

In accordance with the Stock Market Law issued inDecember 30, 2005, the shareholders agreed to modify the Company’s name ofGruma S.A. de C.V. to Gruma, S.A.B. de C.V, through an Extraordinary GeneralMeeting held in November 30, 2006. Additionally, certain bylaws were modifiedto include the new integration, organization and performance of its socialbodies as well as the new rights for minority shareholders.

The attached consolidated financial statements andnotes were authorized on June 25, 2007 by Juan Quiroga García, Chief CorporateOfficer and Homero Huerta Moreno, Chief Administrative Officer.

**2.****             NEW OPERATIONS**

The results of operationsof the new investments have been consolidated since their acquisition dates.

The investments carriedout during 2006 are described as follows:

·      The Company, through itssubsidiary Gruma Corporation, completed two acquisitions in Australia withinthe Victoria province, which are related to the production and distribution oftortilla. In January 2006, all issued and outstanding shares of RositasInvestments Pty, Ltd were acquired for a total of Ps.142,779 (U.S.$13,208,000).In March 2006, the Company purchased the assets related to tortilla productionfrom Oz-Mex Foods Pty, Ltd for Ps.41,845 (U.S.$3,871,000).

The estimated fair valuesof the net assets acquired are summarized as follows:
| Current assets                  |   | Ps.     | 44,082  |   |
|---------------------------------|--------|---------|---------|--------|
| Property, plant  and equipment  |   | 62,343  |    |
| Excess of cost  over book value |   | 108,520 |    |
| Deferred income  taxes          |   | 1,966   |    |
| Total assets acquired           |   | 216,911 |    |
|                            |   |    |    |
| Current  liabilities            |   | 32,287  |    |
| Net assets  acquired            |   | Ps.     | 184,624 |   |

 

·      In September 2006, theCompany acquired in England all issued and outstanding shares of Pride ValleyFoods Ltd for a total of Ps.370,418 (U.S.$32,864,000). This business producesand distributes tortilla, pita bread and Indian bread.

The net assets acquiredare summarized as follows:
| Current assets                  |   | Ps.     | 75,031  |   |
|---------------------------------|--------|---------|---------|--------|
| Property, plant  and equipment  |   | 149,231 |    |
| Excess of cost  over book value |   | 310,648 |    |
| Total assets acquired           |   | 534,910 |    |
|                            |   |    |    |
| Current  liabilities            |   | 139,754 |    |
| Deferred income  taxes          |   | 24,738  |    |
| Net assets  acquired            |   | Ps.     | 370,418 |   |

 

F-8

----

The investments carried out during 2005 are describedas follows:

·      InMay 2005, the Company, through its subsidiary Gruma Corporation, entered intoan asset purchase agreement to acquire from CHS Inc., located in Minnesota,Texas and Arizona in the United States of America, all the assets related tothe production and distribution of tortilla and related products. The Companypaid Ps.437,870 (U.S.$39,437,000).

The estimated fair values of the net assets acquiredare summarized as follows:
| Inventories                              |   | Ps.     | 25,770  |   |
|------------------------------------------|--------|---------|---------|--------|
| Property, plant  and equipment           |   | 220,784 |    |
| Excess of cost  over book value          |   | 99,161  |    |
| Trade names and  other intangible assets |   | 92,155  |    |
| Total assets  acquired                   |   | Ps.     | 437,870 |   |
|                                          |        |         |         |        |  |

 

·      InSeptember 2005, the Company, through its subsidiary Gruma Corporation, acquiredall issued and outstanding shares of La Tapatía Norcal, Inc. for Ps.52,462(U.S.$4,725,000). According to the terms of the agreement, Gruma Corporationpaid an initial amount of Ps.8,327 (U.S.$750,000) with a final payment for theamount of Ps.44,135 (U.S.$3,975,000) due in January 2006. La Tapatíamanufactures and distributes tortillas, chips and related products in SanFrancisco, California. The excess of cost over book value is for an amount ofPs.28,002.

The estimated fair values of the net assets acquiredare summarized as follows:
| Current assets                           |   | Ps.    | 18,076 |   |
|------------------------------------------|--------|--------|--------|--------|
| Property, plant  and equipment           |   | 19,308 |   |
| Excess of cost  over book value          |   | 28,002 |   |
| Trade names and  other intangible assets |   | 22,028 |   |
| Other assets                             |   | 1,821  |   |
| Total assets acquired                    |   | 89,235 |   |
|                                     |   |   |   |
| Current portion  of long-term debt       |   | 15,178 |   |
| Other current  liabilities               |   | 16,488 |   |
| Deferred income  taxes                   |   | 5,107  |   |
| Net assets  acquired                     |   | Ps.    | 52,462 |   |

 

·      InAugust 2005, the Company, through its subsidiary Grupo Industrial Maseca, S.A.de C.V., acquired all issued and outstanding shares of Agroinsa de México, S.A.de C.V. and Agroindustrias Integradas del Norte, S.A. de C.V. for Ps.490,111(U.S.$43,100,000). The businesses acquired are Mexican companies that mainlyproduce corn and wheat flour. Under the terms of the agreement, GrupoIndustrial Maseca initially paid Ps.45,486 (U.S.$4,000,000) and has two notespayable for Ps.41,358 each (U.S.$3,637,000 each) due in August 2006 and 2007,and a third note for Ps.361,804 (U.S.$31,826,000) due in August 2008. The netassets acquired, adjusted to its fair value, and the notes payable have beenincluded in the consolidated financial statements. The legal status of thisacquisition with respect to the *Comisión Federal de Competencia*(“Federal Competition Commission” or “CFC”) is discussed in Note 12.

F-9

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The estimated fair values of the net assets acquiredare summarized as follows:
| Current assets                  |   | Ps.       | 300,033 |   |
|---------------------------------|--------|-----------|---------|--------|
| Property, plant  and equipment  |   | 608,066   |    |
| Excess of cost  over book value |   | 120,221   |    |
| Total assets acquired           |   | 1,028,320 |    |
|                            |   |      |    |
| Current  liabilities            |   | 342,717   |    |
| Deferred income  taxes          |   | 185,442   |    |
| Other long-term  liabilities    |   | 10,050    |    |
| Net assets  acquired            |   | Ps.       | 490,111 |   |

 

·      InDecember 2005, the Company, through its subsidiary Gruma Centroamérica, L.L.C.,acquired all issued and outstanding shares of Maíz Industrializado de C.A.,S.A. de C.V. for Ps.44,825 (2,005 million of Costa Rican colons).

The estimated fair values of the net assets acquiredare summarized as follows:
| Current assets                  |   | Ps.    | 41,657 |   |
|---------------------------------|--------|--------|--------|--------|
| Property, plant  and equipment  |   | 7,745  |   |
| Excess of cost  over book value |   | 4,377  |   |
| Deferred income  tax asset      |   | 6,317  |   |
| Other assets                    |   | 2,291  |   |
| Total assets acquired           |   | 62,387 |   |
|                            |   |   |   |
| Current liabilities             |   | 17,562 |   |
| Net assets  acquired            |   | Ps.    | 44,825 |   |

 

**3.****             SIGNIFICANTACCOUNTING POLICIES**

A)     FINANCIAL REPORTING STANDARDS

Starting January 1, 2006, the Company adopted theprovisions published by the Mexican Financial Reporting Standards Board (CINIF)which is responsible for regulating the development of accounting and reportingstandards in Mexico (“Mexican GAAP”). As a consequence, during the preparationof the attached consolidated financial statements, the following hierarchy asestablished by the CINIF was observed:

·    The Financial ReportingStandards (FRS) and the related interpretations issued by the CINIF.

·    Thestatements issued by the Accounting Principles Board of the Mexican Instituteof Public Accountants, which have not been modified, substituted or otherwisesuperseded by the new FRS.

·    TheInternational Financial Reporting Standards (IFRS) applicable on asupplementary basis.

Based on the criteria mentioned above, the Company applied theaccounting policies that are described below. A reconciliation from MexicanGAAP to United States generally accepted accounting principles (“U.S. GAAP”) isincluded in Note 22.

F-10

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B)      BASIS OF CONSOLIDATION

The consolidated financial statements include theaccounts of Gruma, S.A.B. de C.V. and all of those subsidiaries in which themajority of the common shares is owned directly or indirectly by the Company orotherwise has control. All significant intercompany balances and transactionshave been eliminated from the consolidated financial statements.

As of December 31, 2005 and 2006 the main subsidiariesincluded in the consolidation are the following:
|                                                                                | ** ** | **% of ownership** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                     | ** ** | **2006** | ** ** |
| Gruma  Corporation and subsidiaries                                            |       | 100.00                       |       | 100.00 |   |
| Grupo Industrial  Maseca, S.A.B. de C.V. and subsidiaries                      |       | 83.18                        |       | 83.18 |   |
| (1) Molinos  Nacionales, C.A. (Note 18-C)                                      |       | 95.00                        |       | 83.84 |   |
| (1)Derivados de  Maíz Seleccionado, C.A. (Note 18-C)                      |       | 50.00                        |       | 57.00 |   |
| Molinera de  México, S.A. de C.V. and subsidiaries                        |       | 60.00                        |       | 60.00 |   |
| Gruma  Centroamérica, L.L.C. and subsidiaries                             |       | 100.00                       |       | 100.00 |   |
| Productos y  Distribuidora Azteca, S.A. de C.V. and subsidiaries               |       | 100.00                       |       | 100.00 |   |
| Investigación de  Tecnología Avanzada, S.A. de C.V. and subsidiaries |       | 100.00                       |       | 100.00 |   |

 

----

(1) On April 6, 2006 the Company signed an agreementto sell and buy interests of Molinos Nacionales, C.A. (Monaca) and Derivados deMaiz Seleccionado, C.A. (Demaseca), as follows:

·      TheCompany agreed to sell, in a series of installments, 40% of its ownership inthe common stock of Monaca, a subsidiary located in Venezuela, forU.S.$65,600,000, with reserve of title and for a period no longer than December2007. On May 31, 2006, the Company purchased 2% of the common stock of Monacafrom Archer Daniels Midland (ADM) for a total of U.S.$3,289,000. Thus, once thesale in installments ends, the interest of the Company in Monaca will be of57%. As of December 31, 2006 the Company owns 83.84% of Monaca.

·      Atthe same date, on April 6, 2006, the Company purchased 10% of the common stockof Demaseca for U.S.$2,590,000. On August 16, 2006, the Company sold 3% of thecommon stock of Demaseca to ADM for U.S.$777,000. Thus, after thesetransactions, the interest of the Company in Demaseca is 57%.

C)      USE OF ESTIMATES

The preparation of thefinancial statements in conformity with financial reporting standards requiresmanagement to make certain estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets andliabilities at the dates of the financial statements, and reported amounts ofrevenues, costs and expenses for the reporting years. Actual results coulddiffer from those estimates.

F-11

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D)     FOREIGN CURRENCY TRANSLATION

·      Financialstatements of foreign subsidiaries have been restated to recognize the effectsof inflation and translated to Mexican pesos of constant purchasing power as ofDecember 31, 2006, as follows:

·      Financial statements arerestated to year-end constant local currencies following the provisions ofBulletin B-10, applying the General Consumer Price Index (“GCPI”) of theforeign country, which reflects the change in purchasing power of the localcurrency in which the subsidiary operates.

·      Assets, liabilities, incomeand expenses are translated to Mexican pesos by applying the exchange rate ineffect at each period end. Stockholders’ equity balances are translated byapplying the exchange rates in effect at the dates in which the contributionswere made and the income was generated. The effects of translation arerecognized as a component of equity entitled “Foreign Currency TranslationAdjustments” (Note 13-D).

E)      RECOGNITION OF THE EFFECTSOF INFLATION

The consolidated financial statements have been restated to recognizethe effects of inflation and are expressed in thousands of Mexican pesos ofconstant purchasing power as of December 31, 2006, determined as follows:

·      For comparability purposes,the financial statements as of and for the years ended December 31, 2004 and2005 have been restated using a weighted average restatement factor, whichconsiders the relative total sales contribution by country for that year andthe corresponding inflation and exchange rate fluctuations during that year.The difference between the restatement of stockholders’ equity according tothis methodology and the National Consumer Price Index (“NCPI”) is disclosed inretained earnings of prior years.

·      The consolidated statementsof income and of changes in stockholders’ equity for the year ended December31, 2006 were restated applying GCPI factors from the country in which thesubsidiary operates and applied to periods in which the transactions occurredand year-end.

·      The consolidated statementsof changes in financial position present, in Mexican pesos of constantpurchasing power, the resources provided by or used in operating, financing andinvesting activities.

·      The factors used torecognize the effects of inflation were the following:
| Year | ** ** | **Mexican  national  consumer  price index** | ** ** | **Weighted -  average  restatement  factor** | ** ** |
|------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| 2004 |       | 5.19                                              | %          | 1.17                                              | %          |
| 2005 |       | 3.33                                              | %          | (1.66                                             | )%         |
| 2006 |       | 4.05                                              | %          | 4.45                                              | %          |

 

F-12

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Themethodology used to restate financial statement items is as follows:

·      Restatement of non-monetaryassets

Inventoryand cost of sales are restated using the estimated replacement cost method. Asset forth in Note 3-J, property, plant and equipment, net, is restated usingthe NCPI factors, except for machinery and equipment of foreign origin, whichare restated on the basis of a specific index composed of the GCPI factor fromthe country of origin, to the related foreign currency amounts, and thentranslated to Mexican pesos using the year-end exchange rate.

·      Restatement of common stock,additional paid-in capital and retained earnings

This restatement is determined by applying NCPI factors from the dateson which capital stock and additional paid-in capital were contributed andearnings were generated or losses incurred; and it reflects the amountnecessary to maintain the stockholder’s investment at the original purchasingpower amounts. The restatement is included within the related stockholders’equity captions.

·      Deficit from restatement

Deficit from restatement primarily represents the difference betweenthe replacement cost values of non-monetary assets or specific indexrestatement of machinery and equipment of foreign origin, as described above,and the historical cost of those assets restated for inflation, as measured byNCPI for domestic subsidiaries and GCPI factors for foreign subsidiaries.

·      Monetary position gain

Monetary position gain represents the inflationary effect, measured byNCPI factors, on the net balance of monetary assets and liabilities at thebeginning of each month. The monetary position gain from foreign subsidiariesis measured by the relevant GCPI factor in its net monetary position, prior tothe translation to Mexican pesos.

F)      FOREIGN CURRENCYTRANSACTIONS

Foreign currency transactions are recorded at theexchange rate in effect on the dates the transactions are entered into andsettled. Monetary assets and liabilities denominated in foreign currencies aretranslated into Mexican pesos at the exchange rate in effect at the balancesheet dates. Currency exchange fluctuations from valuation and liquidation ofthese balances are credited or charged to income, except for the effects oftranslation arising from foreign currency denominated liabilities, which areaccounted for as a hedge of the Company’s net investment in foreignsubsidiaries, and are recognized as a component of equity under “Foreigncurrency translation adjustments”.

G)      TEMPORARY INVESTMENTS

Temporary investments are highly liquid investmentswith maturities of less than a year from the date of the financial statementsand are stated at cost, which approximates market value.

H)     INVENTORIES AND COST OF SALES

Inventories are stated at the lower of estimatedreplacement cost or market. Estimated replacement cost is mainly determined bythe last purchase price or the last production cost of the period. Cost ofsales is determined from replacement costs calculated for the month in whichinventories are sold.

F-13

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I)       INVESTMENT IN COMMON STOCK

Investments in common stock with ownership between 10%and 50% of the investees’ voting stock, or where the Company exercisessignificant influence, are accounted for by the equity method.

J)       PROPERTY, PLANT ANDEQUIPMENT, NET

Property, plant and equipment are restated using NCPIfactors, except for machinery and equipment of foreign origin, which arerestated on the basis of a specific index composed of the GCPI from the foreigncountry and the change in value of the Mexican peso against the foreigncurrency at the end of the year.

Depreciation expense is computed based on the net bookvalue less salvage value, using the straight-line method over the estimateduseful lives of the assets.  Useful livesof the assets are as follows:
|                            | ** ** | **Years** | ** ** |
|----------------------------|------------|-----------|------------|
| Buildings                  |       | 25-50     |       |
| Machinery and  equipment   |       | 5-25      |       |
| Software for  internal use |       | 3-7       |       |
| Leasehold improvements     |       | 10        |       |

 

Maintenance and repairsare expensed as incurred. Costs of major replacements and improvements arecapitalized. Comprehensive financing cost, including interest expense, foreigncurrency exchange fluctuations, and monetary position gain of the related debtfor major construction projects, are capitalized as part of the assets duringthe construction period. When assets are retired, sold or otherwise disposedof, any resulting gain or loss is included in “Other expenses, net”.

Direct internal andexternal costs related to the development and implementation of internal usesoftware are capitalized and amortized over the estimated useful life beginningwhen such software is ready for its intended use.

The value of these assetsis subject to impairment tests when certain events and circumstances arepresent as mentioned in Note 3-L.

K)     INTANGIBLE ASSETS, NET ANDEXCESS OF COST OVER BOOK VALUE OF SUBSIDIARIES ACQUIRED

Intangible assets andexcess of cost over book value of subsidiaries acquired are restated using NCPIand GCPI factors for foreign subsidiaries.

Expenses incurred onlyduring the development stage are capitalized as preoperating expenses. Thedevelopment stage ends when the project initiates its commercial activities.Research expenses are expensed as incurred Capitalized preoperating expensesare amortized using the straight-line method over a period not to exceed 12years.

Amortization expense ofother intangible assets with finite lives is computed on the restated valuesusing the straight-line method, over a period of 2 to 20 years, based on theirlimited lives due to contractual, economic, legal or regulatory factors.Indefinite-lived intangible assets are no longer amortized.

F-14

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Business combinations areaccounted under the purchase method. The excess of cost over book value ofbusiness combinations is no longer amortized but is tested annually forimpairment.

Debt issuance costs are capitalized and restated using theNCPI factors. Amortization expense is computed using the straight-line method over the term ofthe related debt.

The value of these assets, other than the excess ofcost over book value and indefinite-lived intangible assets, is subject toimpairment tests when certain events and circumstances are present as mentionedin Note 3-L.

L)      IMPAIRMENT OF LONG LIVEDASSETS

The Company performs impairment tests for itsproperty, plant and equipment; intangible assets; excess of cost over bookvalue of subsidiaries acquired and investment in common stock of associatedcompanies, when certain events or circumstances suggest that the carrying valueof these assets may not be recovered. Indefinite-lived intangible assets andexcess of cost over book value of subsidiaries acquired are tested forimpairment at least on an annual basis.

Fair value of assets held for use is determined usingthe higher between the discounted net cash flows expected from the assets andthe market price; an impairment loss is recorded to the extent that the netbook value exceeds the fair value of the assets. Market price is determinedusing market values or transactions with similar assets less costs to sell.

Fair value of assets to be disposed of is determinedusing the lower between book value and market price; an impairment loss isrecognized for the excess of book value over market price. These assets aresubsequently restated using NCPI factors and are no longer depreciated oramortized.

M)     LABOR OBLIGATIONS

Seniority premiums to which Mexican employees areentitled after 15 years of service are charged to income as determined byannual actuarial valuations. Until December 31, 2004 indemnities to which Mexicanemployees may be entitled in the case of dismissal or death, under certaincircumstances established by Mexican Labor Law, were expensed when they becamepayable.

Starting January 1, 2005 the Company adopted theprovisions of Bulletin D-3 “Labor Obligations”, which includes the regulationsfor the valuation, presentation and recognition of retirement benefits at theend of the employee labor relationship for causes other than restructuring.These effects are recognized through actuarial valuations using the projectedunit credit method. The net period cost amounted to Ps.14,195 which wasrecognized in income of the year. As of January 1, 2005 the initial adoption ofBulletin D-3 included the recognition of a liability and a charge to income ofPs.56,536 net of taxes, for the recognition of prior services for retirementbenefits at the end of the labor relationship. These effects mainly refer tothe recognition of indemnities to which employees are entitled in case ofdismissal.

F-15

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N)      FINANCIALINSTRUMENTS

Derivative financial instruments that are notconsidered for hedging purposes are recognized initially at cost andsubsequently at fair value, with changes in fair value recognized currently inincome.

For cash-flow hedge transactions, changes in the fairvalue of the derivative financial instrument are included as othercomprehensive income in stockholders’ equity, based on the evaluation of thehedge effectiveness, and are reclassified to income in the periods when thehedged commitment or projected transaction is effected. Fair value hedgecontracts as well as the hedged items attributable to the hedged risk arerecognized at fair value and their valuation gains or losses are recognized inincome.

O)      REVENUERECOGNITION

Revenue on product sales is recognized upon shipmentto, and acceptance by the Company’s customers or when the risk of ownership haspassed to the customers. Provisions for discounts and rebates to customers,returns and other adjustments are recognized in the same period that therelated sales are recorded and are based upon either historical estimates oractual terms.

P)      INCOMETAXES AND EMPLOYEES’ STATUTORY PROFIT SHARING

The Company recognizes in income the expense orbenefit from deferred income tax and employees’ statutory profit sharing forall temporary differences between the carrying values for financial reportingand tax values of assets and liabilities that are expected to reverse in thefuture. Valuation allowances are provided if, based upon the weight ofavailable evidence, it is more likely than not that some or all the deferredtax assets will not be realizable.

Q)     EARNINGS PER SHARE

Earnings per share are computed by dividing majority net income for theyear by the weighted average number of common shares outstanding during theyear.

R)      COMPREHENSIVE INCOME (LOSS)

The different componentsthat constitute earned (lost) capital for the year are presented in thestatement of changes in stockholders’ equity as comprehensive income (loss).

**4.****             ACCOUNTS RECEIVABLE,NET AND REFUNDABLE TAXES**

Accounts receivable, net are comprised of thefollowing as of December 31:
|                                   | ** ** | **2005**  | ** **      | **2006**  | ** ** |
|-----------------------------------|------------|-----------|-----------------|-----------|------------|
| Trade accounts  receivable        |       | Ps.       |  3,471,890 |      | Ps.        |  4,157,024 |   |
| Allowance for  doubtful accounts  |       | (148,423  | )               | (204,838  | )          |
|                              |       | 3,323,467 |            | 3,952,186 |       |
| Derivative  financial instruments |       | 42,944    |            | 237,584   |       |
| Employees                         |       | 26,822    |            | 32,019    |       |
| Other debtors                     |       | 212,180   |            | 317,923   |       |
|                              |       | Ps.       |  3,605,413 |      | Ps.        | 4,539,712 |   |

 

F-16

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Refundable taxes are comprised of the following as of December 31:
|                              | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Production and  services tax |       | Ps.      | 913        |     | Ps.        | 874 |   |
| Value-added tax              |       | 163,659  |       | 178,326  |       |
| Income tax                   |       | 377,353  |       | 394,488  |       |
|                         |       | Ps.      | 541,925    |     | Ps.        | 573,688 |   |

 

**5.****             INVENTORIES**

Inventories consisted of the following as of December31:
|                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Raw materials,  mainly corn and wheat |       | Ps.      | 2,576,413  |     | Ps.        | 2,425,955 |   |
| Finished  products                    |       | 391,130  |       | 468,129  |       |
| Materials and  spare parts            |       | 335,797  |       | 371,508  |       |
| Production in  process                |       | 96,778   |       | 110,633  |       |
| Advances to  suppliers                |       | 284,710  |       | 335,423  |       |
| Inventory in transit                  |       | 83,861   |       | 109,657  |       |
|                                  |       | Ps.      | 3,768,689  |     | Ps.        | 3,821,305 |   |

**6.****             INVESTMENT IN COMMONSTOCK OF ASSOCIATED COMPANIES**

Investment in common stock of associated companies consists of theinvestment in common stock of Grupo Financiero Banorte, S.A. de C.V. and subsidiaries(“GFNorte”) and Harinera de Monterrey, S.A. de C.V. which produces wheat flourand related products in Mexico.

These investments, accounted for by the equity method, are comprised ofthe following as of December 31:
|                                      | ** ** | **2005** | ** ** | **2006** | ** ** | **Ownership as of  December 31,  2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|--------------------------------------------------------|------------|
|                                 |       |     |       |     |       |                                                   |       |
| GFNorte                              |       | Ps.      | 2,323,955  |     | Ps.        | 2,593,201                                              |       | 10.0024 | % |
| Harinera de  Monterrey, S.A. de C.V. |       | 129,116  |       | 129,541  |       | 40                                                     | %          |
|                                 |       | Ps.      | 2,453,071  |     | Ps.        | 2,722,742                                              |       |   |   |

 

During 2006, the Company sold through the Mexican Stock Exchange atotal of 17,224,100 shares of its investment in GFNorte, which represented0.8533% of its interest in GFNorte. The net gain from these transactionsamounted to Ps.380,572 and is reflected within “Other expenses, net” (Note 14).Prior to the sale of these shares, the interest of the Company in GFNorte was10.8557%.

F-17

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**7.****             PROPERTY,PLANT AND EQUIPMENT, NET**

Property, plant and equipment, net consisted of thefollowing as of December 31:
|                                            | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|
| Land                                       |       | Ps.         | 1,270,284  |        | Ps.        | 1,208,622 |   |
| Buildings                                  |       | 5,024,186   |       | 5,095,697   |       |
| Machinery and  equipment                   |       | 16,744,874  |       | 18,178,566  |       |
| Construction in  progress                  |       | 696,789     |       | 1,010,076   |       |
| Software for  internal use                 |       | 818,776     |       | 813,050     |       |
| Leasehold  improvements                    |       | 282,230     |       | 364,989     |       |
| Other                                      |       | 46,845      |       | 33,630      |       |
|                                       |       | 24,883,984  |       | 26,704,630  |       |
| Accumulated  depreciation and amortization |       | (10,529,093 | )          | (11,883,438 | )          |
|                                       |       | Ps.         | 14,354,891 |        | Ps.        | 14,821,192 |   |

 

For the years ended December 31, 2004, 2005 and 2006, depreciationexpense amounted to Ps.993,627, Ps.1,055,427 and Ps.1,091,699, respectively. For the years endedDecember 31, 2004, 2005 and 2006, comprehensive financing costs of Ps.274, Ps.8,094 and Ps.5,502, respectively, were capitalized to property, plant andequipment.

As of December 31, 2006, property, plant and equipment includestemporarily idled assets with a carrying value of approximately Ps.653,884,resulting from the temporary shut-down of the productive operation of variousplants in Mexico, mainly in corn flour division. These assets are recognized attheir net realizable value and are not being depreciated.

For the years ended December 31, 2004, 2005 and 2006, the Companyrecognized impairment losses of Ps.169,822, Ps.41,212 and Ps.318,755,respectively, reflected within “Other expenses, net” according to theprovisions established by Bulletin C-15, “Impairment of Long-Lived Assets andtheir Disposition”, as follows:
| Segment                                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Corn flour  division (Mexico)                           |       | Ps.      | 65,366     |     | Ps.        | 23,406   |       | Ps. | 14,107 |   |
| Corn flour,  wheat flour and other products (Venezuela) |       | 10,964   |       | 10,379   |       | 90,285   |       |
| Other                                                   |       | 29,057   |       | 7,427    |       | 182,813  |       |
| Other  reconciling items                                |       | 64,435   |       | —   |       | 31,550   |       |
| Total                                                   |       | Ps.      | 169,822    |     | Ps.        | 41,212   |       | Ps. | 318,755 |   |

 

Additionally, as of December 31, 2006 the Company has assets at netrealizable value of Ps.35,554 which are available for sale.

F-18

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**8.****             INTANGIBLE ASSETS,NET**

Intangible assets, net, are comprised of thefollowing:

**As of December 31, 2005:**
|                                          | ** ** | **Gross   carrying   amount** | ** **      | **Accumulated   amortization** | ** ** | **Net carrying   amount** | ** **      |
|------------------------------------------|------------|-----------------------------------------|-----------------|-------------------------------------|------------|-------------------------------------|-----------------|
| Intangible  assets with finite lives     |       |                                    |            |                                |       |                                |            |
| Acquired:                                |       |                                    |            |                                |       |                                |            |
| Covenants not to compete                 |       | Ps.                                     |  902,217   |                                | Ps.        |  (418,083                      | )               | Ps. |  484,134 |   |
| Debt issuance costs                      |       | 534,413                                 |            | (160,765                            | )          | 373,648                             |            |
| Patents and trademarks                   |       | 173,373                                 |            | (29,779                             | )          | 143,594                             |            |
| Generated:                               |       |                                    |            |                                |       |                                |            |
| Preoperating expenses                    |       | 49,990                                  |            | (45,926                             | )          | 4,064                               |            |
| Research on new projects                 |       | 34,103                                  |            | (34,103                             | )          | —                              |            |
| Other                                    |       | 66,260                                  |            | (22,214                             | )          | 44,046                              |            |
|                                     |       | Ps.                                     |  1,760,356 |                                | Ps.        | (710,870                            | )               | 1,049,486 |   |
| Intangible  assets with indefinite lives |       |                                    |            |                                |       |                                |            |
| Trade names                              |       |                                    |            |                                |       | 174,165                             |            |
|                                     |       |                                    |            |                                |       | Ps.                                 |  1,223,651 |   |
|                                          |            |                                         |                 |                                     |            |                                     |                 |  |  |  |  |

 

**As of December 31, 2006:**
|                                          | ** ** | **Remaining   useful life   (years)** | ** ** | **Gross   carrying   amount** | ** ** | **Accumu-  lated   amortiza-  tion** | ** ** | **Net carrying   amount** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| Intangible  assets with finite lives     |       |                                                 |       |                                    |       |                                      |       |                                |       |
| Acquired:                                |       |                                                 |       |                                    |       |                                      |       |                                |       |
| Covenants not to compete                 |       | 10                                                   |       | Ps.                                     | 895,223    |                                      | Ps.        | (464,003                            | )          | Ps. | 431,220 |   |
| Debt issuance costs                      |       | 1 –  18                                         |       | 537,247                                 |       | (183,932                                  | )          | 353,315                             |       |
| Patents and trademarks                   |       | 2 –  15                                         |       | 101,376                                 |       | (34,419                                   | )          | 66,957                              |       |
| Customer list                            |       | 1 –  15                                         |       | 48,840                                  |       | (13,415                                   | )          | 35,425                              |       |
| Generated:                               |       |                                                 |       |                                    |       |                                      |       |                                |       |
| Preoperating expenses                    |       | 5                                                    |       | 49,144                                  |       | (47,406                                   | )          | 1,738                               |       |
| Research of new projects                 |       | 2 –  11                                         |       | 43,349                                  |       | (43,349                                   | )          | —                              |       |
| Other                                    |       | 1 –  5                                          |       | 58,796                                  |       | (24,000                                   | )          | 34,796                              |       |
|                                     |       |                                                 |       | Ps.                                     | 1,733,975  |                                      | Ps.        | (810,524                            | )          | 923,451 |   |
| Intangible  assets with indefinite lives |       |                                                 |       |                                    |       |                                      |       |                                |       |
| Trade names                              |       |                                                 |       |                                    |       |                                      |       | 13,453                              |       |
|                                     |       |                                                 |       |                                    |       |                                      |       | Ps.                                 | 936,904    |   |
|                                          |            |                                                      |            |                                         |            |                                           |            |                                     |            |  |  |  |  |  |  |

 

F-19

----

Intangible assets recognizedduring 2005 amounted to Ps.36,803 mainly due to the debt issuance costs relatedto the U.S. dollar perpetual notes which totaled Ps.18,008. Intangible assetsrecognized during 2006 amounted to PS.12,926 mainly due to new projects(La Casa del Maíz), as well as the acquisition of the trade nameLa Ideal, which totaled Ps.6,762.

The Company’s managementdetermined based on the provisions of Bulletin C-8, “Intangible Assets”, thatsome trade names have indefinite lives since their future cash flow generationis expected to be indefinite.

For the years ended December31, 2004, 2005 and 2006, the amortization expense of intangible assets amountedto Ps.95,795, Ps.104,513 and Ps.110,379 respectively. 

Research and developmentcosts charged to income amounted to Ps.39,637, Ps.41,978 and Ps.58,909 for theyears ended December 31, 2004, 2005 and 2006, respectively. 

During 2004, the Companyrecognized an impairment loss in certain trade names and preoperating expensesfor an amount of Ps.20,975, which was recognized as “Other expenses, net” (Note14) within the “Other” segment, according with the provisions established byBulletin C-15. During 2006, the Company recognized an impairment loss incertain intangible assets of Ps.146,853 included in “Other expenses, net” (Note14), which corresponds to the “Other” segment. 

Estimated amortization expense over the next fiveyears is as follows:
| Year       | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | Ps.        | 105,524    |   |
| 2008       |       | 90,571     |       |
| 2009       |       | 79,569     |       |
| 2010       |       | 74,453     |       |
| 2011       |       | 73,753     |       |
| Thereafter |       | 499,581    |       |
| Total      |       | Ps.        | 923,451    |   |

 

Excess of cost over book value of subsidiariesacquired (“goodwill”), net, is comprised of the following:
|                                          | ** ** | **Corn flour   and   packaged   tortilla (US   and Europe)** | ** **    | **Corn flour  (Mexico)** | ** ** | **Other**    | ** ** | **Other   recon-  ciling   items** | ** **   | **Total** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------------------------------|---------------|-------------------------------|------------|--------------|------------|----------------------------------------------|--------------|-----------|------------|
| Balance at  January 1, 2005              |       | Ps.                                                                                             |  602,602 |                          | Ps.        |  78,841 |       | Ps.                                          |  22,958 |      | Ps.        |  281,324 |   | Ps. | 985,725 |   |
| Goodwill  acquired                       |       | 231,820                                                                                         |          | 120,221                       |       | 4,377        |       | —                                       |         | 356,418   |       |
| Foreign currency  translation adjustment |       | (20,574                                                                                         | )             | —                        |       | —       |       | —                                       |         | (20,574   | )          |
| Restatement                              |       | (21,291                                                                                         | )             | 5,476                         |       | 391          |       | 16,406                                       |         | 982       |       |
| Balance at  December 31, 2005            |       | 792,557                                                                                         |          | 204,538                       |       | 27,726       |       | 297,730                                      |         | 1,322,551 |       |
| Goodwill  acquired                       |       | 45,726                                                                                          |          | —                        |       | 437,779      |       | —                                       |         | 483,505   |       |
| Foreign currency  translation adjustment |       | 18,636                                                                                          |          | —                        |       | —       |       | —                                       |         | 18,636    |       |
| Restatement                              |       | (20,917                                                                                         | )             | (8,714                        | )          | (2,570       | )          | (373                                         | )            | (32,574   | )          |
| Balance at  December 31, 2006            |       | Ps.                                                                                             | 836,002       |                          | Ps.        | 195,824      |       | Ps.                                          | 462,935      |      | Ps.        | 297,357 |   | Ps. | 1,792,118  |   |

 

F-20

----

During 2004, the Companyadopted the guidelines established by Bulletin B-7 and consequently,ceased the amortization of the excess of cost over book value for approximatelyPs.82,408. During 2004, the Company performed impairment tests in accordancewith Bulletin C-15 and recognized an impairment loss for theseassets of Ps.44,252 within “Other expenses, net” (Note 14).

**9.****             OTHERASSETS**

Other assets consisted of the following, as ofDecember 31:
|                             | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Long-term notes  receivable |       | Ps.      | 41,891     |     | Ps.        | 99,542 |   |
| Club memberships            |       | 9,789    |       | 3,988    |       |
| Guarantee  deposits         |       | 21,601   |       | 23,307   |       |
|                        |       | Ps.      | 73,281     |     | Ps.        | 126,837 |   |

 

**10.****          BANK LOANS AND LONG-TERMDEBT**

Bank loans and long-term debt as of December 31 are summarized asfollows:

|                                                                                                                                                                                | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Perpetual notes  in U.S. dollars, bearing interest at an annual rate of 7.75%, payable  quarterly, redeemable starting 2009                                                    |       | Ps.       | 3,330,911  |      | Ps.        | 3,243,000 |   |
| Syndicated loan  in U.S. dollars, maturing in July 2010; bearing interest at an annual rate of  LIBOR plus 0.375% to 0.45% payable monthly or quarterly (5.83% in 2006)        |       | 1,976,340 |       | 1,621,500 |       |
| Senior unsecured  notes in U.S. dollars, maturing in October 2007 and bearing interest at an  annual rate of 7.625% payable semiannually                                       |       | 561,169   |       | 546,359   |       |
| Credit line in  U.S. dollars, maturing in October 2011, bearing interest at an annual rate of  LIBOR plus 0.35% to 0.45% (8.25% in 2006), payable in 30, 60, 90 and 180  days. |       | —    |       | 118,910   |       |
| Loans in U.S.  dollars and Euros, payable between 2007 and 2010 and bearing interest at  variable annual rates from 2.5% to 7.96% in 2006, payable in different  installments  |       | 770,006   |       | 357,959   |       |
| Loans in  Venezuelan bolivars payable between 2007 and 2009 and bearing interest at  variable annual rates from 8.75% to 9.0% in 2006, payable monthly                         |       | 353,920   |       | 345,654   |       |
| Loans in U.S.  dollar due between 2007 and 2008, bearing interest at variable annual rates  from 5.92% to 6.37%, payable monthly                                               |       | 122,194   |       | 162,870   |       |
| Loans in Mexican  pesos due in 2007 and 2010, bearing interest at fixed annual rates from 8.96%  to 9.16%, payable monthly                                                     |       | 102,811   |       | 91,909    |       |
|                                                                                                                                                                           |       | 7,217,351 |       | 6,488,161 |       |
| Short-term bank  loans                                                                                                                                                         |       | (448,543  | )          | (172,164  | )          |
| Current portion  of long-term debt                                                                                                                                             |       | (88,551   | )          | (710,533  | )          |
| Long-term debt                                                                                                                                                                 |       | Ps.       | 6,680,257  |      | Ps.        | 5,605,464 |   |

 

F-21

----

Short-term bank loans in U.S. dollars for Ps. 134,045(U.S.$12.4 million) bear interest at an average rate of 5.90% as of December31, 2006. Short-term bank loans in Venezuelan bolivars for Ps.18,854 (3,750million of Venezuelan bolivars) bear interest at an average rate of 8.75% as ofDecember 31, 2006. Additionally, as of December 31, 2006 the Company has ashort-term loan in Euros for Ps.19,265 (1.5 million of Euros) that bears anaverage interest rate of 4.13%.

The Company has credit line agreements for Ps.2,162million (U.S.$200 million), from which Ps.2,043 million (U.S.$189 million) wereavailable as of December 31, 2006. These credit line agreements require thepayment of an annual commitment fee of 0.10% to 0.20% on the unused amounts.

Various credit agreements contain covenants, mainlyrelated to the fulfillment of certain financial ratios, which if not maintainedfor a certain period of time, may be considered as a cause for early maturityof the debt. At December 31, 2006, the Company was in compliance with these financialratios.

At December 31, 2006, the annual maturities oflong-term debt outstanding were as follows:
| Year                 | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2008                 |       | Ps.        | 164,991    |   |
| 2009                 |       | 413,668    |       |
| 2010                 |       | 1,662,989  |       |
| 2011                 |       | 120,816    |       |
| 2012 and  thereafter |       | 3,243,000  |       |
|                 |       | Ps.        | 5,605,464  |   |

 

The Company has entered into an interest rate swapagreement for its long term debt maturing in 2010 and exchange rate forwardcontracts for the interest payments of long term debt maturing in 2007 (Note18).

**11.****          LABOR OBLIGATIONS**

Seniority premium cost and other employee retirementbenefits balance as of December 31, 2005 and 2006 amounted to Ps.118,224 andPs.108,006, respectively, and are included in “Other liabilities”. 

Seniority premium cost in Mexico is determined byindependent actuaries and is based mainly on the employees’ years of service,age and salaries. The Company has established trust funds to meet theseobligations. The employees do not contribute to these funds. Additionally, theindemnities to which employees are entitled in case of dismissal are determinedby independent actuaries, principally based on employees’ years of services,salaries and current labor laws. The Company uses December 31 as themeasurement date for its plans.

The components of the net seniority premium cost andfor the obligations at the end of the labor relationship for the years endedDecember 31, were the following:
|                                                                                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                                                         |       | Ps.      | 3,299      |     | Ps.        | 12,435   |       | Ps. | 11,860 |   |
| Interest cost                                                                        |       | 955      |       | 3,610    |       | 4,060    |       |
| Return on plan  assets                                                               |       | (3,466   | )          | (6,509   | )          | (5,796   | )          |
| Curtailment loss                                                                     |       | 14       |       | 1,034    |       | 1,265    |       |
| Settlement loss                                                                      |       | —   |       | 4,751    |       | 13,692   |       |
| Net amortization                                                                     |       | 2,463    |       | 5,778    |       | 6,911    |       |
| Net cost for the  year                                                               |       | Ps.      | 3,265      |     | Ps.        | 21,099   |       | Ps. | 31,992 |   |
| Initial effect for the  recognition of benefits at the end of the labor relationship |       | Ps.      | —     |     | Ps.        | 78,368   |       | Ps. | — |   |

 

F-22

----

As of December 31, the status of the plan was asfollows:

|                                                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Actuarial  present value of accumulated benefit obligations:                              |       |     |       |     |       |
| Vested benefit obligation                                                                 |       | Ps.      | (19,949    | )        | Ps.        | — |   |
| Non-vested benefit obligation                                                             |       | (14,930  | )          | (404     | )          |
|                                                                                      |       | (34,879  | )          | (404     | )          |
| Excess of  projected benefit obligation over accumulated benefit obligation               |       | (86,913  | )          | (124,918 | )          |
| Projected  benefit obligation                                                             |       | (121,792 | )          | (125,322 | )          |
| Plan assets at  fair value (trust funds)                                                  |       | 27,592   |       | 32,078   |       |
| Shortfall of  plan assets over projected benefit obligation                               |       | (94,200  | )          | (93,244  | )          |
| Unrecognized  amounts to be amortized over 17 years:                                      |       |     |       |     |       |
| Cumulative net gain                                                                       |       | 5,267    |       | 19,053   |       |
| Net transition liability                                                                  |       | (1,137   | )          | —   |       |
| Prior service cost                                                                        |       | (47      | )          | —   |       |
| Adjustment required to recognize minimum liability                                        |       | (2,488   | )          | —   |       |
| Liability for seniority  premium and for obligations at the end of the labor relationship |       | Ps.      | (92,605    | )        | Ps.        | (74,191 | ) |

 

For the years endedDecember 31, 2005 and 2006, the changes in projected benefit obligation andplan assets (trust funds) are summarized as follows:
|                                                                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Projected  benefit obligation at beginning of year                                                        |       | Ps.      | 31,468     |     | Ps.        | 121,792 |   |
| Effect of inflation on beginning balance                                                                  |       | (1,314   | )          | (5,165   | )          |
| Service cost                                                                                              |       | 12,435   |       | 11,860   |       |
| Interest cost                                                                                             |       | 3,610    |       | 4,060    |       |
| Benefits paid                                                                                             |       | (18,740  | )          | (33,933  | )          |
| Effect at the beginning of the year for the  recognition of benefits at the end of the labor relationship |       | 78,368   |       | —   |       |
| Actuarial loss                                                                                            |       | 15,965   |       | 26,708   |       |
| Projected  benefit obligation at end of year                                                              |       | Ps.      | 121,792    |     | Ps.        | 125,322 |   |

 
|                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Fair value of  plan assets at beginning of year |       | Ps.      | 21,562     |     | Ps.        | 27,592 |   |
| Effect of inflation on beginning balance        |       | 1,095    |       | (1,175   | )          |
| Return on plan assets                           |       | 6,509    |       | 5,796    |       |
| Benefits paid                                   |       | (1,574   | )          | (22,655  | )          |
| Settlement loss                                 |       | —   |       | 11,153   |       |
| Amortization of obligations at transition       |       | —   |       | 11,367   |       |
| Fair value of plan  assets at end of year       |       | Ps.      | 27,592     |     | Ps.        | 32,078 |   |

 

The weighted average assumptions (net of expectedinflation) used to determine benefit obligations at December 31 were asfollows:

|                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Discount rate                                   |       | 3.5      | %          | 4.0      | %          |
| Rate of increase  in future compensation levels |       | 1.5      | %          | 1.5      | %          |

 

F-23

----

The weighted average assumptions (net of expectedinflation) used to determine net periodic benefit cost for the years endedDecember 31 were as follows:
|                                                   | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                     |       | 3.5      | %          | 3.5      | %          | 4.0      | %          |
| Rate of increase  in future compensation levels   |       | 1.5      | %          | 1.5      | %          | 1.5      | %          |
| Expected long-term rate  of return on plan assets |       | 4.0      | %          | 4.0      | %          | 5.0      | %          |

 

The long-term assetreturn rate is based on the annual recommendations of the Actuarial Commissionin the Mexican Association of Consulting Actuaries. These recommendationsconsider historical information and future expectations of the market.

The Company’s weightedaverage asset allocation by asset category as of December 31 was as follows:

|                         | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Equity  securities      |       | 47       | %          | 46       | %          |
| Fixed rate  instruments |       | 53       | %          | 54       | %          |
| Total                   |       | 100      | %          | 100      | %          |

 

The Company has a policyof maintaining at least 30% of the trust assets in Mexican Federal Governmentinstruments. Objective portfolio guidelines have been established for theremaining 70% and investment decisions are being made to comply with thoseguidelines to the extent that market conditions and available funds allow.

The Company estimatesthat it will not have to contribute to the plan during 2007.

The following tablesummarizes expected benefit payments from the Company’s plans as follows:

| Year       | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | Ps.        | 31,985     |   |
| 2008       |       | 6,395      |       |
| 2009       |       | 8,140      |       |
| 2010       |       | 12,055     |       |
| 2011       |       | 8,466      |       |
| Thereafter |       | 441,095    |       |
|            |            |            |            |  |

 

In the United States, theCompany has a saving and investment plan that incorporates voluntary employee401(K) contributions with Company contributions. For the years ended December31, 2004, 2005 and 2006, total expenses related to this plan wereU.S.$3,017,000 (Ps.32,614) U.S.$3,061,000 (Ps.33,089) and U.S.$3,045,000(Ps.32,916), respectively.

In Venezuela, the Companyrecognizes a liability for seniority premiums and indemnities for dismissalestablished by the local Labor Law, which amounted to Ps.15,244 and Ps.23,839as of December 31, 2005 and 2006, respectively.

In Central America, thelabor legislation of Costa Rica, Nicaragua, El Salvador, Honduras and Guatemalaestablishes that the accumulated payments, to which workers may be entitled,based on the years of services, must be paid in the case of death, retirementor dismissal. The Company records a liability at 9% over salaries paid, whichamounted to Ps.11,520 and Ps.10,048 as of December 31, 2005 and 2006,respectively.

F-24

----

**12.****          CONTINGENCIESAND COMMITMENTS**

A)     CONTINGENCIES

The *Secretaría de Hacienda y CréditoPúblico* (“Ministry of Finance and Public Credit”) has made: (i)certain observations to our asset tax returns for the years 1994, 1996, 1997,1999 and 2000, amounting Ps.340.7 million; (ii) a determination for the amountof Ps.29.9 million for withholding taxes derived from the payment of intereststo our foreign creditors for the years 2000, 2001 and 2002 (the Mexicanauthorities claim that the Company should have withhold 10% over such paymentsinstead of 4.9%); and (iii) certain observations to our income tax returns forthe years 2000 and 2001 in connection to the accreditation of the specialservices and production tax for an amount of Ps.10,972, considered by theauthority as prohibited. Additionally, one of our subsidiaries in Mexico hasbeen notified with several assessments for the import of wheat, amountingPs.93,027, which according to the authority was made under an incorrect HS Code(Harmonized System Code). The Company has filed several appeals to obtain anannulment of such assessments. The Company believes the resolution of theseproceedings will not have a material effect on the Company’s financial positionand results of operation. 

The Venezuelan tax authorities have made certainobservations to one of the Venezuelan subsidiaries, Molinos Nacionales C.A. (“Monaca”),related to the income tax returns for the years 1999 and 1998, which amountedto Ps.15,134 (U.S.$1.4 million), plus sales tax credits presumably omitted forPs.717 (U.S. $66,344). The resolutions of these claims will be assumed by theprevious shareholder, International Multifoods Corporation, in accordance withthe purchase agreement of our subsidiary in Venezuela, Monaca.

Additionally, Monaca has been named in several laborlaw suits by its “Caleteros” for a total amount of Ps.68,877 (13,699 million ofVenezuelan bolivars), which are currently being trialed. The “Caleteros” arepeople that assist the carriers in the unloading of merchandise, which generatea high risk in labor and industrial security for Monaca. In order to handle the“Caleteros” matter, Monaca decided to create a provision of Ps.18,759 (3,731million of Venezuelan bolivars) which is reflected within accrued payableexpenses and other liabilities.

Some of the Company’s subsidiaries have been notifiedby the *Comisión Nacional de Agua* (“NationalWater Commission” or “CNA”) of fee assessments due from different years. Theseassessments mainly arise from the CNA’s determination of discharge of sewagewater on public property of the Nation that was being used as receiverfacilities.  Nevertheless, thesubsidiaries are using the water derived from the production process,previously treated, to irrigate several garden properties of the Company,through the sprinkler system. All of the assessments notified by the CNA havebeen resolved in favor of the Company, with exception of two assessments thatare still pending resolution. The current status of these procedures is thefollowing: (i) the Company has obtained a favorable ruling from the SuperiorChamber of the Federal Tax and Administrative Court to annul an assessment forPs.14,222 plus restatement, penalties and charges, which was appealed by theCNA before an Appeals Court for Administrative Matters, which ordered torestore the procedure due to a procedural defect which has been rectified,being this case at the moment back at the Superior Chamber of the Federal Taxand Administrative Court to dictates the corresponding ruling; and (ii) anassessment for Ps.669 thousand is pending resolution in the first instance.According to the Company’s lawyers, a reasonable basis exists to believe theCompany is in compliance will all applicable legal regulations, given that thewater from the production process is previously treated and later on used toirrigate the garden properties of the Company through the sprinkler system, andare not discharged on public property of the Nation. According to theforegoing, the Company believes all of these proceedings will be resolvedfavorably. The Company intends to vigorously defend against this action.

F-25

----

In November 2001, one of Gruma Corporation’sindependent distributors filed a punitive class action lawsuit against thissubsidiary.  The case was removed fromCalifornia state court to federal court. Prior to April 2005, the Company did not consider this claim to bematerial because two court orders had held that the claim must be arbitratedand that the arbitration would be for the individual plaintiff’s claims onlyand because the total exposure on the individual claim was for a smallamount.  In April 2005, the United StatesDistrict Court, based on a recent U.S. Supreme Court decision, ordered that theoriginal claims should be referred to arbitration and that the arbitrator coulddecide whether the matter should proceed as a class action.  No decision has yet been made as to whetherthe claims should proceed as a class action. The claims, as recently amended, allege: (i) that Gruma Corporationbreached its distributor agreements and its distributors are actuallyemployees; (ii) that Gruma Corporation has failed to make wage, expense, andother payments required for employees; (iii) that Gruma Corporation hasviolated the California antitrust laws and unfair competition statutes and;(iv) that Gruma Corporation has otherwise committed fraud and negligentmisrepresentations.  The arbitratorsubsequently dismissed the antitrust claims. The remaining claims are being asserted by two named plaintiffs.  The arbitrator has issued an order stating anintention to certify the case as a class action; the details of the class orderhave not yet been delineated.  Theplaintiffs seek damages and equitable relief but have not yet specified thetotal amount of damages sought. The Company intends to vigorously defendagainst this action. 

In October 2005, the Company was named in a classaction suit, Ramon Moreno et al. v. Guerrero Mexico Food Products, Inc. andGruma Corporation, filed in the United States District Court for the CentralDistrict of California, Los Angeles County. This is a punitive wage and hourclass action alleging a misclassification of the Teamster-represented SalesDrivers as exempt when they should be treated as non-exempt and paid overtimefor all hours worked in excess of eight in a workday and forty-eight in aworkweek. Plaintiffs also contend that the punitive class members have beendenied state-mandated meal periods and are due penalties under California LaborCode.  Plaintiff subsequently amended the complaint to add a secondplaintiff who is an active employee. The Company filed an answer asserting 33affirmative defenses. The Company then filed a third-party complaint againstTeamsters Local 63 asserting a breach of contract and seeking declaratoryrelief. Teamsters Local 63 filed a motion to dismiss our third-party complaintagainst it. On December 20, 2006, the plaintiffs filed a motion to certifythis case as a class action. The court held a hearing on February 26, 2007,regarding plaintiffs’ motion for class certification and on March 20, 2007, thecourt entered an order certifying the case as a class action.  The court has set a new trial date forOctober 23, 2007. The Company intends to defend the action vigorously, relyingon various affirmative and fact defenses. The parties are engaged in discovery on Defendants’ affirmativedefenses.

On August 24, 2005, the Company, through itssubsidiary Grupo Industrial Maseca, S.A. de C.V., acquired a 100% interest inAgroinsa, a group of companies that produce corn flour in Celaya, Guanajuato aswell as corn flour, wheat flour and other food products in Monterrey, NuevoLeón. In accordance with the Ley Federal de Competencia Económica, or MexicanCompetition Law, the Company notified the Comisión Federal de Competencia, orFederal Competition Commission or CFC of the prospective acquisition through a “noticeof concentration.” 

On November 21, 2005, the Company was notified thatthe CFC had denied its request to approve the Agroinsa acquisition. 

In addition to the Company’s belief that the decisionby the CFC lacked legal and economic merits, on January 16, 2006, the Companyfiled an administrative appeal before the CFC arguing that the acquisitionshould be approved by the CFC under the grounds of the afirmativa ficta, orimplicit approval, in view of the fact that the CFC notified its resolutionextemporaneously in accordance with Article 21 of the Mexican Competition Law.

F-26

----

On April 6, 2006, the CFC denied the Company’s appealand confirmed its decision to reject the acquisition. The Company subsequentlyrequested the Thirteenth Federal Court for Administrative Matters of MexicoCity to overrule the CFC’s resolution. The Federal Court granted the Company’srequest on August 24, 2006 and ordered the CFC to approve the acquisition. OnJune 14, 2007, following a jurisdictional appeal by the CFC before the ThirdFederal Court of Appeals for Administrative Matters, arguing that the decisionmade by the Thirteenth Federal Court for Administrative Matters should beoverruled, the Third Federal Court of Appeals for Administrative Matters,relying on certain legal guidelines previously issued by the Mexican SupremeCourt of Justice in this case, ruled that the implicit approval applied toprotect the Company’s right to acquire Agroinsa. This decision is final andnon-appealable. 

By virtue of the judicial resolution, the CFC islegally bound to promptly issue a new administrative resolution authorizing theCompany to acquire Agroinsa under the terms and conditions that the Companypreviously presented to the CFC. 

Additionally, the Company is involved in certainunresolved proceedings arisen in the ordinary course of the business. TheCompany does not believe that the resolution of these proceedings may have asignificant adverse effect in its financial situation and results of operation.

B)     COMMITMENTS

The Company entered intosale-leaseback agreements for various production equipment located in its U.S.plants. The Company has a purchase option at the expiration of the leases andan early purchase option, which permits the Company to acquire the equipment atfair market value at approximately three-fourths of the lease term. Theseagreements are accounted for as operating leases.

As of December 31, 2006,the Company is leasing certain equipment under long-term operating leaseagreements expiring through 2015. Future minimum lease payments under suchleases amount to approximately Ps.1,683,625 (U.S.$155,747,000), as follows:
| Year   | ** ** | **Facilities** | ** ** | **Equipment** | ** ** | **Total** | ** ** |
|--------|------------|----------------|------------|---------------|------------|-----------|------------|
| 2007   |       | Ps.            | 179,327    |          | Ps.        | 295,827   |       | Ps. | 475,154 |   |
| 2008   |       | 181,694        |       | 230,621       |       | 412,315   |       |
| 2009   |       | 117,040        |       | 157,426       |       | 274,466   |       |
| 2010   |       | 118,553        |       | 100,792       |       | 219,345   |       |
| 2011   |       | 49,921         |       | 60,903        |       | 110,824   |       |
| 2012   |       | 80,005         |       | 111,516       |       | 191,521   |       |
|   |       | Ps.            | 726,540    |          | Ps.        | 957,085   |       | Ps. | 1,683,625 |   |
|   |       | U.S.$          | 67,210     |          | U.S.$      | 88,537    |       | U.S.$ | 155,747 |   |
|        |            |                |            |               |            |           |            |  |  |  |  |  |  |

 

Rental expense was approximately Ps.422,205,Ps.429,526 and Ps.505,801 for the years ended December 31, 2004, 2005 and 2006,respectively.

At December 31, 2006, the Company had variousoutstanding commitments in the United States to purchase commodities and rawmaterials for approximately Ps.1,418,272 (U.S.$131,200 thousand), which will bedelivered during 2007.

As of December 31, 2006, the Company had outstandingcommitments to purchase machinery and equipment amounting to approximatelyPs.485,423 (U.S.$44,905 thousand).

As of December 31, 2006**,**the Company has irrevocable letters of credit in the amount of approximatelyPs.112,208 (U.S.$10,380 thousand) serving as collateral for claims pursuant tothe Company’s self-insured worker’s compensation retention program in theUnited States.

F-27

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**13.****          STOCKHOLDERS’ EQUITY**

A)     COMMON STOCK

On January 27, 2006, theCompany concluded the equity offering of 30 million shares, which representedapproximately Ps.1,148 million net of discounts and commissions fromunderwriters and expenses related with the offering. The net proceeds were usedto increase the production capacity in the United States of America.

At December 31, 2006,Gruma’s outstanding common stock consisted of 482,549,952 shares of Series “B”,with no par value, fully subscribed and paid, which can only be withdrawn withstockholders’ approval, and no shares held in Treasury. At December 31, 2005,the Company’s outstanding common stock consisted of 452,549,952 shares.

B)      RETAINED EARNINGS

In accordance withMexican Corporate Law, the legal reserve must be increased annually by 5% ofannual net profits until it reaches a fifth of the fully paid common stockamount.

Dividends paid fromretained earnings which have not been previously taxed are subject to an incometax payable by the Company equal to 38.91% in 2007 and thereafter. Theapplicable tax may be credited against income tax the Company is subject to inthe year or in the following two fiscal years. Dividends paid by the Companyfrom the net tax income account are not subject to any tax.

C)      PURCHASE OF COMMON STOCK

The Stockholders’ Meeting approved a Ps.650,000 reserve to repurchasethe Company’s own shares. The total amount of repurchased shares cannot exceed5% of total equity. The difference between the acquisition cost of therepurchased shares and their stated value, composed of common stock andadditional paid-in capital, is recognized as part of the reserve to repurchasethe Company’s own shares, which is included within retained earnings from prioryears. The gain or loss in the sale of the Company’s own shares is recorded asadditional paid-in capital. As of December 31, 2006, the Company does not havetransactions with its own stock.

D)     FOREIGN CURRENCY TRANSLATIONADJUSTMENTS

Foreign currencytranslation adjustments as of December 31 consisted of the following:
|                                                                                                                                                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency  translation at beginning of year                                                                                                                    |       | Ps.      | (644,134   | )        | Ps.        | (1,165,485 | ) |
| Effect of  translating net investment in foreign subsidiaries                                                                                                         |       | (712,304 | )          | 450,858  |       |
| Exchange  differences arising from foreign currency liabilities accounted for as a  hedge of the Company’s net investments in foreign subsidiaries, net of taxes |       | 190,953  |       | (54,848  | )          |
|                                                                                                                                                                  |       | Ps.      | (1,165,485 | )        | Ps.        | (769,475 | ) |

 

The investment that the Company maintains in theoperations in the United States and Europe generates a natural hedge of up toU.S.$520 million and U.S.$500 million as of December 31, 2005 and 2006,respectively.

As of December 31, 2005 and 2006, the accumulatedeffect of translating net investment in foreign subsidiaries in the minorityinterest amounted to Ps.2,927 and Ps.(73,226), respectively.

F-28

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E)      INFLATION EFFECTS

As of December 31, 2006,the majority stockholders’ equity is comprised of the following:

|                                                                                                                                   | ** ** | **Nominal** | ** ** | **Restatement** | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------|------------|
| Common stock                                                                                                                      |       | Ps.         | 4,880,142  |            | Ps.        | 7,954,822   |       | Ps. | 12,834,964 |   |
| Additional  paid-in capital                                                                                                       |       | 2,150,629   |       | 2,515,458       |       | 4,666,087   |       |
| Deficit from  restatement                                                                                                         |       | —      |       | (14,577,180     | )          | (14,577,180 | )          |
| Derivative  financial instruments                                                                                                 |       | 6,404       |       | —          |       | 6,404       |       |
| Cumulative  effect of a change in an accounting principle for deferred income taxes and  employees’ statutory profit sharing |       | (209,951    | )          | (8,165          | )          | (218,116    | )          |
| Retained  earnings from prior years                                                                                               |       | 4,107,506   |       | 6,550,865       |       | 10,658,371  |       |
| Net income for  the year                                                                                                          |       | 1,511,977   |       | 12,761          |       | 1,524,738   |       |
| Foreign currency  translation adjustments                                                                                         |       | (769,475    | )          | —          |       | (769,475    | )          |
|                                                                                                                              |       | Ps.         | 11,677,232 |            | Ps.        | 2,448,561   |       | Ps. | 14,125,793 |   |

 

F)      TAX VALUES OF COMMON STOCK AND RETAINED EARNINGS

As of December 31, 2006, tax amounts of common stockand retained earnings were Ps.10,086,904 and Ps.1,715,867, respectively.

**14.****          OTHER EXPENSES, NET**

Otherexpenses, net is comprised of the following:

|                                                                    | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net gain from  sale of GFNorte’s shares (Note 6)              |       | Ps.                                        | —     |   | Ps. | — |   | Ps. | 380,572 |   |
| Net gain from  sale of subsidiaries’ shares                   |       | —                                     |       | — |   | 137,971 |   |
| Impairment loss  on assets (Note 3-L)                              |       | (235,049                                   | )          | (41,212 | ) | (465,608 | ) |
| Amortization of  other deferred costs                              |       | (51,697                                    | )          | (50,488 | ) | (56,330 | ) |
| Net gain (loss) in  sale of fixed assets and other assets          |       | 31,215                                     |       | (13,772 | ) | (5,720 | ) |
| Debt issuance  costs cancelled due to early extinguishment of debt |       | (24,558                                    | )          | — |   | — |   |
| Other                                                              |       | (16,002                                    | )          | (41,662 | ) | (4,953 | ) |
|                                                               |       | Ps.                                        | (296,091   | ) | Ps. | (147,134 | ) | Ps. | (14,068 | ) |

 

F-29

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**15.****          INCOME TAX, ASSET TAXAND EMPLOYEES’ STATUTORY PROFIT SHARING**

A)     INCOME TAX AND ASSET TAX

Gruma files a consolidated income tax return forMexican income tax purposes, consolidating taxable income and losses of Grumaand its controlled Mexican subsidiaries. Filing a consolidated tax return hadthe effect of reducing income tax expense for the years ended December 31,2004, 2005 and 2006 by Ps.147,997, Ps.286,095 and Ps.408,874, respectively, ascompared to filing a tax return on an unconsolidated basis. Tax regulationspermit to consolidate 100% of the ownership investment.

In accordance with the applicable tax law, Mexicancorporations must pay the higher of either income tax or asset tax (1.8%through December 31, 2006 and from 2007 on 1.25% without deducting liabilities).Asset tax is determined on the average value of substantially all of theCompany’s Mexican assets less certain liabilities. Payments of asset tax arerecoverable against the excess of income tax over asset tax (when it is higherthan income tax) of the three prior years and the ten subsequent years.

For the year ended December 31, 2004 and 2005, assettax amounted to Ps.3,134 and Ps.71,833, respectively. 

B)      RECONCILIATION OF FINANCIALAND TAXABLE INCOME

For the years 2004, 2005and 2006, the reconciliation between statutory income tax amounts and theeffective income tax amounts is summarized as follows:
|                                                                                       | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statutory  federal income tax (33% for 2004, 30% for 2005 and 29% in 2006)            |       | Ps.                                        | 548,474    |   | Ps. | 361,815 |   | Ps. | 416,249 |   |
| Variation in  valuation of tax loss carryforwards                                     |       | —                                     |       | 43,037 |   | 58,288 |   |
| Losses of  Mexican subsidiaries which cannot be utilized for income tax consolidation |       | 70,138                                     |       | 13,087 |   | 10,108 |   |
| Foreign income  tax differences                                                       |       | 24,500                                     |       | (26,548 | ) | (82,870 | ) |
| Foreign  dividends                                                                    |       | 257,133                                    |       | — |   | — |   |
| Effect due to  change in income tax rate                                              |       | (99,659                                    | )          | — |   | — |   |
| Effects related  to inflation                                                         |       | (9,706                                     | )          | (12,049 | ) | 4,056 |   |
| Other                                                                                 |       | (2,844                                     | )          | 7,083 |   | 5,718 |   |
| Effective income  tax (48% for 2004, 32% for 2005 and 29% in 2006)                    |       | Ps.                                        | 788,036    |   | Ps. | 386,425 |   | Ps. | 411,549 |   |

 

As a result of changes inthe Mexican Income Tax Law, approved in November 13, 2004, statutory tax rateswill be 28% in 2007. Consequently, the effect of this tax rate decrease was thereduction of Ps.99,659 in the deferred tax liability during 2004, as well as anincrease in net income for the same amount.

F-30

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At December 31, 2005 and 2006, the tax effects of maindifferences that give rise to significant portions of the deferred tax assetsand liabilities, are as follows:
|                                                         | ** ** | **(Assets) Liabilities** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **2005**                      | ** ** | **2006** | ** ** |
| Deferred tax  assets:                                   |       |                          |       |   |   |
| Net operating  loss carryforwards and other tax credits |       | Ps.                           | (279,238   | ) | Ps. | (179,420 | ) |
| Accrued  liabilities                                    |       | (170,878                      | )          | (229,997 | ) |
| Recoverable  asset tax                                  |       | (403,711                      | )          | (195,168 | ) |
| Intangible asset  resulting from intercompany operation |       | (87,552                       | )          | (60,669 | ) |
| Other                                                   |       | (136,640                      | )          | (164,721 | ) |
|                                                    |       | (1,078,019                    | )          | (829,975 | ) |
| Deferred tax  liabilities:                              |       |                          |       |   |   |
| Property, plant  and equipment, net                     |       | 1,823,094                     |       | 1,752,579 |   |
| Inventories                                             |       | 288,589                       |       | 243,292 |   |
| Intangible  assets and other                            |       | 141,812                       |       | 155,562 |   |
| Investment in  partnership and equity method investee   |       | 383,100                       |       | 392,003 |   |
|                                                    |       | 2,636,595                     |       | 2,543,436 |   |
| Net deferred tax  liability                             |       | Ps.                           | 1,558,576  |   | Ps. | 1,713,461 |   |
|                                                         |            |                               |            |  |  |  |  |  |  |

 

At December 31, 2006 theCompany did not recognize deferred income tax asset of Ps.85,269 from tax losscarryforwards pertaining to certain foreign subsidiaries, since no sufficientevidence is available that these tax loss carryforwards will be realizable.

C)      TAX LOSS CARRYFORWARDS ANDRECOVERABLE ASSET TAX

At December 31, 2006, the Company does not have taxloss carryforwards in Mexico corresponding to the consolidated income taxreturn. As of December 31, 2006, asset tax of Ps.103,449 generated in theconsolidated income tax return in Mexico and available to offset the excess ofincome tax over asset tax in future years, is shown below:
| Expiration year | ** ** | **Recoverable asset  tax** | ** ** |
|----------------------|------------|---------------------------------|------------|
| 2013                 |       | Ps.                             | 28,509     |   |
| 2014                 |       |                            | 3,107      |   |
| 2015                 |       |                            | 71,833     |   |
|                 |       | Ps.                             | 103,449    |   |
|                      |            |                                 |            |  |  |

 

At December 31, 2006certain foreign subsidiaries have tax loss carryforwards of approximatelyPs.48,163 (2,307 million of Costa Rican colons) that expire in 2009 to 2011 andPs.87,095 (17,322 million of Venezuelan bolivars) which will expire in 2007 to2008.

D)     EMPLOYEES’ STATUTORY PROFITSHARING

In Mexico, employees’ statutory profit sharing isdetermined for each subsidiary on an unconsolidated basis, applying 10% oftaxable income determined on a basis similar to income tax, except that theemployees’ statutory profit sharing does not consider inflation effects,depreciation and amortization expense is based on the historical cost, and aforeign exchange gain or loss is recognized when a monetary asset or liabilityis contractually due.

F-31

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**16.****          FOREIGN CURRENCY**

A)     EXCHANGEDIFFERENCES

For the years ended December 31, 2004, 2005 and 2006,the effects of exchange rate fluctuations on the Company’s monetary assets andliabilities were recognized as follows:
|                                                                                                                                                                                                                                                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Exchange  differences arising from foreign currency liabilities accounted for as a  hedge of the Company’s net investment in foreign subsidiaries recorded  directly to stockholders’ equity as an effect of foreign currency translation  adjustments |       | Ps.      | 21,943     |     | Ps.        | 270,792  |       | Ps. | (75,635 | ) |
| Exchange  differences arising from foreign currency transactions credited (charged) to  income                                                                                                                                                                   |       |     | (53,004    | )        |       | (53,476  | )          |   | (18,441 | ) |
|                                                                                                                                                                                                                                                             |       | Ps.      | (31,061    | )        | Ps.        | 217,316  |       | Ps. | (94,076 | ) |

 

B)      FOREIGN CURRENCY POSITION

As of December 31, 2005 and 2006, monetary assets andliabilities held or payable in U.S. dollars are summarized below:
|                                                         | ** ** | **Thousands of U.S. dollars** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|
| **In companies located in Mexico:** | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| Assets:                                                 |       |                                         |       |   |   |
| Current                                                 |       | U.S.$                                        | 9,656      |   | U.S.$ | 12,142 |   |
| Non-current                                             |       |                                         | 81         |   |   | 71 |   |
| Liabilities:                                            |       |                                         |       |   |   |   |   |
| Current                                                 |       |                                         | (8,560     | ) |   | (69,488 | ) |
| Long-term                                               |       |                                         | (564,005   | ) |   | (481,826 | ) |
|                                                    |       | U.S.$                                        | (562,828   | ) | U.S.$ | (539,101 | ) |

 
|                           | ** ** | **Thousands of U.S. dollars** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|
| **In foreign companies:** | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| Assets:                   |       |                                         |       |   |   |
| Current                   |       | U.S.$                                        | 195,550    |   | U.S.$ | 285,321 |   |
| Non-current               |       |                                         | 3,312      |   |   | 4,279 |   |
| Liabilities:              |       |                                         |       |   |   |   |   |
| Current                   |       |                                         | (276,943   | ) |   | (314,436 | ) |
| Long-term                 |       |                                         | (185,262   | ) |   | (184,612 | ) |
|                      |       | U.S.$                                        | (263,343   | ) | U.S.$ | (209,448 | ) |

 

At December 31, 2005 and 2006, the exchange rates usedto translate U.S. dollar assets and liabilities were Ps.10.63 and Ps.10.81,respectively. On June 25, 2007, date of issuance of these financial statements,the exchange rate for the U.S. dollar was Ps.10.82.

F-32

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For the years ended December 31, 2004, 2005 and 2006the Company’s Mexican subsidiaries had transactions in U.S. dollars as follows:
|                                      | ** ** | **Thousands of U.S. dollars** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| Corn purchases and other inventories |       | U.S.$                                        | 94,939     |   | U.S.$ | 94,963 |   | U.S.$ | 108,830 |   |
| Interest expense                     |       |                                         | 27,081     |   |   | 35,946 |   |   | 38,222 |   |
| Equipment  purchases                 |       |                                         | 133        |   |   | 424 |   |   | 424 |   |
| Services                             |       |                                         | 5,125      |   |   | 7,480 |   |   | 7,480 |   |
|                                 |       | U.S.$                                        | 127,278    |   | U.S.$ | 138,813 |   | U.S.$ | 154,956 |   |

 

As of December 31, consolidated non-monetary assets offoreign origin, which are restated on the basis of the GCPI from the foreigncountry of origin, are summarized as follows:
|                      | ** ** | **2005**                           | ** ** | **2006**                           | ** ** |
|----------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **           | ** ** | **Foreign  currency  (thousands)** | ** ** | **Year-end  exchange   rate** | ** ** | **Foreign  currency   (thousands)** | ** ** | **Year-end   exchange rate** | ** ** |
| U.S. dollars         |       | 716,756                            |       | 10.63                              |       | 836,932 |   | 10.81 |   |
| Swiss francs         |       | 21,562                             |       | 8.08                               |       | 199,701 |   | 8.87 |   |
| Euros                |       | 13,823                             |       | 12.5732                            |       | 32,989 |   | 14.2681 |   |
| Venezuelan  bolivars |       | 462,462,371                        |       | 0.0049                             |       | 385,424,593 |   | 0.0050 |   |
| Australian  Dollars  |       | —                             |       | 7.796                              |       | 28,695 |   | 8.4913 |   |
| Yuans                |       | —                             |       | 1.3171                             |       | 5,853 |   | 1.3834 |   |
| Pounds sterling      |       | —                             |       | 18.2708                            |       | 7,729 |   | 21.1671 |   |
| Canadian dollars     |       | —                             |       | 9.11                               |       | 521 |   | 9.28 |   |
| Costa Rican colons   |       | 35,660,409                         |       | 0.0214                             |       | 43,572,733 |   | 0.0209 |   |

 

**17.****          SEGMENT INFORMATION**

The Company’s reportable segments are strategicbusiness units that offer different products in different geographical regions.These business units are managed separately because each business segmentrequires different technology and marketing strategies.

The Company’s reportable segments are as follows:

·    Cornflour and packaged tortilla division (mainly United States and Europe) –manufactures and distributes over more than 20 varieties of corn flour that areused mainly to produce and distribute different types of tortillas and tortillachip products in the United States, Europe, Asia and Oceania. The main brandsare MASECA for corn flour and MISSION and GUERRERO for packaged tortillas.

·    Cornflour division (Mexico) – engaged principally in the production, distributionand sale of corn flour in Mexico under MASECA brand. Corn flour produced bythis division is used mainly in the preparation of tortillas and other relatedproducts.

·    Cornflour, wheat flour and other products division (Venezuela) – engaged mainly inproducing and distributing grains, used principally for industrial and humanconsumption. The main brands are JUANA, TIA BERTA and DECASA for corn flour;ROBIN HOOD and POLAR for wheat flour; MONICA for rice and LASSIE for oats.

F-33

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·    “Other”division – represents those segments individually amounting less than 10% ofthe consolidated total. These segments are: corn flour and other productsdivision in Central America, wheat flour division in Mexico, packaged tortilladivision in Mexico and technology and equipment division. Corn flour and otherproducts division in Central America manufactures, distributes and sells cornflour, tortillas and snacks; cultivates and sells hearts of palm. Wheat flourdivision in Mexico is engaged in the production and marketing of wheat flour inthis country. Packaged tortilla division in Mexico produces and distributespackaged tortillas. The technology and equipment division conducts research anddevelopment regarding flour and tortilla manufacturing equipment, producesmachinery for corn flour and tortilla production and is engaged in theconstruction of the Company’s corn flour manufacturing facilities.

·    The“Other reconciling items” row includes the corporate expenses and the eliminationof inter-business unit transactions.

All inter-segment salesprices are market based. The Company evaluates performance based on operatingincome of the respective business units.

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing tables.

Segmentinformation as of and for the year ended December 31, 2004:
| Segment                                                               | ** ** | **Net sales to  external  customers** | ** ** | **Inter-segment  net sales** | ** ** | **Operating  income  (loss)** | ** ** | **Depreciation  and   amortization** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|
| Corn flour and  packaged tortilla division (United States and Europe) |       | Ps.                                             | 12,296,117 |                              | Ps.        | —                        |       | Ps.                                       | 1,218,895  |   | Ps. | 497,851 |   |
| Corn flour  division (Mexico)                                         |       | 6,027,837                                       |       | 194,186                           |       | 484,685                       |       | 272,840                                   |       |
| Corn flour,  wheat flour and other products (Venezuela)               |       | 3,821,510                                       |       | —                            |       | 213,027                       |       | 92,008                                    |       |
| Other                                                                 |       | 3,620,610                                       |       | 462,666                           |       | 4,304                         |       | 161,050                                   |       |
| Other  reconciling items                                              |       | 33,666                                          |       | (656,852                          | )          | 81,668                        |       | 65,786                                    |       |
| Total                                                                 |       | Ps.                                             | 25,799,740 |                              | Ps.        | —                        |       | Ps.                                       | 2,002,579  |   | Ps. | 1,089,535 |   |
|                                                                       |            |                                                 |            |                                   |            |                               |            |                                           |            |  |  |  |  |  |  |  |

 
| Segment                                                                | ** ** | **Total assets** | ** ** | **Total liabilities** | ** ** | **Expenditures for  long-lived assets** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|---------------------------------------------------|------------|
| Corn flour and  packaged tortilla division  (United States and Europe) |       | Ps.                   | 8,848,151  |                       | Ps.        | 3,295,319                                         |       | Ps. | 1,007,290 |   |
| Corn flour  division (Mexico)                                          |       | 8,030,204             |       | 1,466,837                  |       | 64,653                                            |       |
| Corn flour,  wheat flour and other products (Venezuela)                |       | 3,539,169             |       | 1,726,168                  |       | 102,298                                           |       |
| Other                                                                  |       | 4,080,887             |       | 621,316                    |       | 96,994                                            |       |
| Other  reconciling items                                               |       | 1,524,665             |       | 4,708,033                  |       | 49,583                                            |       |
| Total                                                                  |       | Ps.                   | 26,023,076 |                       | Ps.        | 11,817,673                                        |       | Ps. | 1,320,818 |   |
|                                                                        |            |                       |            |                            |            |                                                   |            |  |  |  |  |  |

 

F-34

----

 

Segmentinformation as of and for the year ended December 31, 2005:
| Segment                                                               | ** ** | **Net sales to  external  customers** | ** ** | **Inter-segment  net sales** | ** ** | **Operating  income  (loss)** | ** ** | **Depreciation  and   amortization** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|
| Corn flour and  packaged tortilla division (United States and Europe) |       | Ps.                                             | 14,326,749 |                              | Ps.        | —                        |       | Ps.                                       | 1,183,786  |   | Ps. | 561,323 |   |
| Corn flour  division (Mexico)                                         |       | 6,569,860                                       |       | 220,868                           |       | 721,690                       |       | 272,470                                   |       |
| Corn flour,  wheat flour and other products (Venezuela)               |       | 3,220,834                                       |       | —                            |       | (90,640                       | )          | 108,589                                   |       |
| Other                                                                 |       | 3,724,603                                       |       | 523,207                           |       | (148,138                      | )          | 156,242                                   |       |
| Other reconciling  items                                              |       | 20,852                                          |       | (744,075                          | )          | (33,569                       | )          | 61,316                                    |       |
| Total                                                                 |       | Ps.                                             | 27,862,898 |                              | Ps.        | —                        |       | Ps.                                       | 1,633,129  |   | Ps. | 1,159,940 |   |
|                                                                       |            |                                                 |            |                                   |            |                               |            |                                           |            |  |  |  |  |  |  |  |

 
| Segment                                                               | ** ** | **Total assets** | ** ** | **Total liabilities** | ** ** | **Expenditures for  long-lived assets** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|---------------------------------------------------|------------|
| Corn flour and  packaged tortilla division (United States and Europe) |       | Ps.                   | 9,757,642  |                       | Ps.        | 3,613,881                                         |       | Ps. | 950,798 |   |
| Corn flour  division (Mexico)                                         |       | 8,863,386             |       | 2,254,519                  |       | 769,842                                           |       |
| Corn flour,  wheat flour and other products (Venezuela)               |       | 3,181,564             |       | 1,602,613                  |       | 217,895                                           |       |
| Other                                                                 |       | 4,337,770             |       | 1,051,415                  |       | 163,974                                           |       |
| Other  reconciling items                                              |       | 1,826,221             |       | 4,719,203                  |       | 42,582                                            |       |
| Total                                                                 |       | Ps.                   | 27,966,583 |                       | Ps.        | 13,241,631                                        |       | Ps. | 2,145,091 |   |
|                                                                       |            |                       |            |                            |            |                                                   |            |  |  |  |  |  |

Segment information as ofand for the year ended December 31, 2006:
| Segment                                                               | ** ** | **Net sales to   external   customers** | ** ** | **Inter-  segment  net sales** | ** ** | **Operating  income  (loss)** | ** ** | **Depreciation  and  amortization** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|-------------------------------------|------------|
| Corn flour and packaged  tortilla division (United States and Europe) |       | Ps.                                                         | 16,309,916 |                                | Ps.        | 1,686                         |       | Ps.                                 | 938,253    |   | Ps. | 609,369 |   |
| Corn flour division  (Mexico)                                         |       | 7,112,059                                                   |       | 276,284                             |       | 823,094                       |       | 280,165                             |       |
| Corn flour, wheat flour  and other products (Venezuela)               |       | 3,132,121                                                   |       | —                              |       | 96,232                        |       | 102,308                             |       |
| Other                                                                 |       | 4,081,697                                                   |       | 1,019,196                           |       | 171,055                       |       | 160,253                             |       |
| Other reconciling items                                               |       | 18,385                                                      |       | (1,297,166                          | )          | (246,109                      | )          | 49,983                              |       |
| Total                                                                 |       | Ps.                                                         | 30,654,178 |                                | Ps.        | —                        |       | Ps.                                 | 1,782,525  |   | Ps. | 1,202,078 |   |
|                                                                       |            |                                                             |            |                                     |            |                               |            |                                     |            |  |  |  |  |  |  |  |

 

F-35

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| Segment                                                               | ** ** | **Total assets** | ** ** | **Total liabilities** | ** ** | **Expenditures for  long-lived assets** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|---------------------------------------------------|------------|
| Corn flour and  packaged tortilla division (United States and Europe) |       | Ps.                   | 12,348,600 |                       | Ps.        | 5,027,571                                         |       | Ps. | 1,576,904 |   |
| Corn flour  division (Mexico)                                         |       | 8,970,120             |       | 2,060,830                  |       | 338,076                                           |       |
| Corn flour,  wheat flour and other products (Venezuela)               |       | 2,589,034             |       | 1,535,757                  |       | 236,655                                           |       |
| Other                                                                 |       | 4,634,676             |       | 1,241,798                  |       | 201,097                                           |       |
| Other  reconciling items                                              |       | 1,695,075             |       | 3,323,408                  |       | 80,231                                            |       |
| Total                                                                 |       | Ps.                   | 30,237,505 |                       | Ps.        | 13,189,364                                        |       | Ps. | 2,432,963 |   |
|                                                                       |            |                       |            |                            |            |                                                   |            |  |  |  |  |  |  |

 

The following tablepresents the details of  “Otherreconciling items” for operating income:
| Other reconciling items                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Corporate expenses                               |       | Ps.      | 41,419     |     | Ps.        | (86,993  | )          | Ps. | (121,029 | ) |
| Elimination of  inter-business unit transactions |       |     | 40,249     |     |       | 53,424   |       |   | (125,080 | ) |
| ** **                                       |       | Ps.      | 81,668     |     | Ps.        | (33,569  | )          | Ps. | (246,109 | ) |

Additionally, a summaryof information by geographic segment is as follows:
|                                         | ** ** | **2004**   | ** ** | **%**  | ** ** | **2005**   | ** ** | **%**      | ** ** | **2006**   | ** ** | **%**  | ** **      |
|-----------------------------------------|------------|------------|------------|--------|------------|------------|------------|------------|------------|------------|------------|--------|-----------------|
| **NET SALES TO EXTERNAL  CUSTOMERS:**   |       |       |       |   |       |       |       |       |       |       |       |   |            |
| United States  and Europe               |       | Ps.        | 12,296,117 |   | 48         |       | Ps.        | 14,326,749 |       | 51         |       | Ps.    | 16,309,916      |   | 53 |   |
| Mexico                                  |       | 8,367,917  |       | 32     |       | 8,891,595  |       | 32         |       | 9,616,862  |       | 32     |            |
| Venezuela                               |       | 3,821,510  |       | 15     |       | 3,220,834  |       | 12         |       | 3,132,121  |       | 10     |            |
| Central America                         |       | 1,314,196  |       | 5      |       | 1,423,720  |       | 5          |       | 1,595,279  |       | 5      |            |
|                                    |       | Ps.        | 25,799,740 |   | 100        |       | Ps.        | 27,862,898 |       | 100        |       | Ps.    | 30,654,178      |   | 100 |   |
|                                    |       |       |       |   |       |       |       |       |       |       |       |   |            |
| **IDENTIFIABLE ASSETS:**                |       |       |       |   |       |       |       |       |       |       |       |   |            |
| United States  and Europe               |       | Ps.        | 8,848,150  |   | 34         |       | Ps.        | 9,757,642  |       | 35         |       | Ps.    | 12,348,600      |   | 41 |   |
| Mexico                                  |       | 12,592,755 |       | 48     |       | 13,960,137 |       | 50         |       | 14,099,451 |       | 47     |            |
| Venezuela                               |       | 3,539,169  |       | 14     |       | 3,181,564  |       | 11         |       | 2,589,034  |       | 8      |            |
| Central America                         |       | 1,043,002  |       | 4      |       | 1,067,240  |       | 4          |       | 1,200,420  |       | 4      |            |
|                                    |       | Ps.        | 26,023,076 |   | 100        |       | Ps.        | 27,966,583 |       | 100        |       | Ps.    | 30,237,505      |   | 100 |   |
|                                    |       |       |       |   |       |       |       |       |       |       |       |   |            |
| **CAPITAL EXPENDITURES FOR THE  YEAR:** |       |       |       |   |       |       |       |       |       |       |       |   |            |
| United States  and Europe               |       | Ps.        | 1,007,290  |   | 76         |       | Ps.        | 950,798    |       | 44         |       | Ps.    |  1,576,904 |   | 65 |   |
| Mexico                                  |       | 211,230    |       | 16     |       | 932,379    |       | 44         |       | 491,627    |       | 20     |            |
| Venezuela                               |       | 102,298    |       | 8      |       | 217,895    |       | 10         |       | 236,655    |       | 10     |            |
| Central America                         |       | —     |       | 0      |       | 44,019     |       | 2          |       | 127,777    |       | 5      |            |
|                                    |       | Ps.        | 1,320,818  |   | 100        |       | Ps.        | 2,145,091  |       | 100        |       | Ps.    |  2,432,963 |   | 100 |   |
|                                         |            |            |            |        |            |            |            |            |            |            |            |        |                 |  |  |  |  |  |  |

 

F-36

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**18.****          FINANCIALINSTRUMENTS**

A)     FAIR VALUE OF FINANCIALINSTRUMENTS

The carrying amounts of cash and temporaryinvestments, accounts receivable, refundable taxes, trade accounts payable,short-term bank loans, current portion of long-term debt and accruedliabilities and other payables approximate their fair value, due to their shortmaturity. In addition, the net book value of accounts receivable and refundabletaxes represent the expected cash flow to be received.

The estimated fairvalue of the Company’s financial instruments is as follows:
|                                                                                                       | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------|------------|
| **At  December 31, 2005:**                                                                            | ** ** | ** **               | ** ** | ** **          | ** ** |
|                                                                                                  |       |                     |       |                |       |
| Liabilities:  Perpetual bonds in U.S. dollars bearing fixed interests at an annual rate of  7.75%     |       | Ps.                      | 3,330,911  |                | Ps.        | 3,516,442 |   |
| Liabilities:  Senior unsecured notes in U.S. dollars bearing fixed interest at annual rate  of 7.625% |       | 561,169                  |       | 577,244             |       |
| Liabilities:  Exchange rate forward contract                                                          |       | 16,274                   |       | 16,274              |       |
| Asset: Interest rate  swaps contract                                                                  |       | 41,077                   |       | 41,077              |       |
|                                                                                                       |            |                          |            |                     |            |  |  |

 
|                                                                                                       | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------|------------|
| **At  December 31, 2006:**                                                                            | ** ** | ** **               | ** ** | ** **          | ** ** |
|                                                                                                  |       |                     |       |                |       |
| Liabilities:  Perpetual bonds in U.S. dollars bearing fixed interests at an annual rate of  7.75%     |       | Ps.                      | 3,243,000  |                | Ps.        | 3,420,068 |   |
| Liabilities:  Senior unsecured notes in U.S. dollars bearing fixed interest at annual rate  of 7.625% |       | 546,359                  |       | 553,026             |       |
| Liabilities:  Exchange rate forward contract                                                          |       | 14,946                   |       | 14,946              |       |
| Liabilities:  Interest rate swaps contract                                                            |       | 9,980                    |       | 9,980               |       |
| Asset: Exchange  rate forward contract                                                                |       | 2,244                    |       | 2,244               |       |
| Asset: Interest  rate swaps contract                                                                  |       | 32,782                   |       | 32,782              |       |
| Asset: Commodity hedge  contracts                                                                     |       | 202,558                  |       | 202,558             |       |
|                                                                                                       |            |                          |            |                     |            |  |  |

Fair values weredetermined as follows:

·  Thefair value of debt and derivative financial instruments is determined based onquoted market prices for such instruments in the reference market.

·  Thecarrying value of the remainder of the long-term debt was similar to its fairvalue.

B)        HEDGES

The Company has enteredinto futures contracts for certain key production requirements such as gas andsome raw materials in order to hedge the cash flow variability due to pricefluctuations. These contracts are short-term and do not exceed the maximumproduction requirements for a one-year period and are classified as cash flowhedges or fair value hedges.

F-37

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As of December 31, 2005and 2006, the Company had open derivative commodity contracts with a fair valueof Ps.1,865 and Ps.202,558, respectively.

The Company from time totime hedges commodity price risks utilizing futures and options strategies thatdo not qualify for hedge accounting. As a result of non-qualification, thesederivative financial instruments are recognized at their estimated fair valuesand are marked to market with the associated effect recorded in current periodearnings. During 2006, the Company had an unfavorable effect of approximatelyPs.133,027 (U.S.$12,306 thousand) from these contracts.

The Company usesderivative financial instruments such as interest rate swaps with the purposeof managing the interest rate risk related to its long term debt. The Companyhas entered into interest rate swaps to hedge its senior unsecured notes thatmature in 2007 and bear interest at a rate of 7.625%, under which the fixedrate is converted to a variable rate of LIBOR plus 2.035%; additionally, theCompany entered into an agreement to pay a fixed interest rate of 5.1525%through 2004 and 5.485% from 2005 through 2007 and to receive LIBOR rate. TheCompany has also entered into interest rate swaps to hedge its syndicated loanthat matures in 2010 under which the loan’s variable rate of LIBOR 6M isconverted to a fixed rate of 3.2775% through March 2008 and 4.5050% throughMarch 2009; these contracts also include a provision limiting the amounts to beexchanged should the LIBOR 6M reaches 6% through March 2008 and 7% throughMarch 2009. As of December 31, 2006 the favorable effect of the changes in thefair value of all the interest rate swap contracts mentioned above amounted toPs.32,782, from which Ps.24,411 were recognized as comprehensive income withinstockholders’ equity and Ps.8,371 were registered in income for the year. Therealized gain of the contracts due in 2006 was Ps.19,022 which was recognizedin income.

During 2006, the Companyentered into interest rate swap contracts for a nominal amount of U.S.$150million, maturing in September 2007 and March 2008. Through these contracts,the Company pays a fixed rate of 0.34% and receives a LIBOR 6M rate less3.2775% if the LIBOR 6M rate is greater than or equal to 6% and less than 6.5%in March 2007 and is greater than or equal to 6% and less than 6.75% inSeptember 2007. Additionally, the Company entered into swap contracts for anominal amount of U.S.$150 million, maturing in March 2007, through which theCompany paid U.S.$437 thousand and receives a LIBOR 6M rate less 3.2775% if theLIBOR 6M rate is equal or greater than 6% in September 2006. These contractswere not recognized as hedge accounting and their fair values as of December31, 2006 amounted Ps.9,980.

During 2004 and 2005, theCompany entered into forward contracts and exchange rate option contracts(Mexican peso — U.S. dollar) for a notional amount of U.S.$55.8 million, withdifferent maturity dates until November 2007. The objective of these contractsis to hedge the financial risks due to exchange rate fluctuations over thequarterly interest payments related to the Company’s perpetual notes. Therealized unfavorable effect of the contracts due during 2006 was Ps.4,770 whichwas recognized in income of the year. As of December 31, 2006, the unrealizedunfavorable effect for changes in the fair value of outstanding contracts for anominal amount of U.S.$10.1 million was Ps.14,946, which was recognized ascomprehensive income within stockholders’ equity.

During 2006, theCompany entered into forward contracts and exchange rate option contracts(Mexican peso – U.S. dollar) for a nominal amount of U.S.$16.7 million,maturing during 2006 and for a nominal amount of U.S.$21.8 million, maturing indifferent dates until November 2007. These contracts were not recognized ashedge accounting. The realized unfavorable effect of the contracts due in 2006was Ps.894 which was recognized in income. As of December 31, 2006 theunrealized favorable effect for changes in the fair value of the outstandingcontracts was Ps.2,244, which was also recognized in income.

F-38

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C)        CONCENTRATION OF CREDITRISK

The financial instruments which are potentiallysubject to a concentration of risk are principally cash, temporary investmentsand trade accounts receivable. The Company deposits its cash and temporaryinvestments in recognized financial institutions. The concentration of thecredit risk with respect to trade receivables is limited since the Companysells its products to a large number of customers located in different parts ofMexico, United States, Central America, Venezuela, Europe Asia and Oceania. TheCompany maintains reserves for potential credit losses.

Operations in Venezuela represented approximately10.2% of net sales in 2006. In recent years, the political and socialinstability has prevailed in Venezuela. This severe political and civiluncertainty represents a risk to the business in this country, which cannot becontrolled or measured accurately. For instance, as a result of the nation-widegeneral strike that took place from December 2002 to February 2003 and in aneffort to shore up the economy and control inflation, Venezuelan authoritiesimposed foreign exchange and price controls on certain products in 2003. Theseforeign exchange controls may limit the Company’s capacity to convert bolivarsto other currencies and also transfer funds outside Venezuela. Additionally,these price controls apply to certain products such as corn flour and wheat flour,which limit the Company’s ability to increase prices in order to compensate forhigher costs in raw materials. In February 2003, the Venezuelan government seta single fixed exchange rate for the bolivar against the U.S. dollar of 1,600bolivars to U.S.$1.00. Later, in February 2004 the Venezuelan government set anew fixed exchange rate of 1,920 bolivars to U.S.$1.00. In March 2005, theVenezuelan government established a new exchange rate of 2,150 bolivars perU.S. dollar. The financial situation and results of the Company might benegatively affected, among other reasons, since (i) a portion of its sales isdenominated in bolivars, (ii) the subsidiaries in Venezuela make products thatare subject to price controls, (iii) part of the Company’s sales depend oncentralized government procurement policies for its social welfare programs,(iv) difficulty for Venezuelan subsidiaries to pay dividends, as well as toimport some of its requirements of raw material as a result of the exchangecontrol, and (v) increasing costs in some of the Company’s raw materials due tothe implementation of import tariffs.

Thecurrent president in Venezuela was reelected to a second term in December 2006,thus the civil and political instability will continue to prevail during thenext six-year term. Additionally, starting 2007 the current president wasqualified by the legislative power of this country with extraordinary facultiesto legislate by decree for a period of 18 months in several strategic areas,which could result in certain structural changes in the economical and socialpolicies in Venezuela and thus, increasing the uncertainty in this country.Most recently, the government’s actions affected certain Venezuelan businesses,including news and media outlets, which have been met with civil unrest andpublic demonstrations.

**19.****          RELATEDPARTY TRANSACTIONS**

As of December 31, 2005 and 2006, the Company owns a10.8557% and 10.0024% interest in GFNorte, a Mexican financial institution,respectively. In the normal course of business, the Company obtains long-termfinancing from GFNorte and other subsidiaries of this institution at marketrates and terms. During 2006, the Company did not obtain financing from GFNorte’ssubsidiaries.

As of December 31, 2005 and 2006, the Company hadaccounts payable to Archer-Daniels-Midland (ADM) of Ps.144,136 and Ps.132,439,respectively. Additionally, during 2004, 2005 and 2006, the Company purchasedinventory ingredients from ADM, amounting to U.S.$103 million (Ps.1,148,414),U.S.$105 million (Ps.1,138,922) and U.S.$115 million (Ps.1,240,336),respectively. ADM is a North American company associated with the Company insome of its subsidiaries.

F-39

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**20.****          RECENTACCOUNTING PRONOUNCEMENTS**

Starting January 1, 2007 the following FinancialReporting Standards (FRS) issued by the Mexican Financial Reporting StandardsBoard became effective. These FRS will not have a material effect in theCompany’s financial information.

FRS B-3 Statement of Income – Incorporates, amongothers, a new focus to classify income, costs and expenses into ordinary andnon-ordinary, eliminates the terms “Special Items” and “Extraordinary Items”,as well as establishes the employees’ statutory profit sharing as an ordinaryexpense and not as a tax expense.

FRS B-13 Subsequent Events – Requires, among others,that the restructurings for assets and liabilities and the disclaimers fromcreditors to exercise their right to settle the debt in the case ofincompliance by the entity should be recognized in the period that occurs.These issues will only be disclosed in the notes to financial statements.

FRS C-13 Related Parties – Extends, among others, thedefinition (scope) for related parties and increases the disclosurerequirements in notes to financial statements.

FRS D-6 Capitalization of comprehensive financing cost– Establishes, among others, the obligation and rules for capitalizingcomprehensive financing cost.

**21.****          SUBSEQUENT EVENTS**

During January 2007, due to increases in theinternational price for corn registered in the Chicago Board of Trade (CBOT) aswell as in the Jalisco, Bajío and México crops, a series of price increases fortortilla took place. The tortilla represents a main staple of the Mexican dietand the main market of the Company. In January 15, 2007 the Company, throughits subsidiary Grupo Industrial Maseca, published its intention for no priceincreases in corn flour until the next harvest, as well as explained that theCompany is not a producer or trader of corn and strengthened its compromise tocontinue supporting the manufacturers and supermarket chains that producetortilla to maintain the competitive quality and price for this product.

The Federal Government, the productive sectors, thecompanies linked to the production chain and the organizations of agricultureproducers agreed in a number of actions in order to stabilize the price oftortillas and guarantee the provisions of corn, wheat flour and tortilla at areasonable price. Consequently, in January 18, 2007 the *PACTO PARAESTABILIZAR EL PRECIO DE LA TORTILLA* (“Agreement to stabilize thetortilla price”) was signed. This agreement includes 12 specific actions fromwhich the following are highlighted:

·      *Distribuidora Conasupo*(“Conasupo Distributor” or “DICONSA”) will sell the kilogram of corn at Ps.3.50and of corn flour at Ps.5.00, in its 22,000 stores around the country.

·      Thecommercial agents that supply and sell corn to the nixtamal manufacturers willsell its product at Ps.3.50 per kilogram, packaged and delivered in the millswithin Mexico’s capital.

·      Theproducers of corn flour that constitute the *Cámara Nacional del MaizIndustrializado* (“National Chamber of Industrialized Corn”)committed to maintain an average price not higher than Ps.5.00 per kilogram ofcorn flour.

·      Thecompanies affiliated to the *Asociación Nacional deTiendas de Autoservicio*(“National Association of Supermarket Chains”or “ANTAD”) as well as Wal-Mart will not increase the tortilla price, offeringthe kilogram of this product at Ps.6.50 in its 1,900 points of sale.

F-40

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·      Tortillamanufactures grouped (more than 5,000 points of sale) will sell the kilogram oftortilla not higher than Ps.8.50.

·      Theimport quota is increased until a maximum of 750 thousand tons of corn free oftariff.

·      Animport quota free of tariff of 2 million 850 thousand tons is authorized forcorn to be used for consumption of birds, pigs and cattle.

·      TheFederal Government, through its productive agents, will instruct severalmechanisms that allow in the future having a strategic reserve of white cornfor human consumption.

The Company, as well as its principal competitors,signed this agreement, which is effective from January 15 through April 30,2007. On April 25, 2007 the Mexican government announced a second agreementthat extended the term through August 15, 2007.

As a result, the Company’s corn flour prices do notreflect the recent increase in the cost of corn, which resulted in asignificant deterioration in the financial performance of Grupo IndustrialMaseca, the Company’s subsidiary engaged in corn flour production, during thefirst quarter of 2007, which may continue to the extent the Company does notincrease prices. While the Mexican government has not directly fixed or capedcorn flour or tortilla prices, it has strongly encouraged Mexican producers andretailers to voluntarily do so until the next harvest of Mexican corn crops.The Company intends to fully abide by the terms of these agreements.  The Company cannot assure that there will notbe another extension of the agreements, that the Company will fully comply withtheir terms at all times, or that the Mexican government will not take actionsthat could adversely affect the Company’s financial condition and results ofoperation.

**22.****          DIFFERENCES BETWEENMEXICAN GAAP AND U.S. GAAP**

The Company’s consolidated financial statements areprepared in accordance with Mexican GAAP, which differ in certain significantrespects from U.S. GAAP. The Mexican GAAP consolidated financial statementsinclude the effects of inflation as provided for under Bulletin B-10 (see Note3-E), including the Fifth Amendment to Bulletin B-10 and Bulletin B-15, whereasfinancial statements prepared under U.S. GAAP are presented on a historicalcost basis. The reconciliation to U.S. GAAP includes a reconciling item for theeffect of applying the Fifth Amendment to Bulletin B-10 and Bulletin B-15restatement to Mexican pesos of constant purchasing power as of December 31,2006 because, as described below, these provisions of inflation accountingunder Mexican GAAP do not meet the consistent reporting currency requirementsof Regulation S-X. The U.S. GAAP adjustments have been determined based onMexican NCPI factors. The reconciliation does not include the reversal of otherMexican GAAP inflation accounting adjustments as they represent a comprehensivemeasure of the effects of price-level changes in the inflationary Mexicaneconomy and, as such, are considered a more meaningful presentation thanhistorical cost-based financial reporting for both Mexican and U.S. accountingpurposes.

The principal differences, other than inflationaccounting, between Mexican GAAP and U.S. GAAP and the effect on consolidatednet income and consolidated stockholders’ equity are presented below, with anexplanation of the adjustments.

F-41

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|                                                                    | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Reconciliation of net income:**                   | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net majority  income under Mexican GAAP                            |       | Ps.                                        | 953,000    |   | Ps. | 1,238,754 |   | Ps. | 1,524,738 |   |
| U.S. GAAP  adjustments:                                            |       |                                       |       |   |   |   |   |
| Depreciation expense (See C)                                       |       | (66,605                                    | )          | (58,887 | ) | (66,473 | ) |
| Impairment loss in the carrying value of idle assets  (See C)      |       | 65,366                                     |       | 23,406 |   | 14,107 |   |
| Preoperating expenses and other deferred costs (See D)             |       | 14,229                                     |       | 6,224 |   | (3,271 | ) |
| Capitalized comprehensive financing costs (See E)                  |       | 3,097                                      |       | 3,238 |   | 3,225 |   |
| Sale-leaseback transaction (See F):                                |       |                                       |       |   |   |   |   |
| Interest expense                                                   |       | (15,321                                    | )          | (13,324 | ) | (10,886 | ) |
| Rental and depreciation expense, net                               |       | 6,480                                      |       | 4,796 |   | 2,584 |   |
| Deferred income taxes (See H)                                      |       | 88,475                                     |       | (53,218 | ) | (96,470 | ) |
| Deferred employees’ statutory profit sharing   (See H)        |       | (1,419                                     | )          | (598 | ) | 486 |   |
| Net gain from sale of associated company’s shares  (See M)    |       | —                                     |       | — |   | 10,294 |   |
| Effect of U.S. GAAP adjustments on equity method  investee (See M) |       | (40,879                                    | )          | 5,304 |   | (18,104 | ) |
| Negative goodwill (See I):                                         |       |                                       |       |   |   |   |   |
| Depreciation expense                                               |       | 57,177                                     |       | 59,781 |   | 59,554 |   |
| Goodwill and indefinite-lived intangible assets (See  J)           |       | 12,477                                     |       | — |   | (6,228 | ) |
| Extinguishment of debt (See K)                                     |       | (263,669                                   | )          | 13,784 |   | 13,685 |   |
| Debt issuance costs (See K)                                        |       | —                                     |       | (2,760 | ) | 2,118 |   |
| Monetary position loss resulting from U.S. GAAP  adjustments       |       | (72                                        | )          | (13 | ) | (16 | ) |
| Effects of Bulletin B-15 restatement (See A)                       |       | 33,744                                     |       | (4,658 | ) | — |   |
| Total U.S. GAAP adjustments                                        |       | (106,920                                   | )          | (16,925 | ) | (95,395 | ) |
| Minority interest (See B)                                          |       | (10,406                                    | )          | 17,103 |   | 19,078 |   |
| **Net  income under U.S. GAAP**                                    |       | Ps.                                        | 835,674    |   | Ps. | 1,238,932 |   | Ps. | 1,448,421 |   |
| **Basic  and diluted earnings per share (in pesos)**               |       | Ps.                                        | 1.86       |   | Ps. | 2.74 |   | Ps. | 3.02 |   |
| **Weighted average shares  outstanding (thousands)**               |       | 450,306                                    |       | 451,446 |   | 480,007 |   |
|                                                                    |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

F-42

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|                                                                 | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| **Reconciliation of stockholders’ equity:** | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| **Stockholders’  equity under Mexican GAAP**               |       | Ps.                                   | 14,724,952 |   | Ps. | 17,048,141 |   |
| U.S. GAAP  adjustments:                                         |       |                                  |       |   |   |
| Property, plant and equipment (See C)                           |       | 650,573                               |       | 766,341 |   |
| Preoperating expenses and other deferred costs (See  D)         |       | (7,780                                | )          | (10,686 | ) |
| Capitalized comprehensive financing cost (See E)                |       | (9,712                                | )          | (6,450 | ) |
| Sale-leaseback transaction (See F)                              |       | (81,963                               | )          | (88,101 | ) |
| Excess of cost over book value (See G)                          |       | (167,321                              | )          | (166,685 | ) |
| Deferred income taxes (See H)                                   |       | (17,576                               | )          | (108,644 | ) |
| Deferred employees’ statutory profit sharing (See H)       |       | 127                                   |       | 596 |   |
| Equity method investee (See M)                                  |       | (180,267                              | )          | (133,511 | ) |
| Negative goodwill (See I)                                       |       | (818,885                              | )          | (756,220 | ) |
| Goodwill and indefinite-lived intangible assets (See  J)        |       | 205,475                               |       | 190,339 |   |
| Extinguishment of debt (See K)                                  |       | (261,893                              | )          | (247,177 | ) |
| Debt issuance costs (See K)                                     |       | (2,831                                | )          | (1,749 | ) |
| Labor obligations (See L)                                       |       | —                                |       | (19,053 | ) |
| U.S. GAAP adjustments attributable to minority  interest        |       | (109,099                              | )          | (119,681 | ) |
| Minority interest under Mexican GAAP (See B)                    |       | (2,989,119                            | )          | (2,922,348 | ) |
| Effects of Bulletin B-15 restatement (See A)                    |       | (41,531                               | )          | — |   |
| Total U.S. GAAP adjustments                                     |       | (3,831,802                            | )          | (3,623,029 | ) |
| **Stockholders’ equity under U.S.  GAAP**                  |       | Ps.                                   | 10,893,150 |   | Ps. | 13,425,112 |   |
|                                                                 |            |                                       |            |  |  |  |  |  |

 

A summary of the Company’s statement of changes instockholders’ equity with balances determined under U.S. GAAP is as follows:
| Balance at December 31, 2005                            |   | Ps.       | 10,893,150 |   |
|---------------------------------------------------------|--------|-----------|------------|--------|
| Stock issuance                                          |   | 1,148,136 |       |
| Net purchases and sales of Company’s common stock  |   | 2,614     |       |
| Dividends paid                                          |   | (424,394  | )          |
| Derivative financial instruments                        |   | 6,312     |       |
| Recognition of inflation effects for the year           |   | (26,204   | )          |
| Impact of adoption of SFAS No. 158 (net of income  tax) |   | (13,718   | )          |
| Foreign currency translation adjustments                |   | 390,795   |       |
| Net income for the year                                 |   | 1,448,421 |       |
| Balance at December 31,  2006                           |   | Ps.       | 13,425,112 |   |

 

A summary of the Company’s stockholders’ equity afterthe U.S. GAAP adjustments described above as of December 31, 2005 and 2006 isas follows:
|                                                  | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|--------------------------------------------------|------------|-------------|------------|-------------|------------|
| Capital stock                                    |       | Ps.         | 12,520,555 |        | Ps.        | 12,834,964 |   |
| Additional  paid-in capital                      |       | 3,733,297   |       | 4,569,494   |       |
| Retained  earnings                               |       | 9,302,065   |       | 10,326,236  |       |
| Accumulated  other comprehensive loss            |       | (14,662,767 | )          | (14,305,582 | )          |
| Total stockholders’  equity under U.S. GAAP |       | Ps.         | 10,893,150 |        | Ps.        | 13,425,112 |   |

 

F-43

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A)     EFFECTS OF BULLETIN B-15RESTATEMENT

As disclosed inNote 3-E, the Company restates information for prior periods for comparisonpurposes to information of the most current period presented, based on aweighted average restatement factor that reflects the relative inflation andcurrency exchange movements of the countries in which the Company operates.This restatement do not meet the Regulation S-X requirement that the financialstatements be stated in the same currency for all periods, because changes inforeign currency exchange rates are included in the restatement factor.  The U.S. GAAP adjustments to net income andstockholders’ equity reflect the difference between restating these priorperiods, including the U.S. GAAP adjustments, to December 31, 2006 constantpesos utilizing the Mexican NCPI and the weighted average restatementfactor.  See Note 22-R for summarizedfinancial information prepared on a U.S. GAAP basis restated to December 31,2006 constant pesos utilizing the Mexican NCPI.

B)      MINORITY INTEREST

Under MexicanGAAP, the minority interest in consolidated subsidiaries is presented as aseparate component within stockholders’ equity in the consolidated balancesheet. For U.S. GAAP purposes, the minority interest is not included instockholders’ equity.

C)      PROPERTY, PLANT ANDEQUIPMENT

Mexican GAAPallows companies the option of using a specific index, which contemplatesinflation and currency exchange movements in the restatement of machinery and equipmentand the related depreciation expense if such machinery and equipment is offoreign origin. The Company has elected to apply a specific index to fixedassets of foreign origin for the purposes of determining the restated balancesunder Mexican GAAP. For U.S. GAAP purposes, the use of a specific index, whichcontemplates currency exchange changes, is not in accordance with thehistorical cost concept nor does it present financial information in a constantreporting currency. The impact on the net carrying value of fixed assets ofrestating fixed assets of foreign origin utilizing the Mexican NCPI for U.S.GAAP purposes increases stockholders’ equity as of December 31, 2005 and 2006by Ps.741,176 and Ps.858,803, respectively.

Under MexicanGAAP, depreciation on idle equipment is not required if the carrying value isexpected to be recovered and is subject to an impairment review. Under U.S.GAAP, those assets should continue be depreciated and subject to an impairmentreview. Therefore, the adjustment to property, plant and equipment decreasesstockholder’s equity as of December 31, 2005 and 2006 by Ps.182,351 andPs.197,969, respectively.

Under MexicanGAAP, the Company recognized impairment losses in the value of certain idleassets that were not being depreciated. Under U.S. GAAP, no impairment wasrecognized given that the depreciation of these assets had not ceased;consequently, the carrying value under U.S. GAAP was lower than Mexican GAAPand the impairment recognized for Mexican GAAP purposes was reversed.Therefore, the adjustment to property, plant and equipment increasesstockholders’ equity as of December 31, 2005 and 2006 by Ps.91,748 andPs.105,507, respectively.

F-44

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D)     PREOPERATING EXPENSES ANDOTHER DEFERRED COSTS

As of December 31,2002, under Mexican GAAP, preoperating expenses incurred were permitted to becapitalized and amortized by the Company over the period of time estimated togenerate the income necessary to recover such expenses. The Company definedthis period as 12 years based on prior experience. Starting January 1, 2003,under Mexican GAAP, only preoperating expenses incurred during the developmentstage are capitalized, whereas preoperating expenses identified as research areexpensed as incurred. Additionally, the preoperating expenses capitalized untilJanuary 1, 2003 are continuing to be amortized using the straight-line methodover a period not to exceed 12 years. Under US GAAP, such expenses should betreated as period expenses.

The U.S. GAAPequity adjustments of Ps.7,780 and Ps.10,686 decrease intangible assetspresented in the balance sheets as of December 31, 2005 and 2006, respectively.

E)      COMPREHENSIVE FINANCINGCOSTS

Under MexicanGAAP, comprehensive financing costs, including interest expense, foreignexchange gains or losses and monetary position of the related debt for majorconstruction projects, are capitalized as part of the assets during theconstruction period.  Under U.S. GAAP,monetary position and foreign exchange gains and losses on U.S. dollar or otherstable currency borrowings are excluded from capitalized interest.

F)      SALE-LEASEBACK TRANSACTION

Under MexicanGAAP, a sale-leaseback transaction that involves real estate is recognized withthe use of the general criteria established for capital and operating leasetransactions.  Based upon these criteria,a sale-leaseback of real estate was recorded by the Company as an operatinglease.  Under U.S. GAAP, Statement ofFinancial Accounting Standards (“SFAS”) No. 98, such a transaction would berecognized as a financing lease because a continuing involvement from theseller-lessee is present, and consequently, the risks and benefits of theproperty are not transferred to the buyer-lessor.  The U.S. GAAP balance sheet as of December31, 2005 and 2006 would reflect increases in fixed assets, net, of Ps.76,300and Ps.41,943 (net of accumulated depreciation of Ps.81,963 and Ps.88,101,respectively), respectively, and long-term debt increases of Ps.158,263 andPs.130,044, respectively.

The financing lease under U.S. GAAP has a 15-year termwith an effective date of May 1, 1996. It requires minimum annual payments ofapproximately U.S.$3.2 million (Ps.34,592) for the year 2007, U.S.$5.0 million(Ps.54,050) for 2008, U.S.$1.5 million (Ps.16,215) for 2009 and approximatelyU.S.$4.7 million (Ps.50,807) thereafter.

G)      AMORTIZATION OF EXCESS OFCOST OVER BOOK VALUE

Under MexicanGAAP, until January 1, 2004, the excess of the purchase price over theproportionate book value of net assets acquired was recorded as “Excess of costover book value” for all of the Company’s acquisitions, including commoncontrol acquisitions. Under U.S. GAAP, transfers and exchanges betweenenterprises under common control are accounted for on a carry-over basis, andtherefore, no such goodwill would be recorded. The U.S. GAAP equity adjustments of Ps.167,321 and Ps.166,685 decreasethe excess of cost over book value presented in the balance sheet as ofDecember 31, 2005 and 2006, respectively. There is no net income reconciliationadjustment in 2004, 2005 and 2006 since the Company ceased amortizing goodwillunder Mexican GAAP with the adoption of Bulletin B-7.

F-45

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H)     DEFERRED INCOME TAXES ANDEMPLOYEES’ STATUTORY PROFIT SHARING

Under MexicanGAAP, the Company adopted the provisions of revised Bulletin D-4 for therecognition of deferred tax assets and liabilities. The accounting treatment ofBulletin D-4 is in accordance with the comprehensive asset and liability methodof SFAS No. 109 “Accounting for Income Taxes”. The U.S. GAAP adjustments to netincome and stockholders’ equity reflect the deferred income taxes and employees’statutory profit sharing generated by the other U.S. GAAP adjustments discussedelsewhere herein. Additionally, during 2006 the Company recognized a deferredtax liability of Ps.44,253 derived from the excess of the amount for financialreporting over the tax basis of the investment in GFNorte.

Under thecomprehensive asset and liability method of SFAS No. 109, deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to bereversed.

For both Mexicanand U.S. GAAP purposes, the financial statement carrying amounts utilized inthe determination of the deferred tax assets and liabilities included theinflation adjustments described in Note 3-E, and their respective tax basesalso included the effects of inflation based on tax regulations.

The amounts ofdeferred income taxes charged or credited to net income for each year underSFAS No. 109 and as set forth in Issued 93-9 of the U.S. Financial AccountingStandards Board’s Emerging Issues Task Force was determined based on thedifferences between the beginning and ending balances of the deferred taxassets or liabilities for each period, expressed in Mexican pesos of constantpurchasing power.

Income taxexpense:

The domestic and foreign components of income beforetaxes, employees’ statutory profit sharing, equity in earnings of associatedcompanies and minority interest reported under Mexican GAAP are as follows:
|            | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Domestic   |       | Ps.                                        | 173,403    |   | Ps. | 43,266 |   | Ps. | 416,774 |   |
| Foreign    |       | 1,464,086                                  |       | 1,162,789 |   | 1,018,567 |   |
|       |       | Ps.                                        | 1,637,489  |   | Ps. | 1,206,055 |   | Ps. | 1,435,341 |   |

 

Provisions for domestic federal, foreign federal andstate income taxes in the Mexican GAAP consolidated statements of incomeconsist of the following components:

F-46

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|                     | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Current:            |       |                                       |       |   |   |   |   |
| Domestic federal    |       | Ps.                                        | 7,578      |   | Ps. | 172,991 |   | Ps. | 157,455 |   |
| Foreign federal     |       | 375,044                                    |       | 341,451 |   | 152,389 |   |
| Foreign state       |       | 35,555                                     |       | 34,142 |   | 29,025 |   |
|                |       | Ps.                                        | 418,177    |   | Ps. | 548,584 |   | Ps. | 338,869 |   |
| Deferred:           |       |                                       |       |   |   |   |   |
| Domestic federal    |       | Ps.                                        | 289,381    |   | Ps. | (68,027 | ) | Ps. | 116,098 |   |
| Foreign federal     |       | 67,436                                     |       | (74,049 | ) | (49,331 | ) |
| Foreign state       |       | 13,047                                     |       | (20,083 | ) | 5,913 |   |
|                |       | Ps.                                        | 369,864    |   | Ps. | (162,159 | ) | Ps. | 72,680 |   |
| Total income  taxes |       | Ps.                                        | 788,041    |   | Ps. | 386,425 |   | Ps. | 411,549 |   |
|                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The tax effects of temporary differences that giverise to significant portions of the deferred tax assets and liabilities atDecember 31, 2005 and 2006, are as follows:
|                                                             | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|-------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Deferred  tax assets:**                                   |       |      |       |      |       |
| Net operating  loss carryforwards and other tax credits (a) |       | Ps.       | 682,948    |      | Ps.        | 374,588 |   |
| Accrued  liabilities                                        |       | 170,878   |       | 229,997   |       |
| Intangible  assets (b)                                      |       | 87,552    |       | 60,669    |       |
| Other                                                       |       | 136,640   |       | 170,056   |       |
| Total gross  deferred tax assets                            |       | 1,078,018 |       | 835,310   |       |
|                                                        |       |      |       |      |       |
| **Deferred  tax liabilities:**                              |       |      |       |      |       |
| Property, plant  and equipment, net (c)                     |       | 1,752,846 |       | 1,733,172 |       |
| Inventories                                                 |       | 288,589   |       | 243,292   |       |
| Investment in  partnership and equity method investee       |       | 544,812   |       | 597,355   |       |
| Other assets                                                |       | 67,923    |       | 83,596    |       |
| Total gross  deferred tax liabilities                       |       | 2,654,170 |       | 2,657,415 |       |
|                                                        |       |      |       |      |       |
| Net deferred tax  liability under U.S. GAAP                 |       | 1,576,152 |       | 1,822,105 |       |
| Net deferred tax  liability under Mexican GAAP              |       | 1,558,576 |       | 1,713,461 |       |
| Adjustment for  U.S. GAAP                                   |       | Ps.       | 17,576     |      | Ps.        | 108,644 |   |
|                                                        |       |      |       |      |       |

 

----

|   | (a) | Includes valuation allowance of Ps.167,917 and  Ps.85,269 as of December 31, 2005 and 2006, respectively, since no sufficient  evidence is available that these tax loss carryforwards will be realizable. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (b) | Reflects a prepaid asset resulting from an  intercompany transaction.                                                                                                                                      |
|   | (c) | Principally due to the differences between restated  book and tax basis, including depreciation and capitalized interest.                                                                                  |

 

F-47

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A summary of the deferred tax liability (asset)balances on a U.S. GAAP basis are as follows:
|                        | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|------------------------|------------|-----------|------------|-----------|------------|
| Current:               |       |      |       |      |       |
| Deferred tax asset     |       | Ps.       | (307,519   | )         | Ps.        | (400,053 | ) |
| Deferred tax liability |       | 288,589   |       | 243,292   |       |
|                   |       | (18,930   | )          | (156,761  | )          |
| Non-current:           |       |      |       |      |       |
| Deferred tax asset     |       | (770,500  | )          | (435,257  | )          |
| Deferred tax liability |       | 2,365,582 |       | 2,414,123 |       |
|                   |       | 1,595,082 |       | 1,978,866 |       |
| Total                  |       | Ps.       | 1,576,152  |      | Ps.        | 1,822,105 |   |

The provision for income tax on a U.S. GAAP basis isas follows:
|            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| ** ** |       |     |       |     |       |     |       |
| Current    |       | Ps.      | (414,513   | )        | Ps.        | (546,487 | )          | Ps. | (338,869 | ) |
| Deferred   |       | (278,921 | )          | 130,279  |       | (169,150 | )          |
|       |       | Ps.      | (693,434   | )        | Ps         | (416,208 | )          | Ps. | (508,019 | ) |

 

In addition, the Company has established a deferredliability for U.S. GAAP purposes of Ps.18,894 and Ps.2,584, at December 31,2005 and 2006, respectively, relating to employees’ statutory profit sharing.

I)     NEGATIVEGOODWILL

Under Mexican GAAP, until January 1, 2004, the excessof the net book value of identifiable assets acquired over their purchase pricewas recorded as “Excess of book value over cost of subsidiaries acquired, net”and was permitted to be amortized over a period of time not to exceed 5 years.

Under U.S. GAAP, the excess of the fair value over thenet book value of acquired identifiable assets is allocated to the book valueof the non-monetary assets acquired. Once the book value has been reduced tozero, any unallocated amounts are recorded in earnings.

As of December 31, 2005 and 2006, the U.S. GAAP equityadjustment of Ps.818,885 and Ps.756,220 respectively, decrease the net fixedassets in the same amounts.

J)       GOODWILL ANDINDEFINITE-LIVED INTANGIBLE ASSETS

Under U.S. GAAP, effective January 1, 2002, theCompany adopted the provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets” (“SFAS No. 142”). Under SFAS No. 142, goodwill and indefinite-livedintangible assets are no longer amortized but are reviewed for impairment on anannual basis at the reporting unit level.

F-48

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Under Mexican GAAP, until January 1, 2003, allintangible assets were amortized over their estimated useful life. Bulletin C-8“Intangible Assets” was adopted starting January 1, 2003, and consequently,certain intangible assets (excluding goodwill) were recognized as havingindefinite lives and were no longer amortized. Accordingly, amortization ofindefinite-lived intangible assets ceased in 2002 for U.S. GAAP and in 2003 forMexican GAAP. As mentioned in Note 3-K, starting January 1, 2004, under MexicanGAAP goodwill should no longer be amortized, but subject to annual impairmenttests. Accordingly, goodwill amortization ceased in 2002 for U.S. GAAP and in2004 for Mexican GAAP.

Due to the application of Bulletin C-15 “Impairment inthe Value of Long-Lived Assets and Their Disposal”, during 2004 the Companyrecognized in income an impairment loss in the value of intangible assets andgoodwill for Ps.6,685 and Ps.5,792, respectively. Under U.S. GAAP, these assetshad been written off in previous years. As mentioned in Note 8, during 2006 theCompany recognized in income an impairment loss for certain intangible assets.Under U.S. GAAP, the carrying value of these assets is higher by Ps.6,228.

The U.S. GAAP equity adjustment of Ps.205,475 andPs.190,339 increases the excess of cost over book value in Ps.196,367 andPs.187,746 and intangible assets in Ps.9,108 and Ps.2,593 as of December 31,2005 and 2006, respectively, as a result of the above items.

K)    EXTINGUISHMENTOF DEBT

In December 2004, the Company issued perpetual notesfor a total of Ps.3,243,000 (U.S. $300,000 thousand) which pay interestquarterly at 7.75% annual rate. The proceeds were used mainly to repay U.S.$200million of the 7.625% senior unsecured notes due October 2007. For the earlyredemption of the senior unsecured notes, the Company paid a premium ofPs.263,669. Under Mexican GAAP, this premium was recognized in intangibleassets as debt issuance costs of the perpetual notes and amortized using thestraight-line method over a period of 20 years.

Under U.S. GAAP, this premium was recognized inincome. The perpetual notes represented a new debt instrument, since theexchange was not done with the holders of the old senior unsecured notes. Inaddition, under U.S. GAAP, all previously unamortized debt issuance costsrelated to the old senior unsecured notes was also written off.

On July 2005 the Company obtained a U.S.$250,000thousand, five-year credit facility, at LIBOR plus 40 basis points for thefirst year and LIBOR plus 37.5 and 45 basis points for the following yearsdepending on the Company’s leverage. The Company incurred debt issuance costsof Ps.7,475 related to the new debt. The proceeds were used to repay U.S.$250million debt which would mature between 2008 and 2009. At the redemption date,the Company had Ps.10,733 of unamortized debt issuance costs related to thisdebt. Under Mexican GAAP, the unamortized debt issuance costs related to theold debt will continue to be amortized throughout the maturity of the new debtas it has been considered a refinancing of the old debt under Bulletin C-9.Debt issuance costs incurred with the issuance of the new debt have beenexpensed.

Under U.S. GAAP, the unamortized debt issuance costsrelated to the old debt that was redeemed have been written-off and the debtissuance costs incurred with the issuance of the new debt have been capitalizedas they relate to a new debt instrument with a different creditor.

F-49

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L)    LABOR OBLIGATIONS

Under U.S. GAAP, on December 31, 2006 the Companyadopted the recognition and disclosure provisions of SFAS No. 158 “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFASNo. 158”). SFAS No. 158 requires the Company to recognize the funded status(i.e. difference between the fair value of plan assets and the benefitobligations) of its defined benefit pension and other postretirement plans inthe Company’s December 31, 2006 consolidated balance sheet, with acorresponding adjustment to accumulated other comprehensive income (AOCI), netof tax. The adjustment to AOCI at adoption represents primarily deferredactuarial gains, which where previously netted against the plans’ funded statusin the balance sheet pursuant to the provisions of SFAS No. 87, “Employers’Accounting for Pensions”, SFAS No. 106 “Employers’ Accounting forPostretirement Benefits other than Pensions”, and SFAS No. 112, “Employers’Accounting for Postemployment Benefits”. These amounts will continue to beamortized and recognized as a component of future net periodic benefit cost.

In addition, SFAS No. 158 requires that companiesusing a measurement date for their defined benefit pension plans and otherpostretirement plans other than their fiscal year-end, change to a fiscalyear-end measurement date effective for years ending after December 15, 2008.The Company’s measurement date for its plans is and has been the same as theCompany’s fiscal year-end (i.e. December 31, 2006).

The incremental effects of adopting SFAS No. 158 onthe Company’s consolidated balance sheet at December 31, 2006, are presented inthe following table. The adoption of SFAS No. 158 had no effect in the Company’sconsolidated statement of income or the Company’s consolidated statement ofcomprehensive income for the year ended December 31, 2006.
|                                                   | ** ** | **Balance under U.S. GAAP**              | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **Before  application of  SFAS No. 158** | ** ** | **Effect  of adopting SFAS  No. 158** | ** ** | **After  application of  SFAS No. 158** | ** ** |
| ** **                                        | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other  liabilities                                |       | Ps.                                                     | 611,553    |   | Ps. | 19,053 |   | Ps. | 630,606 |   |
|                                              |       |                                                    |       |   |   |   |   |   |   |   |
| Deferred income  taxes                            |       | 1,827,440                                               |       | (5,335 | ) | 1,822,105 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Total  liabilities                                |       | 13,432,790                                              |       | 13,718 |   | 13,446,508 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Accumulated  other comprehensive loss, net of tax |       | (14,291,864                                             | )          | (13,718 | ) | (14,305,582 | ) |
|                                              |       |                                                    |       |   |   |   |   |
| Total stockholders’  equity                  |       | 13,438,830                                              |       | (13,718 | ) | 13,425,112 |   |

The amount recorded in accumulated other comprehensiveloss at December 31, 2006 of Ps.13,718 consisted of cumulative net gain ofPs.19,053, net of income tax of Ps.5,335.

The estimated amount of cumulative net gain that isexpected to be amortized from accumulated other comprehensive loss into netperiodic pension cost over the next fiscal year is Ps.1,301.

F-50

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M)        SUPPLEMENTALBALANCE SHEET INFORMATION

·      Securitiesof related parties:

The investment in common stock of GFNorte is accountedfor under the equity method, since the Company has significant influence overthe investee due to its representation on the Board of Directors of GFNorte andthe equity interest of GRUMA’s principal shareholder in GFNorte. The effect ofapplying U.S. GAAP adjustments to the equity investment has been included inthe Company’s U.S. GAAP reconciliation.

As mentioned in Note 6, during 2006 the Company sold17,224,100 shares from its investment in GFNorte. Under Mexican GAAP, theCompany recognized a net gain of Ps.380,572 from this sale. Considering thecarrying value of the investment in GFNorte under U.S. GAAP, the net gain from thissale amounted to Ps.390,866.

During 2005 and 2006, the Company received dividendsfrom GFNorte amounting to Ps.56,864 and Ps.77,948, respectively.

Under both Mexican and U.S. GAAP, the Companyrecognized goodwill for the acquisition of GFNorte in 1992. Under U.S. GAAP,effective January 1, 2002, with the adoption of SFAS No. 142, goodwill was nolonger amortized. The amount of such remaining goodwill is Ps.44,878. UnderMexican GAAP, goodwill was fully amortized by December 31, 2002.

The Company’s investment in GFNorte has a market valueof Ps.8,529,531 based on the quoted market price at December 31, 2006.

Condensed financial information under Mexican Banking GAAP for GFNorteas of and for the years ended December 31:
|                                                | ** ** | **Amounts in millions of Mexican  pesos of constant purchasing power  as of December 31, 2006** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                                                                                                                                    | ** ** | **2006** | ** ** |
| Cash and cash  equivalents                     |       | Ps.                                                                                                                                                         | 40,403     |   | Ps. | 43,403 |   |
| Investment  securities                         |       | 22,325                                                                                                                                                      |       | 25,672 |   |
| Net loan  portfolio                            |       | 117,989                                                                                                                                                     |       | 140,493 |   |
| Property,  furniture and equipment, net        |       | 5,918                                                                                                                                                       |       | 6,646 |   |
| Total assets                                   |       | 198,103                                                                                                                                                     |       | 234,437 |   |
| Deposits                                       |       | 143,159                                                                                                                                                     |       | 169,537 |   |
| Bank and other  entity loans – current    |       | 8,440                                                                                                                                                       |       | 6,891 |   |
| Bank and other  entity loans – noncurrent |       | 11,945                                                                                                                                                      |       | 9,959 |   |
| Total  liabilities                             |       | 175,734                                                                                                                                                     |       | 206,932 |   |
| Majority  interest                             |       | 21,349                                                                                                                                                      |       | 26,097 |   |
| Minority interest                              |       | 1,020                                                                                                                                                       |       | 1,408 |   |
|                                                |            |                                                                                                                                                             |            |  |  |  |  |

 

F-51

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|                                  | ** ** | **Amounts in millions of Mexican pesos of constant** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **purchasing power as of December 31, 2006**              | ** ** |
| ** **                       | ** ** | **2004**                                                                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| Interest income                  |       | Ps.                                                                                     | 27,208     |   | Ps. | 36,792 |   | Ps. | 35,480 |   |
| Interest expense                 |       | (16,495                                                                                 | )          | (22,841 | ) | (20,626 | ) |
| Income before  minority interest |       | 3,006                                                                                   |       | 6,286 |   | 6,168 |   |
| Net income                       |       | 2,809                                                                                   |       | 5,957 |   | 5,959 |   |
|                                  |            |                                                                                         |            |  |  |  |  |  |  |  |

 

·                  Other currentliabilities:

Included within accrued liabilities and other payables as of December31, 2005 and 2006 are accrued compensation costs (Ps.438,827 and Ps.453,419 in2005 and 2006, respectively) and accrued advertising costs (Ps.190,180 andPs.206,103 in 2005 and 2006, respectively).

·                  Otherstockholders’ equity:

Included within retained earnings as of December 31,2005 and 2006 are undistributed earnings of GF Banorte amounting toapproximately Ps.1,836,769 and Ps.2,178,023, respectively.

·                  Computersoftware:

Depreciation expense for the years ended December 31, 2004, 2005 and2006 amounted to Ps.93,700, Ps.81,995 and Ps.66,453, respectively, oncapitalized computer software cost. Unamortized software costs included as ofDecember 31, 2005 and 2006 totaled Ps. 167,088 and Ps.83,152

N)           SUPPLEMENTALINCOME STATEMENT INFORMATION

·                  Advertisingcosts:

Advertising costs, included in selling, general andadministrative expenses, are expensed when the advertising first takes place.Advertising expense was Ps.690,252, Ps.769,175 and Ps.868,367 for the yearsended December 31, 2004, 2005 and 2006, respectively. The Company had Ps.78,356and Ps.118,802 of prepaid advertising costs reported as prepaid expenses as ofDecember 31, 2005 and 2006, respectively.

·                  Shipping andhandling costs:

Shipping andhandling costs are included in selling, general and administrative expenses andamounted to Ps.1,309,264, Ps.1,536,779 and Ps.1,796,331 for the years endedDecember 31, 2004, 2005 and 2006.

·                  Operatingincome:

Under U.S. GAAP, certain other income items included in the MexicanGAAP financial statements of the Company, such as ESPS and amortization ofother deferred costs would be included in the determination of operatingincome. For the years ended December 31, 2004, 2005 and 2006, these itemsamounted to Ps.61,230, Ps.71,174 and Ps.89,031, respectively.

F-52

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·                  Consumer and trade sales promotionexpenses

Under U.S. GAAP,the Company has classified certain consumer and trade sales promotion expenses,such as coupon redemption costs, cooperative advertising programs, new productintroduction fees, feature price discounts and in-store display incentives as areduction of revenue. For the years ended December 31, 2004, 2005 and 2006these items amounted to Ps.212,834, Ps.214,600 and Ps.266,294, respectively.

·      Other

During 2006, theCompany recognized an impairment charge at its subsidiary, Molinera de México,related to property, plant and equipment and certain intangibles totalingPs.327,215.  Molinera de México, which isincluded in the “Other” segment, has faced market pressures in Mexico.

O)           SUPPLEMENTALCASH FLOW INFORMATION

Mexican GAAP Bulletin B-12 specifies the appropriate presentation ofthe statements of changes in financial position. Under Bulletin B-12, thesources and uses of resources are determined based upon the differences betweenbeginning and ending financial statement balances in Mexican pesos of constantpurchasing power. Under U.S. GAAP, a statement of cash flow is required, whichpresents only cash movements and excludes non-cash items.

The following presents a price-level adjustedstatement of cash flows, after considering the impact of U.S. GAAP adjustmentsin conformity with the AICPA SEC Regulations Committees’ International PracticeTask Force recommendation.

 

F-53

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|                                                                                     | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Operating activities:                                                               |       |                                       |       |   |   |   |   |
| Net income                                                                          |       | Ps.                                        | 835,674    |   | Ps. | 1,238,932 |   | Ps. | 1,448,421 |   |
| Minority  interest                                                                  |       | 196,047                                    |       | 136,195 |   | 59,901 |   |
| Consolidated  income                                                                |       | 1,031,721                                  |       | 1,375,127 |   | 1,508,322 |   |
| Adjustments to  reconcile net income to resources provided by operating activities: |       |                                       |       |   |   |   |   |
| Monetary position  gain                                                             |       | (261,007                                   | )          | (313,174 | ) | (320,483 | ) |
| Depreciation and  amortization                                                      |       | 1,126,595                                  |       | 1,131,487 |   | 1,196,884 |   |
| Impairment of  long-lived assets                                                    |       | 177,720                                    |       | 17,738 |   | 451,501 |   |
| Allowance for  doubtful accounts                                                    |       | 38,946                                     |       | 33,454 |   | 76,522 |   |
| Equity in  earnings of associated companies, less dividends received                |       | (201,321                                   | )          | (580,845 | ) | (516,576 | ) |
| Seniority  premium and other long-term accrued liabilities                          |       | 9,464                                      |       | 45,812 |   | 9,015 |   |
| Debt issuance  costs cancelled due to early extinguishment of debt                  |       | 25,579                                     |       | — |   | — |   |
| Net gain from  sale of subsidiaries’ shares                                    |       | —                                     |       | — |   | (137,971 | ) |
| Net gain from  sale of associated company’s shares                             |       | —                                     |       | — |   | (390,866 | ) |
| Retirement  benefits at the end of the employee labor relationship                  |       | —                                     |       | 78,070 |   | — |   |
| Deferred income  taxes and employees’ statutory profit sharing                 |       | 288,281                                    |       | (138,137 | ) | 152,645 |   |
|                                                                                |       | 2,235,978                                  |       | 1,649,532 |   | 2,028,993 |   |
|                                                                                |       |                                       |       |   |   |   |   |
| Changes in working  capital:                                                        |       |                                       |       |   |   |   |   |
| Restricted cash                                                                     |       | 696                                        |       | 502 |   | — |   |
| Accounts  receivable, net                                                           |       | (729,896                                   | )          | (303,252 | ) | (1,360,584 | ) |
| Inventories                                                                         |       | (570,435                                   | )          | 81,918 |   | 132,870 |   |
| Prepaid expenses                                                                    |       | (32,793                                    | )          | (37,356 | ) | (55,051 | ) |
| Trade accounts  payable                                                             |       | 593,440                                    |       | 561,818 |   | 248,152 |   |
| Accrued  liabilities and other payable                                              |       | 109,217                                    |       | (416,882 | ) | 674,648 |   |
| Income taxes and  employees’ statutory profit sharing payable                  |       | 4,239                                      |       | (13,795 | ) | 4,284 |   |
|                                                                                |       | (625,532                                   | )          | (127,047 | ) | (355,681 | ) |
| Net cash provided by  operating activities                                          |       | 1,610,446                                  |       | 1,522,485 |   | 1,673,312 |   |
|                                                                                     |            |                                            |            |  |  |  |  |  |  |  |

 

F-54

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| Investing activities:                                            |   |        |    |       |   |       |   |
|------------------------------------------------------------------|--------|-------------|---------|------------|--------|------------|--------|
| Purchases of  property, plant and equipment                      |   | (968,744    | )       | (1,335,613 | )      | (2,221,388 | )      |
| Purchases of new  facilities, net of cash                        |   | (413,115    | )       | (657,479   | )      | (570,587   | )      |
| Proceeds from  sale of property, plant and equipment             |   | 204,187     |    | 180,169    |   | 748,590    |   |
| Deferred assets                                                  |   | (120,641    | )       | (21,778    | )      | (15,694    | )      |
| Proceeds  received from sale of subsidiaries’ shares        |   | —      |    | —     |   | 137,971    |   |
| Proceeds  received from sale of associated company’s shares |   | —      |    | —     |   | 588,854    |   |
| Other                                                            |   | 12,801      |    | (31,021    | )      | (152,122   | )      |
| Net cash used in  investing activities                           |   | (1,285,512) |    | (1,865,722 | )      | (1,484,376 | )      |
|                                                             |   |        |    |       |   |       |   |
| Financing activities:                                            |   |        |    |       |   |       |   |
| Proceeds from  bank loans and long-term debt                     |   | 4,895,985   |    | 2,786,620  |   | 2,575,318  |   |
| Repayment of  bank loans and long-term debt                      |   | (4,825,250  | )       | (2,006,810 | )      | (3,061,511 | )      |
| Repayment of  long-term note payable                             |   | —      |    | —     |   | (48,213    | )      |
| Proceeds from  stock issuance                                    |   | —      |    | —     |   | 1,148,136  |   |
| Contributions  (distributions) by minority interest              |   | 69,405      |    | (1,560     | )      | 94,024     |   |
| Net  purchases-sales of Company’s common stock              |   | 305,203     |    | 22,899     |   | 2,614      |   |
| Derivative  financial instruments                                |   | —      |    | (29,964    | )      | 16,351     |   |
| Dividends paid                                                   |   | (593,742    | )       | (556,601   | )      | (659,469   | )      |
| Other                                                            |   | (12,201     | )       | (5,104     | )      | 12,042     |   |
| Net cash (used  in) provided by financing activities             |   | (160,600    | )       | 209,480    |   | 79,292     |   |
|                                                             |   |        |    |       |   |       |   |
| Effect of inflation on  cash and cash equivalents                |   | (57,188     | )       | (50,698    | )      | (37,743    | )      |
| Net increase(decrease)  in cash and cash equivalents             |   | 107,146     |    | (184,455   | )      | 230,485    |   |
| Cash and cash  equivalents at beginning of year                  |   | 417,613     |    | 524,759    |   | 340,304    |   |
| Cash and cash equivalents at end of year                         |   | Ps.         | 524,759 |       | Ps.    | 340,304    |   | Ps. | 570,789 |   |
|                                                                  |        |             |         |            |        |            |        |  |  |  |

 

In August 2005, there was a non-cash transaction of Ps.442,936 relatedto notes payables issued by a subsidiary for the acquisition of certainbusinesses.

Net cash flow from operating activities reflects cashpayments and receipts for interest and income taxes as follows:

F-55

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|                              | ** ** | **Year ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Interest paid                |       | Ps. 590,761                                |       | Ps. 606,868 |   | Ps. 676,272 |   |
| Income and asset  taxes paid |       | 570,232                                    |       | 640,266 |   | 344,909 |   |

 

P)      COMPREHENSIVEINCOME
|                                          | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Comprehensive  income is as follows:     |       |                                       |       |   |   |   |   |
| Net income under U.S. GAAP               |       | Ps.                                        | 835,674    |   | Ps. | 1,238,932 |   | Ps.  1,448,421 |   |
| Other comprehensive loss, net of taxes:  |       |                                       |       |   |   |   |   |
| Deficit from restatement                 |       | (625,250                                   | )          | 21,051 |   | (26,204 | ) |
| Derivative financial instruments         |       | (41                                        | )          | (20,983 | ) | 6,312 |   |
| Foreign currency translation adjustments |       | (16,934                                    | )          | (492,939 | ) | 390,795 |   |
| Comprehensive income under U.S. GAAP     |       | Ps.                                        | 193,449    |   | Ps. | 746,061 |   | Ps. 1,819,324 |   |
|                                          |            |                                            |            |  |  |  |  |  |  |  |  |

 

Foreign currency translation adjustments are presentednet of tax expense (benefit) of Ps.11,242, Ps.79,839 and Ps.(20,787) for theyears ended December 31, 2004, 2005 and 2006, respectively.

The components of accumulated other comprehensive loss are as followsas of December 31, 2005 and 2006:
|                                                         | ** ** | **Foreign   currency   translation   adjustments** | ** ** | **Derivative   financial   instruments** | ** ** | **Deficit from  restatement** | ** ** | **Accumulated   other   comprehensive   loss** | ** **  |
|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------|-------------|
| Balance at  December 31, 2004                           |       | Ps.                                                               | 746,783    |                                               | Ps.        | 21,075                             |       | Ps.                                                           | (14,937,754 | ) | Ps. | (14,169,896 | ) |
| Current period  changes                                 |       | (492,939                                                          | )          | (20,983                                            | )          | 21,051                             |       | (492,871                                                      | )           |
| Balance at  December 31, 2005                           |       | 253,844                                                           |       | 92                                                 |       | (14,916,703                        | )          | (14,662,767                                                   | )           |
| Impact of  adoption of SFAS No. 158 (net of income tax) |       | —                                                            |       | —                                             |       | —                             |       | (13,718                                                       | )           |
| Current period  changes                                 |       | 390,795                                                           |       | 6,312                                              |       | (26,204                            | )          | 370,903                                                       |        |
| Balance at  December 31, 2006                           |       | Ps.                                                               | 644,639    |                                               | Ps.        | 6,404                              |       | Ps.                                                           | (14,942,907 | ) | Ps. | (14,305,582 | ) |
|                                                         |            |                                                                   |            |                                                    |            |                                    |            |                                                               |             |  |  |  |  |  |

 

F-56

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Q)           VALUATIONAND QUALIFYING ACCOUNTS

The valuation and qualifying accounts are as follows:

Allowance for doubtful accounts:
| For the year   ended   December 31, | ** ** | **Balance at   beginning of   year** | ** ** | **Additions   charged to costs  and expenses** | ** ** | **Deductions** | ** ** | **Balance  at year-end** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------|------------|-------------------------------|------------|
| 2004                                                         |       | Ps.                                                      | 112,937    |                                                               | Ps.        | 37,392         |       | Ps.                           | (31,012    | ) | Ps. | 119,317 |   |
| 2005                                                         |       | 119,317                                                  |       | 33,582                                                             |       | (4,476         | )          | 148,423                       |       |
| 2006                                                         |       | 148,423                                                  |       | 76,522                                                             |       | (20,107        | )          | 204,838                       |       |
|                                                              |            |                                                          |            |                                                                    |            |                |            |                               |            |  |  |  |  |

 

R)            RESTATEMENTTO CONSTANT PESOS

The following presents condensed financial information prepared on aU.S. GAAP basis restated to December 31, 2006 constant pesos utilizing theMexican NCPI. As disclosed in Note 3-E, under Bulletin B-15, the Companyrestated prior year balances utilizing weighted average restatement factors.The difference in the factors applied to restate prior year information toDecember 31, 2006 constant pesos utilizing the Mexican NCPI were:

|      | ** ** | **Factor** | ** ** |
|------|------------|------------|------------|
| 2004 |       | 1.04157    |       |
| 2005 |       | 0.99620    |       |

 

Condensed consolidated balance sheets as ofDecember 31:
|                                  | ** ** | **Expressed in Thousands of  Constant Mexican Pesos  as of December 31, 2006** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                                                                                                    | ** ** | **2006** | ** ** |
| Total current  assets            |       | Ps.8,506,700                                                                                                                |       | Ps.9,837,712 |   |
| Property, plant  and equipment   |       | 14,199,033                                                                                                                  |       | 14,866,806 |   |
| Total assets                     |       | 27,345,977                                                                                                                  |       | 29,913,649 |   |
| Short-term debt                  |       | 559,653                                                                                                                     |       | 908,706 |   |
| Long-term debt                   |       | 6,787,946                                                                                                                   |       | 5,709,499 |   |
| Total  liabilities               |       | 13,366,378                                                                                                                  |       | 13,446,508 |   |
| Minority  interest               |       | 3,086,449                                                                                                                   |       | 3,042,029 |   |
| Total stockholders’  equity |       | 10,893,150                                                                                                                  |       | 13,425,112 |   |

 

F-57

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Condensed consolidated statements of incomefor the years ended December 31:

 
|                     | ** ** | **Expressed in Thousands of  Constant Mexican Pesos  as of December 31, 2006** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **2004**                                                                                                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net sales           |       | Ps.26,650,510                                                                                                               |       | Ps.27,543,284 |   | Ps.30,387,884 |   |
| Gross profit        |       | 9,409,867                                                                                                                   |       | 9,423,645 |   | 10,412,294 |   |
| Operating income    |       | 2,035,550                                                                                                                   |       | 1,492,449 |   | 1,689,599 |   |
| Majority net income |       | 835,674                                                                                                                     |       | 1,238,932 |   | 1,448,421 |   |

 

S)      RECENTLYISSUED ACCOUNTING STANDARDS

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFASNo. 157 defines fair value, establishes the framework for measuring fair valueunder U.S. GAAP, and expands disclosures about fair value measurements. SFASNo. 157 applies whenever other standards require assets or liabilities to bemeasured at fair value. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, with earlieradoption permitted. The Company is currently evaluating the impact that SFASNo. 157 will have on its results of operations and financial position.

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Part of this Statement iseffective as of December 31, 2006, and requires companies that have definedbenefit pension plans and other postretirement benefit plans to recognize thefunded status of those plans on the balance sheet on a prospective basis fromthe effective date.  In addition, SFASNo. 158 requires that companies using a measurement date for those plans otherthan their fiscal year, change to a fiscal year end measurement date, effectivefor years ending after December 15, 2008. The Company’s balance sheet as ofDecember 31, 2006 has been adjusted to reflect the required recognition of thefunded status for their plans as of that date (see Note 22-L for a discussionof the effects of this adoption).

In June 2006, the FASBissued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of SFAS 109 — Accounting for Income Taxes” (“FIN No. 48”).FIN No. 48 clarifies the accounting for uncertainty in income taxes, byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements. FIN No. 48 iseffective for fiscal years beginning after December 15, 2006. The Companyis currently in the process of assessing and adopting FIN No. 48.

F-58

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**GRUPOFINANCIERO BANORTE, S.A. DE C.V. INDEX TO REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRMS AND CONSOLIDATED FINANCIAL STATEMENTS 2004, 2005 and 2006 Table ofContents**

 
| Reports of Independent  Registered Public Accounting Firms                                                                  |   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                        |   |   |
| Consolidated  Balance Sheets as of December 13, 2005 and 2006                                                          |   |   |
|                                                                                                                        |   |   |
| Consolidated  Statements of Income for the Years Ended December 31, 2004, 2005 and  2006                               |   |   |
|                                                                                                                        |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended  December 31, 2004, 2005 and 2006 |   |   |
|                                                                                                                        |   |   |
| Consolidated  Statements of Changes in Financial Position for the Years Ended  December 31, 2004, 2005 and 2006        |   |   |
|                                                                                                                        |   |   |
| Notes to Consolidated Financial Statements                                                                                  |   |   |

 

F-59

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

**Grupo Financiero Banorte, S.A. de C.V.**

**Monterrey,N.L.**

We have audited the accompanying consolidated balancesheet of Grupo Financiero Banorte, S.A. de C.V. and Subsidiaries (the “FinancialGroup”) as of December 31, 2006 and 2005, and the related consolidatedstatements of income, changes in stockholders’ equity and changes in financialposition for the years then ended, all expressed in millions of Mexican pesosof purchasing power of December 31, 2006. These consolidated financialstatements are the responsibility of the Financial Group’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our audit in accordance with auditingstandards generally accepted in Mexico and with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement and that they areprepared in conformity with the accounting practices prescribed by the MexicanNational Banking and Securities Commission (the “Commission”). The FinancialGroup is not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audit included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Financial Group’s internalcontrol over financial reporting. Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statementspresent fairly, in all material respects, the financial position of GrupoFinanciero Banorte, S. A. de C. V. and Subsidiaries as of December 31, 2006 and2005, and the results of their operations, changes in their stockholders’equity and changes in their financial position for the years then ended in conformitywith the accounting practices prescribed by the Mexican National Banking andSecurities Commission.

Accounting practices prescribed by the Commission varyin certain significant respects from Mexican Financial Reporting Standards. Theapplication of the latter would have affected the determination of stockholders’equity and net income as of and for the years ended December 31, 2006 and 2005,to the extent summarized in Note 39.

Accounting practices prescribed by the Commission varyin certain significant respects from accounting principles generally acceptedin the United States of America. The application of the latter would haveaffected the determination of stockholders’ equity and net income as of and forthe years ended December 31, 2006 and 2005, to the extent summarized in Note40.

As discussed in Note 40 to the accompanyingconsolidated financial statements, the U.S. GAAP consolidated statement of cashflows for the year ended December 31, 2005 has been restated.

The accompanying consolidated financial statementshave been translated into English for the convenience of users.

Galaz, Yamazaki, Ruiz Urquiza, S.C.Member of Deloitte Touche Tohmatsu

F-60

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM TO THESTOCKHOLDERS OF GRUPO FINANCIERO BANORTE, S.A. DE C.V. MONTERREY, N.L.**

**MARCH 28, 2005, EXCEPT FOR NOTE 40 FOR WHICH THEDATE IS JUNE 16, 2006 AND FOR NOTE 40 (III.B) AND THE RESTATEMENT TO CONSTANTMEXICAN PESOS AS OF DECEMBER 31, 2006 FOR WHICH THE DATE IS MAY 25, 2007**

We haveaudited the accompanying consolidated statements of income, changes instockholders’ equity and changes in financial position of Grupo FinancieroBanorte, S.A. de C.V. and Subsidiaries (the “Financial Group”) for the yearended December 31, 2004, all expressed in millions of Mexican pesos ofpurchasing power of December 31, 2004. These consolidated financialstatements are the responsibility of the Financial Group’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audit.

Weconducted our audit in accordance with auditing standards generally accepted inMexico and with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement and that they are prepared in conformity with theaccounting practices prescribed by the Mexican National Banking and SecuritiesCommission (the “Commission”). An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

In ouropinion, the consolidated statements of income, changes in stockholders’ equityand changes in financial position present fairly, in all material respects, thefinancial position of Grupo Financiero Banorte, S.A. de C.V. and Subsidiariesfor the year ended December 31, 2004, in conformity with the accountingpractices prescribed by the Commission.

Accountingpractices prescribed by the Commission vary in certain significant respectsfrom accounting principles generally accepted in the United States of America.Information relating to the nature and effect of such differences is presentedin Note 40 to the consolidated financial statements, as restated.

PricewaterhouseCoopersS.C.José Antonio Quesada Palacios

F-61

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**GRUPOFINANCIERO BANORTE, S.A. DE C.V. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OFDECEMBER 31, 2006 AND 2005**

**(Expressedin millions of Mexican pesos of purchasing power of December 31, 2006)**
| **Assets**                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Cash and cash  equivalents                              |       | $        | 43,403     |     | $          | 40,403 |   |
|                                                    |       |     |       |     |       |
| Investments in  securities:                             |       |     |       |     |       |
| Trading securities                                      |       | 15,015   |       | 9,369    |       |
| Available-for-sale securities                           |       | 6,254    |       | 141      |       |
| Held-to-maturity securities                             |       | 4,403    |       | 12,815   |       |
|                                                    |       | 25,672   |       | 22,325   |       |
| Securities and  derivative financial instruments:       |       |     |       |     |       |
| Debtor balances under repurchase and resale  agreements |       | 25       |       | 162      |       |
| Derivative financial instruments                        |       | 19       |       | 488      |       |
|                                                    |       | 44       |       | 650      |       |
| Current loan  portfolio:                                |       |     |       |     |       |
| Commercial loans                                        |       | 80,293   |       | 60,264   |       |
| Loans to financial institutions                         |       | 2,373    |       | 2,046    |       |
| Consumer loans                                          |       | 20,718   |       | 16,157   |       |
| Housing mortgage loans                                  |       | 27,798   |       | 24,772   |       |
| Government loans                                        |       | 10,784   |       | 15,849   |       |
| FOBAPROA or IPAB loans                                  |       | —   |       | 169      |       |
| Total current loan portfolio:                           |       | 141,966  |       | 119,257  |       |
|                                                    |       |     |       |     |       |
| Past-due loan  portfolio:                               |       |     |       |     |       |
| Commercial loans                                        |       | 730      |       | 699      |       |
| Consumer loans                                          |       | 609      |       | 429      |       |
| Housing mortgage loans                                  |       | 721      |       | 799      |       |
|                                                    |       |     |       |     |       |
| Total past-due loan portfolio:                          |       | 2,060    |       | 1,927    |       |
|                                                    |       |     |       |     |       |
| Total loan portfolio:                                   |       | 144,026  |       | 121,184  |       |
| (Minus) Allowance for loan losses                       |       | 3,533    |       | 3,195    |       |
| Loan portfolio, net                                     |       | 140,493  |       | 117,989  |       |
|                                                    |       |     |       |     |       |
| Credit asset  portfolio                                 |       | 3,618    |       | 3,367    |       |
| Other accounts  receivable, net                         |       | 5,639    |       | 2,901    |       |
| Foreclosed  assets, net                                 |       | 316      |       | 465      |       |
| Property,  furniture and fixtures, net                  |       | 6,646    |       | 5,918    |       |
| Permanent stock  investments                            |       | 3,164    |       | 2,319    |       |
| Deferred taxes,  net                                    |       | —   |       | 420      |       |
|                                                    |       |     |       |     |       |
| Other assets:                                           |       |     |       |     |       |
| Other assets, deferred charges and intangible assets    |       | 5,442    |       | 1,346    |       |
|                                                    |       |     |       |     |       |
| Total assets                                            |       | $        | 234,437    |     | $          | 198,103 |   |

 
| **Liabilities**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Deposits:                                                 |       |     |       |     |       |
| Demand deposits                                           |       | $        | 95,401     |     | $          | 79,206 |   |
| Time deposits-                                            |       |     |       |     |       |
| General public                                            |       | 69,591   |       | 56,595   |       |
| Money market                                              |       | 4,545    |       | 7,358    |       |
|                                                      |       | 169,537  |       | 143,159  |       |
| Bank and other  loans:                                    |       |     |       |     |       |
| Demand loans                                              |       | 988      |       | 2,671    |       |
| Short-term loans                                          |       | 5,903    |       | 5,769    |       |
| Long-term loans                                           |       | 9,959    |       | 11,945   |       |
|                                                      |       | 16,850   |       | 20,385   |       |
|                                                      |       |     |       |     |       |
| Securities and  derivative financial instruments:         |       |     |       |     |       |
| Creditor balances under repurchase and resale  agreements |       | 235      |       | 347      |       |
| Derivative financial instruments                          |       | 2        |       | 465      |       |
|                                                      |       | 237      |       | 812      |       |
| Other payables:                                           |       |     |       |     |       |
| Income taxes and employee profit sharing                  |       | 1,277    |       | 1,773    |       |
| Sundry creditors and other payables                       |       | 7,449    |       | 4,786    |       |
|                                                      |       | 8,726    |       | 6,559    |       |
|                                                      |       |     |       |     |       |
| Subordinated  debentures                                  |       | 11,367   |       | 4,744    |       |
| Deferred taxes,  net                                      |       | 144      |       | —   |       |
| Deferred credits                                          |       | 71       |       | 75       |       |
| Total liabilities                                         |       | 206,932  |       | 175,734  |       |
|                                                      |       |     |       |     |       |
| **Stockholders’  Equity**                            |       |     |       |     |       |
| Paid-in capital:                                          |       |     |       |     |       |
| Common stock                                              |       | 11,580   |       | 11,581   |       |
| Additional paid-in capital                                |       | 1,794    |       | 1,790    |       |
|                                                      |       | 13,374   |       | 13,371   |       |
| Other capital:                                            |       |     |       |     |       |
| Capital reserves                                          |       | 2,062    |       | 1,741    |       |
| Retained earnings from prior years                        |       | 15,816   |       | 10,916   |       |
| Insufficiency in restated stockholders’ equity       |       | (6,147   | )          | (6,147   | )          |
| Valuation of permanent stock investments                  |       | (4,967   | )          | (4,489   | )          |
| Net income                                                |       | 5,959    |       | 5,957    |       |
|                                                      |       | 12,723   |       | 7,978    |       |
| Minority  interest in stockholders’ equity           |       | 1,408    |       | 1,020    |       |
| Total  stockholders’ equity                          |       | 27,505   |       | 22,369   |       |
|                                                      |       |     |       |     |       |
| Total  liabilities and stockholders’ equity          |       | $        | 234,437    |     | $          | 198,103 |   |

 

F-62

----

**Memorandum accounts (Note 35)**

“These balance sheets,consolidated with those of the financial entities and other companies that formpart of the financial group and are susceptible to consolidation, were preparedaccording to Accounting Principles applicable to Financial Group HoldingCompanies issued by the National Banking and Securities Commission according toarticle 30 of the Law of Financial Institutions, of general and mandatoryobservance, consistently applied, reflecting the operations conducted by theHolding company, the financial entities and the other companies that form partof the Financial Group and are susceptible to consolidation as of the date above,which were carried out and valued according to sound practices and applicablelegal and administrative dispositions.”

“As of December 31, 2006,the historical Capital stock amounted to $7,064.”

“The accompanyingConsolidated Balance Sheets have been approved by the Board of Directors underthe accountability of the signors.”
|                      |   |                                |   |                                       |   |                             |   |                                     |
|---------------------------|--------|-------------------------------------|--------|--------------------------------------------|--------|----------------------------------|--------|------------------------------------------|
| Ing. Luis Peña Kegel |   | Ing. Sergio  García Robles Gil |   | C.P. Román  Martínez Méndez |   | Lic. Jorge  Eduardo Vega Camargo |   | C.P.C. Nora Elia  Cantú Suárez |
| Chief Executive Officer   |   | Managing Director  - CFO            |   | Managing Director  - Audit                 |   | Executive  Director Controlling  |   | Executive  Director Accounting           |

 

The accompanyingnotes are part these consolidated balance sheets.

F-63

----

**GRUPO FINANCIERO BANORTE, S.A. DEC.V. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2006,2005 AND 2004**

** (Expressed in millions of Mexican pesos of purchasingpower of**

**December 31, 2006**

 
| ** **                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                       |       |     |       |     |       |     |       |
| Interest income                                                            |       | $        | 35,480     |     | $          | 36,792   |       | $ | 27,208 |   |
| Interest expense                                                           |       | (20,626  | )          | (22,841  | )          | (16,495  | )          |
| Monetary  position loss, net (financial margin)                            |       | (336     | )          | (153     | )          | (147     | )          |
| Financial margin                                                           |       | 14,518   |       | 13,798   |       | 10,566   |       |
|                                                                       |       |     |       |     |       |     |       |
| Allowance for  loan losses                                                 |       | (1,530   | )          | (1,505   | )          | (1,278   | )          |
| Financial margin after provision for loan losses                           |       | 12,988   |       | 12,293   |       | 9,288    |       |
|                                                                       |       |     |       |     |       |     |       |
| Commission and  fee income                                                 |       | 7,588    |       | 6,905    |       | 6,354    |       |
| Commission and  fee expense                                                |       | (1,528   | )          | (1,560   | )          | (1,035   | )          |
| Brokerage  revenues                                                        |       | 1,716    |       | 1,080    |       | 952      |       |
|                                                                       |       | 7,776    |       | 6,425    |       | 6,271    |       |
|                                                                       |       |     |       |     |       |     |       |
| Net operating revenues                                                     |       | 20,764   |       | 18,718   |       | 15,559   |       |
|                                                                       |       |     |       |     |       |     |       |
| Administrative  and promotional expenses                                   |       | (12,458  | )          | (11,579  | )          | (11,987  | )          |
| Operating income                                                           |       | 8,306    |       | 7,139    |       | 3,572    |       |
|                                                                       |       |     |       |     |       |     |       |
| Other income                                                               |       | 1,086    |       | 3,021    |       | 2,354    |       |
| Other expenses                                                             |       | (885     | )          | (1,936   | )          | (2,393   | )          |
|                                                                       |       | 201      |       | 1,085    |       | (39      | )          |
| Income before income taxes and employee profit  sharing                    |       | 8,507    |       | 8,224    |       | 3,533    |       |
|                                                                       |       |     |       |     |       |     |       |
| Current income  taxes and employee profit sharing                          |       | 2,923    |       | 2,382    |       | 533      |       |
| Deferred income  taxes and employee profit sharing                         |       | 213      |       | (25      | )          | 232      |       |
|                                                                       |       | 3,136    |       | 2,357    |       | 765      |       |
| Income before equity in earnings of subsidiaries and  associated companies |       | 5,371    |       | 5,867    |       | 2,768    |       |
|                                                                       |       |     |       |     |       |     |       |
| Equity in  earnings of subsidiaries and associated companies               |       | 797      |       | 419      |       | 238      |       |
| Income before minority interest                                            |       | 6,168    |       | 6,286    |       | 3,006    |       |
| Minority  interest                                                         |       | (209     | )          | (329     | )          | (197     | )          |
|                                                                       |       |     |       |     |       |     |       |
| Net income                                                                 |       | $        | 5,959      |     | $          | 5,957    |       | $ | 2,809 |   |

 

“These income statements, consolidated with those ofthe financial entities and other companies that form part of the financial groupand are susceptible to consolidation, were prepared according to AccountingPrinciples applicable to Financial Group Holding Companies issued by theNational Banking and Securities Commission according to article 30 of the Lawof Financial Institutions, of general and mandatory observance, consistentlyapplied, reflecting all of the revenues and expenses derived from theoperations conducted by the Holding Company, the financial entities and theother companies that form part of the Financial Group and are susceptible toconsolidation as of the date above, which were carried out and valued accordingto sound practices and applicable legal and administrative provisions.”

“The accompanying Consolidated Statements of Incomehave been approved by the Board of Directors under the accountability of thesignors.”
|                      |   |                                |
|---------------------------|--------|-------------------------------------|
| Ing. Luis Peña Kegel |   | Ing. Sergio  García Robles Gil |
| Chief Executive Officer   |   | Managing  Director - CFO            |

 
|                                           |   |                             |   |                                     |
|-------------------------------------------|--------|----------------------------------|--------|------------------------------------------|
| C.P. Román Martínez Méndez |   | Lic. Jorge  Eduardo Vega Camargo |   | C.P.C. Nora Elia  Cantú Suárez |
| Managing Director - Audit                 |   | Executive  Director Controlling  |   | Executive  Director Accounting           |

 

The accompanying notes are part of these consolidated financialstatements.

F-64

----

**GRUPO FINANCIEROBANORTE, S.A. DE C.V. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2006,2005 AND 2004**

**(Expressed in millions of Mexicanpesos of purchasing power of**

**December31, 2006**
| ** **                                                                                                           | ** ** | **Paid-in capital** | ** ** | **Other capital:**          | ** ** | ** **            | ** ** | ** **             | ** ** | ** **                                                      | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **Common  stock**        | ** ** | **Additional  paid-in  capital** | ** ** | **Capital  reserves** | ** ** | **Retained  earnings** | ** ** | **Insufficiency  in restated  stockholders’  equity** | ** ** | **Valuation of  permanent  stock  investments** | ** ** | **Net income** | ** ** | **Total  majority  interest** | ** ** | **Total  minority  interest** | ** ** | **Total  stockholders’  equity** | ** ** |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Balances, January  1, 2004                                                                                           |       | $                        | 6,026      |                             | $          | 1,790                 |       | $                      | 1,491      |                                                            | $          | 12,905 |   | $ | (6,147) |   | $ | (3,346) |   | $ | 2,507 |   | $ | 15,226 |   | $ | 1,007 |   | $ | 16,233 |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Transactions approved by stockholders:                                                                               |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Issuance (repurchase of shares)                                                                                      |       |                     |       | —                           |       | 5                     |       | —                 |       | —                                                          |       | — |   | — |   | 5 |   | — |   | 5 |   |
| Transfer of prior years’ result                                                                                 |       | —                   |       | —                           |       | —                |       | 2,507                  |       | —                                                          |       | — |   | (2,507) |   | — |   | — |   | — |   |
| Creation of reserves as per General Stockholders’  Meeting on April 29, 2004                                    |       | —                   |       | —                           |       | 123                   |       | (123)                  |       | —                                                          |       | — |   | — |   | — |   | — |   | — |   |
| Dividend decreed as per General Stockholders’ Meeting  on October 4 2004                                        |       | —                   |       | —                           |       | —                |       | (549)                  |       | —                                                          |       | — |   | — |   | (549) |   | — |   | (549) |   |
| Total transactions approved by stockholders                                                                          |       | —                   |       | —                           |       | 128                   |       | 1,835                  |       | —                                                          |       | — |   | (2,507) |   | (544) |   | — |   | (544) |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income entries:                                                                                        |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                           |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | — |   | 2,809 |   | 2,809 |   | — |   | 2,809 |   |
| Result from holding nonmonetary assets                                                                               |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | (606) |   | — |   | (606) |   | — |   | (606) |   |
| Official sale of portfolio, per official letter of  the CNBV No.601-II-34966                                         |       | —                   |       | —                           |       | —                |       | (278)                  |       | —                                                          |       | — |   | — |   | (278) |   | — |   | (278) |   |
| Write-off of foreclosed assets and creation of  reserves for past-due portfolio of Arrendadora Banorte, S.A. de C.V. |       | —                   |       | —                           |       | —                |       | (16)                   |       | —                                                          |       | — |   | — |   | (16) |   | — |   | (16) |   |
| Merger with Seguros Generali México, S.A. de C.V.                                                               |       | —                   |       | —                           |       | —                |       | 19                     |       | —                                                          |       | — |   | — |   | 19 |   | — |   | 19 |   |
| Total comprehensive income                                                                                           |       | —                   |       | —                           |       | —                |       | (275)                  |       | —                                                          |       | (606) |   | 2,809 |   | 1,928 |   | — |   | 1,928 |   |
| Minority interest                                                                                                    |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | — |   | — |   | — |   | (70) |   | (70) |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Balances,  December 31, 2004                                                                                         |       | 6,026                    |       | 1,790                            |       | 1,619                 |       | 14,465                 |       | (6,147)                                                         |       | (3,952) |   | 2,809 |   | 16,610 |   | 937 |   | 17,547 |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Transactions approved by stockholders:                                                                               |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Issuance (repurchase of shares)                                                                                      |       | 1                        |       | —                           |       | (18)                  |       | —                 |       | —                                                          |       | — |   | — |   | (17) |   | — |   | (17) |   |
| Transfer of prior years’ result                                                                                 |       | —                   |       | —                           |       | —                |       | 2,809                  |       | —                                                          |       | — |   | (2,809) |   | — |   | — |   | — |   |
| Creation of reserves as per General Stockholders’  Meeting on April 28, 2005                                    |       | —                   |       | —                           |       | 140                   |       | (140)                  |       | —                                                          |       | — |   | — |   | — |   | — |   | — |   |
| Dividend decreed as per General Stockholders’ Meeting  on October 6, 2005                                       |       | —                   |       | —                           |       | —                |       | (664)                  |       | —                                                          |       | — |   | — |   | (664) |   | — |   | (664) |   |
| Increase in capital stock as per General  Stockholders’ Meeting on October 6, 2005                              |       | 5,554                    |       | —                           |       | —                |       | (5,554)                |       | —                                                          |       | — |   | — |   | — |   | — |   | — |   |
| Total transactions approved by stockholders                                                                          |       | 5,555                    |       | —                           |       | 122                   |       | (3,549)                |       | —                                                          |       | — |   | (2,809) |   | (681) |   | — |   | (681) |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income entries:                                                                                        |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                           |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | — |   | 5,957 |   | 5,957 |   | — |   | 5,957 |   |
| Result from holding nonmonetary assets                                                                               |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | (537) |   | — |   | (537) |   | — |   | (537) |   |
| Total comprehensive income                                                                                           |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | (537) |   | 5,957 |   | 5,420 |   | — |   | 5,420 |   |
| Minority interest                                                                                                    |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | — |   | — |   | — |   | 83 |   | 83 |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Balances,  December 31, 2005                                                                                         |       | 11,581                   |       | 1,790                            |       | 1,741                 |       | 10,916                 |       | (6,147)                                                         |       | (4,489) |   | 5,957 |   | 21,349 |   | 1,020 |   | 22,369 |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Transactions approved by stockholders:                                                                               |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Issuance (repurchase of shares)                                                                                      |       | (1)                      |       | 4                                |       | 27                    |       | —                 |       | —                                                          |       | — |   | — |   | 30 |   | — |   | 30 |   |
| Transfer of prior years’ result                                                                                 |       | —                   |       | —                           |       | —                |       | 5,957                  |       | —                                                          |       | — |   | (5,957) |   | — |   | — |   | — |   |
| Creation of reserves as per General Stockholders’  Meeting on April 28, 2006                                    |       | —                   |       | —                           |       | 294                   |       | (294)                  |       | —                                                          |       | — |   | — |   | — |   | — |   | — |   |
| Dividend decreed as per General Stockholders’ Meeting  on October 6, 2006                                       |       | —                   |       | —                           |       | —                |       | (763)                  |       | —                                                          |       | — |   | — |   | (763) |   | — |   | (763) |   |
| Total transactions approved by stockholders                                                                          |       | (1)                      |       | 4                                |       | 321                   |       | 4,900                  |       | —                                                          |       | — |   | (5,957) |   | (733) |   | — |   | (733) |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income entries:                                                                                        |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                           |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | — |   | 5,959 |   | 5,959 |   | — |   | 5,959 |   |
| Result from holding nonmonetary assets                                                                               |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | (478) |   | — |   | (478) |   | — |   | (478) |   |
| Total comprehensive income                                                                                           |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | (478) |   | 5,959 |   | 5,481 |   | — |   | 5,481 |   |
| Minority interest                                                                                                    |       | —                   |       | —                           |       | —                |       | —                 |       | —                                                          |       | — |   | — |   | — |   | 388 |   | 388 |   |
|                                                                                                                 |       |                     |       |                             |       |                  |       |                   |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2006                                                                                          |       | $                        | 11,580     |                             | $          | 1,794                 |       | $                      | 2,062      |                                                            | $          | 15,816 |   | $ | (6,147) |   | $ | (4,967) |   | $ | 5,959 |   | $ | 26,097 |   | $ | 1,408 |   | $ | 27,505 |   |

 

“These statements of changes in shareholder’s equity,consolidated with those of the financial entities and other companies that formpart of the Financial Group and are susceptible to consolidation, were preparedaccording to Accounting Principles applicable to Financial Group HoldingCompanies issued by the National Banking and Securities Commission according toarticle 30 of the Law of Financial Institutions, of general and mandatoryobservance, consistently applied, reflecting all of the movements in equityaccounts derived from the operations, conducted by the Holding Company, thefinancial entities and the other companies that form part of the FinancialGroup and are susceptible to consolidation as of the date above, which werecarried out and valued according to sound practices and applicable legal andadministrative provisions.”

“The accompanying Consolidated Statements of Changesin Stockholder’s Equity were approved by the Board of Directors under theaccountability of the signors.”
|                           | ** ** | ** **                          | ** ** | ** **                                 | ** ** | ** **                       | ** ** |                                     |
|---------------------------|------------|-------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|------------------------------------------|
| Ing. Luis Peña Kegel |       | Ing. Sergio  García Robles Gil |       | C.P. Román  Martínez Méndez |       | Lic. Jorge  Eduardo Vega Camargo |       | C.P.C. Nora Elia  Cantú Suárez |
| Chief Executive Officer   |       | Managing Director  - CFO            |       | Managing Director  - Audit                 |       | Executive Director  Controlling  |       | Executive  Director Accounting           |

 

The accompanying notesare part of these consolidated financial statements.

F-65

----

**GRUPO FINANCIERO BANORTE, S.A. DEC.V. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEARS ENDED DECEMBER 31, 2006,2005 AND 2004**

**(Expressed in millions of Mexicanpesos of purchasing power of**

**December 31, 2006)**

 
| ** **                                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating  activities:                                                                          |       |     |       |     |       |     |       |
| Net income                                                                                      |       | $        | 5,959      |     | $          | 5,957    |       | $ | 2,809 |   |
| Items not requiring (generating) resources:                                                     |       |     |       |     |       |     |       |
| Allowance for loan losses                                                                       |       | 1,530    |       | 1,505    |       | 1,278    |       |
| Depreciation and amortization                                                                   |       | 888      |       | 988      |       | 1,148    |       |
| Deferred taxes                                                                                  |       | 213      |       | (25      | )          | 232      |       |
| Minority interest                                                                               |       | 209      |       | 329      |       | 197      |       |
| Provisions for sundry obligations                                                               |       | (45      | )          | 1,942    |       | 253      |       |
| Equity in earnings of associated companies and  affiliates                                      |       | (797     | )          | (419     | )          | (239     | )          |
| Valuation effects on financial instruments                                                      |       | 170      |       | (45      | )          | (19      | )          |
|                                                                                            |       | 8,127    |       | 10,232   |       | 5,659    |       |
| Changes in  operating assets and liabilities:                                                   |       |     |       |     |       |     |       |
| Increase in deposits                                                                            |       | 26,378   |       | 5,526    |       | (45,987  | )          |
| Increase in treasury transactions (investment  securities)                                      |       | (3,517   | )          | (951     | )          | 2        |       |
| Decrease in bank and other loans                                                                |       | (3,535   | )          | (4,306   | )          | (8,448   | )          |
| Increase in credit asset portfolio                                                              |       | (251     | )          | (1,062   | )          | 30       |       |
| Increase in loan portfolio                                                                      |       | (24,034  | )          | (10,839  | )          | 57,565   |       |
| Decrease in deferred taxes                                                                      |       | 350      |       | 331      |       | 139      |       |
| Increase in securities and derivative financial  instruments:                                   |       | 31       |       | 131      |       | (164     | )          |
| Increase (decrease) of other receivables and  payables, net                                     |       | (526     | )          | 842      |       | (1,425   | )          |
| Loss on sale of past-due portfolio                                                              |       |     |       |     |       | (277     | )          |
| Creation of reserves for past-due portfolio of  Arrendadora Banorte, S.A. de C.V.               |       | —   |       | —   |       | (11      | )          |
| Net resources used in operating activities                                                      |       | (5,104   | )          | (96      | )          | 7,083    |       |
|                                                                                            |       |     |       |     |       |     |       |
| Financing  activities:                                                                          |       |     |       |     |       |     |       |
| Subordinated debentures                                                                         |       | 6,623    |       | (198     | )          | 1854     |       |
| Income of Generali México Compañía de Seguros, S.A.  in results from prior years |       |     |       |     |       | 18       |       |
| Issuance (repurchase) of shares                                                                 |       | 30       |       | (17      | )          | 5        |       |
| Dividends paid                                                                                  |       | (763     | )          | —   |       | (549     | )          |
| Increase of shareholders’ equity                                                           |       | —   |       | (663     | )          | —   |       |
| Resources generated by (used in) financing  activities                                          |       | 5,890    |       | (878     | )          | 1,328    |       |
|                                                                                            |       |     |       |     |       |     |       |
| Investing  activities:                                                                          |       |     |       |     |       |     |       |
| Decrease (increase) in foreclosed assets                                                        |       | 149      |       | (74      | )          | 879      |       |
| Increase in permanent stock investments                                                         |       | (348     | )          | (671     | )          | (722     | )          |
| Increase (decrease) in deferred charges and credits                                             |       | (4,387   | )          | 103      |       | (442     | )          |
| Acquisition of property, furniture and equipment,  net of disposals                             |       | (1,327   | )          | (177     | )          | (678     | )          |
| Write-off of foreclosed assets of Arrendadora  Banorte, S.A. de C.V.                            |       | —   |       | —   |       | (4       | )          |
| Resources used in investing activities                                                          |       | (5,913   | )          | (819     | )          | (967     | )          |
| Increase (decrease) in funds available                                                          |       | 3,000    |       | (1,793   | )          | 7,444    |       |
| Funds available at the beginning of the year                                                    |       | 40,403   |       | 42,196   |       | 34,752   |       |
|                                                                                            |       |     |       |     |       |     |       |
| Funds available  at the end of the year                                                         |       | $        | 43,403     |     | $          | 40,403   |       | $ | 42,196 |   |

 

“Thesestatements of changes in financial position, consolidated with those of thefinancial entities and other companies that form part of the Financial Groupand are susceptible to consolidation, were prepared according to AccountingPrinciples applicable to Financial Group Holding Companies issued by theNational Banking and Securities Commission according to article 30 of the Lawof Financial Institutions, of general and mandatory observance, consistentlyapplied, reflecting all of the origins and applications of cash derived fromthe operations conducted by the Holding Company, the financial entities and theother companies that form part of the Financial Group and are susceptible toconsolidation as of the date above, which were carried out and valued accordingto sound practices and applicable legal and administrative dispositions.”

“Theaccompanying Consolidated Statements of Changes in Financial Position have beenapproved by the Board of Directors under the accountability of the signors.”

|                           |   |                               |
|---------------------------|--------|------------------------------------|
| Ing. Luis Peña Kegel |   | Ing. Sergio García Robles Gil |
| Chief Executive Officer   |   | Managing Director - CFO            |

 
|                                           |   |                            |   |                                    |
|-------------------------------------------|--------|---------------------------------|--------|-----------------------------------------|
| C.P. Román Martínez Méndez |   | Lic. Jorge Eduardo Vega Camargo |   | C.P.C. Nora Elia Cantú Suárez |
| Managing Director - Audit                 |   | Executive Director Controlling  |   | Executive Director Accounting           |

 

The accompanying notes are part of these consolidated financialstatements.

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**GRUPO FINANCIERO BANORTE, S.A. DEC.V. AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006,2005 AND 2004**

**(Expressed in millions of Mexicanpesos of purchasing power of**

**December 31, 2006)**

 

**1.****                            Activitiesand regulatory environment**

Grupo Financiero Banorte, S.A. de C.V. (the “FinancialGroup”) is authorized by the Mexican Treasury Department (SHCP) to operate as afinancial group under the form and terms established by the Mexican FinancialGroup Law, subject to the supervision and monitoring of the Mexican NationalBanking and Securities Commission (the “Commission”). Its main activitiesconsist of acquiring and managing entities engaged in the financial servicesindustry and supervising their activities, as defined by the previouslymentioned Law. The Financial Group and its subsidiaries are regulated,depending on their activities, by the Commission, the Mexican NationalInsurance and Bond Commission, the Mexican National Retirement Savings SystemsCommission (CONSAR), Banco de México and other applicable laws.

The main activity of the Financial Group’ssubsidiaries is to carry out financial transactions that include the renderingof full-banking services, securities brokerage activities, management ofretirement funds, the purchase and sale of uncollected invoices and notes,rendering of general warehousing services and providing life insurance andcasualty insurance.

Per legal requirements, the Financial Group hasunlimited liability for the obligations assumed and losses incurred by each ofits subsidiaries. 

The powers of the Commission in its capacity asregulator of financial institutions include reviewing the Financial Group’sfinancial information and requesting modifications to such information.

As stated in Note 28, at the ExtraordinaryStockholders’ Meeting held on December 13, 2006, it was resolved, among otherthings, to change the Financial Group’s name from Grupo Financiero Banorte,S.A. de C.V. to Grupo Financiero Banorte, S.A.B. de C.V. due to a requirementof the Mexican securities law issued on June 28, 2006. This new law requiresevery company that is listed on the Bolsa Mexicana de Valores, S.A. de C.V. (“BMV”Mexican Stock Exchange) to include “Bursátil” (publicly traded) in their legalname or use the letter “B” after S.A. However, authorization of thismodification is still pending approval by the SHCP, and therefore the FinancialGroup’s legal name will remain the same until such approval is obtained.

**2.****                            Significantevents during the year**

a)                            **Merger of financial institutions**

During the Extraordinary Stockholders’ Meetings heldon August 17, 2006 at the Financial Group and on August 16, 2006 at Banco delCentro, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte (Bancen),the merger of Bancen and Banco Mercantil del Norte, S.A., Institución de BancaMúltiple, Grupo Financiero Banorte (Banorte) was approved, whereby the formerwas the merging entity and the latter the merged entity. The merger becameeffective for accounting and tax purposes as of August 1, 2006. 

The merger was approved by the Commission and theSHCP, who awarded its authorization by means of Document No. UBA/118/2006 datedAugust 24, 2006.

The merger agreements were inscribed in the PublicRegister of Property and Commerce on August 28, 2006 and immediately went intoeffect. 

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b)                           **Acquisition of INB Financial Corporation**

In November 2006, Banorte, through its subsidiary Banorte USACorporation —an entity constituted in the United States of America, completedthe purchase of 70% of the stockholders’ equity representative shares of INBFinancial Corporation, which in turn is the holder of Inter National Bank(INB), a banking institution based in Texas. This transaction was approved bythe SHCP in Mexico and the Federal Reserve Board in the United States.

Banorte paid USD 259 million for this acquisition with its own funds,and has the option to purchase the remaining 30% of the INB FinancialCorporation shares. 

As of December 31, 2006, INB’s total assets are USD 1,472 million,deposits total USD 1,363 million, securities investments are USD 352 million,and it has a total loan portfolio of USD 788 million. 

The purchase generated a goodwill for $2,267 and otherintangible assets for $154, which are included as “Other assets, deferredcharges and intangibles” in the general balance sheet. On the other hand,Banorte is committed to exercise the purchase option for the remaining 30% ofthe INB capital, which will take place as soon as some of the other conditionsdefined in the purchase-sale contract are met, and consequently acknowledged,in accordance with the opinion issued by the Commission, a contingent liabilitythat corresponded with an increase of $1,208 in goodwill. This liability willvalued applying a formula agreed to by both parties.

c)                            **Issuance of subordinated debentures**

The General Extraordinary Shareholders’ Meeting, heldon October 2, 2006 at Banorte, approved the constitution of two collectivecredits by two issuances of Subordinate Debentures, one preferred and the othernon-preferred, not susceptible to conversion into stockholders’ equityrepresentative securities, for a sum of USD 600 million, with a 10-year and15-year term, respectively. Interest will be paid twice a year and capitalamortization will be at the end of the 10-year and 15-year terms, respectively.The funds generated by placing the subordinate securities will be used forgeneral corporate purposes.

On October 13, 2006, the final placement of theaforementioned subordinate debenture issuances was completed as follows:

·                               Aprincipal sum of USD 200 million in non-preferred subordinate debentures tomature in 2021, with a 6.826% interest rate. 

·                               Aprincipal sum of USD 400 million in preferred subordinate debentures to maturein 2016, with a 6.135% interest rate.

d)                           **UMS bond securitization**

In keeping with a modification in its investmentstrategy, Banorte, during the first quarter of 2006, reclassified its positionof UMS bonds in “Securities held to maturity” to “Available securities” for anamount of $7,505. Derived from this reclassification, $67 was acknowledged inthe Financial Group’s stockholders’ equity as a result of the market valuationof available securities according to the Commission’s B-2 criterion.

On the other hand, derived from the transfer ofsecurities between the aforementioned categories, an internal reclassificationwas made of the Derived Financial Instruments that covered said position, madeup of 32 Cross Currency Swaps instruments that changed from a variableexposition with interest rates denominated in Mexican pesos to a fixedexposition in US dollar interest rates. The reclassification consisted of achange of category between instruments, from “Coverage of securities

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held to maturity” to “Coverage of available securities”.

Later, Banorte sold part of its position in UMS bondsto a trust for $4,910 so that the trust would issue Stock Certificates to beplaced through public offering. The securities valuation effect at the time ofthe sale was a $12 loss originated by canceling its valuation in capital andacknowledging the capital loss in the period from its purpose reclassification.

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The UMS securities sale originated the liquidation ofthe coverage swaps position that was maintained to cover investment riskexposure. The effect generated a $169 profit that was recognized as part of thetrading result.

Banorte described this operation as a sale, as per anopinion issued by the Commission, which confirms this type of transaction as asale providing that the Stock Certificates repurchased by the Financial Groupare placed through securities repurchase agreement operations. If saidcertificated had not been placed in a securities repurchase agreement, thetransaction would have been considered as a loan with collateral.

e)                            **Mortgage loan securitization**

In December 2006 Banorte securitized the mortgage loanportfolio with the support of the Federal Mortgage Agency [Sociedad HipotecariaFederal — (SHF)]. Through this operation mortgage-supported bonds for $2,068 intwo series were issued under an authorized program for up to $10,000, thatBanorte registered to exercise in the following 5 years. S&P, Fitch andMoodys gave this structure the highest possible rating, AAA.

This transaction generated a reduction in theperforming loans for $2,068, and cash in the amount of $2,048 and $20 rights onthe trust were received. The operation was registered under “Securitiesinvestments” under “Available securities”, valued in conformity with theCommission criteria.

f)                              **Mortgage loan portfolio transferred to FOVISSSTE**

In November 2006, Banorte addressed the requirementsubmitted by the Instituto de Seguridad y Servicios Sociales de losTrabajadores del Estado and granted to its decentralized agency Fondo deVivienda del ISSSTE (FOVISSSTE) the creditor’s rights and active tenure of itsrespective mortgage guaranty over the 37,124 loans granted to its affiliates.

The effect in Banorte’s financial statements shows upas a $2,677 reduction in mortgage loans, complemented by the cancellation of$2,040 in liabilities generated from funding said portfolio.   

**3.****                            Basisof presentation**

***Explanation for translation intoEnglish*** - Theaccompanying consolidated financial statements have been translated fromSpanish into English for the convenience of users.  These consolidated financial statements arepresented on the basis of accounting practices prescribed by the Commission.Certain accounting practices applied by the Institution may not conform toaccounting principles generally accepted in the country of use.

***Consolidation of financialstatements*** - The accompanying consolidated financialstatements include those of the Financial Group and its subsidiaries mentionedbelow.  

All significant intercompany balances and transactionshave been eliminated in consolidation.

As of December 31,2006 and 2005, the Financial Group’s consolidated subsidiaries and itsownership percentage is as follows:

 
|                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Banco Mercantil  del Norte, S.A.        |       | 97.06      | %          | 96.11      | %          |
| Banco del  Centro, S.A.                 |       | —     |       | 99.99      | %          |
| Casa de Bolsa  Banorte, S.A. de C.V.    |       | 99.99      | %          | 99.99      | %          |
| Arrendadora  Banorte, S.A. de C.V.      |       | 99.99      | %          | 99.99      | %          |
| Factor Banorte,  S.A. de C.V.           |       | 99.99      | %          | 99.99      | %          |
| Almacenadora  Banorte, S.A. de C.V.     |       | 99.99      | %          | 99.99      | %          |
| Créditos Pronegocio,  S.A. de C.V. |       | 99.99      | %          | 99.99      | %          |

 

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***Conversion of financialstatements of Banorte USA, Corporation and subsidiaries (foreign subsidiary)***-To consolidate the financial statements of the foreign subsidiary operatingindependently of Banorte, the same accounting policies are applied, and themonetary assets and liabilities as well as revenue and expenses in the earningsstatement are converted at the exchange rate of the close, whereas theshareholders’ equity is converted at the historical exchange rate of the datewhen transactions and contributions were made. The resulting figures are updated applyingfactors derived from the General Index of Consumer Prices of the country oforigin. The conversion effects are presented in the stockholders’equity.

**4.****                            Newaccounting principles**

On September 15, 2006, the Federal Gazette of theFederation published the modifications or changes to the accounting practicesestablished by the Commission for credit institutions, and which becameeffective as of January 1, 2007. These provisions dictate that the holdingcompanies shall follow the accounting guidelines of the Financial ReportingStandards (NIF) issued by the Mexican Board for Research and Development ofFinancial Information Standards (CINIF), except when the Commission determinesthat it is necessary to apply a specific rule or accounting criterionconsidering that credit institutions perform specialized transactions.

Some of the main modifications are:

·                  Companiesthat are not part of the financial system are included for financial statementconsolidation.

·                  Foreclosedassets should be considered as non-monetary items and should, therefore, beupdated for inflation as of January 1, 2007 without acknowledging thecumulative effects.

·                  Withoutexception, all derivative financial instruments should be recorded at fairvalue.

NIF C-10 “Derivative financial instruments and hedgingactivities”, that establishes the obligation of setting the market value forall derivatives, including hedging activities, will be applied to operationswith derivative financial instruments. It established the requirements forhedging, among which is the obligation to follow up on their effectiveness. Theeffects of the initial implementation of these criteria will be acknowledged inassets (patrimony).

·                  Thepreventive estimates for loan risks that have exceeded the amount required torate the loan will be cancelled on the date of the following quarterly ratingagainst the period earnings. 

·                  Previouslypunished loan recoveries will be recognized directly in the results (earnings).

·                  Therecoveries made one the collection rights over the loan portfolios will beapplied to accounts receivable until the balance is zero. Supluss recoverieswill be recognized directly in the results (earnings).

·                  Thefees charged for the initial granting of loans will be recorded as a differedcredit, which will be amortized as per the straight line method during the loan’sterm.

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**5.****                            Mainaccounting policies**

The significant accounting policies of the FinancialGroup are in conformity with practices prescribed by the Commission’saccounting circulars, and other general and specific purpose official lettersissued for such purposes, which require management to make certain estimatesand use certain assumptions to determine the valuation of certain itemsincluded in the consolidated financial statements and make the requireddisclosures therein. Even though they may differ in their final effect, themanagement considers the estimates and assumptions were adequate under thecircumstances.

The significant accounting policies followed by theFinancial Group are described below:

***Recognition of the effects ofinflation in financial information*** - The Financial Grouprestates its consolidated financial statements to Mexican peso purchasing powerof the most recent balance sheet date presented thereby acknowledging inflationeffects.   Accordingly, the consolidatedfinancial statements of the prior year, that are presented for comparative purposes,have also been restated to Mexican pesos of the same purchasing power and,therefore, differ from those originally reported in the prior year.  Consequently, the figures in the financialstatements are comparable with each other and with the previous year as theyare all expressed in the same currency.

To recognize the effects of inflation in terms ofpurchasing power of the most recent balance sheet presented, the followingprocedures are applied:

*To the balance sheet accounts -*

Real estate property is restated based on a factorderived from the value of Investment Units (UDIS), taking values determined byindependent appraisers as the basis for their valuation.

Furniture and fixtures are restated based on a factorderived from the value of the UDI from their acquisition date to the mostrecent balance sheet presented.

Foreclosed assets are considered to be monetary items,and therefore these assets are not restated for the effects of inflation, butare included in the calculation of the monetary position result.

Investments in shares are valued based on the equitymethod as a specific cost. The difference between the restatement of thebalance at the beginning of the period using the restatement factor derivedfrom the value of the UDI and the increase or decrease from the equity inearnings is reflected as a result from holding non-monetary assets.

Contributed capital and retained earnings, as well asother non-monetary items, are restated using a factor derived the value of theUDI from the date of contribution or when earned.  Contributed and earned capital is restatedtaking May 1992 as the base month for restatement.

*To the accounts of the statement of income -*

Revenues and expenses that affect or are derived froma monetary item (funds available, financial instruments, loan portfolio,deposits, etc.), and those derived from current operations (commissions,tariffs and administrative and promotional expenses) are restated from themonth in which they occur to the most recent balance sheet presented, using afactor derived from the value of the UDI.

Depreciation for the year is calculated on restatedvalues based on the estimated useful lives determined by

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independent appraisers.

Monetary position result, which represents the erosionof purchasing power of monetary items caused by inflation, is calculated byapplying the inflation factor derived from the value of the UDI to the monthlynet monetary liability (asset) average and is restated using the factordiscussed above at the most recent balance sheet presented. 

*To the accounts of the statements of changes infinancial position*

The statement of changes in financial positionpresents the changes in constant pesos, starting from the financial position ofthe previous balance sheet presented, restated to pesos at the most recentbalance sheet presented.

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***Comprehensive income***- Represents changes in stockholders’ equity during the year, for conceptsother than distributions and activity in contributed common stock, and iscomprised of the net income of the year, plus other comprehensive income (loss)items of the same period, which are presented directly in stockholders’ equitywithout affecting the consolidated statements of income, in accordance with theaccounting practices established by the Commission.  In 2006 and 2005, other comprehensive incomeitems are represented by the insufficiency in the restatement of stockholders’equity, the result from valuation of securities available for sale, thecreation of reserved for foreclosed assets, the cancellation of deferred taxesof the shared loss reserve and the conversion effects of foreign entities.

***Cash and cash equivalents***-Funds available are stated at nominal value. Coins or foreign currencies arestated at fair value based on exchange rates at the most recent balance sheetdate presented.******  Funds available in foreign currency arevalued at the exchange rate published by Banco de México at the most recentbalance sheet date presented.

***Trading securities***-Trading securities represent debt instruments and equity securities owned bythe Financial Group, from which it intends to obtain profits by participatingin the market.   They are stated at fairvalue, which is determined by the price vendor contracted by the FinancialGroup, in conformity with the following guidelines:

*Debt securities-*

·                  Applying marketvalues

·                  If the marketvalue cannot be obtained from a reliable source or it is not representative,the market prices of similar instruments or prices calculated based on formalvaluation techniques are used.

·                  Whenthe fair value of the securities cannot be determined, they are recorded at themost recent fair value or acquisition cost, recording accrued interest and, ifapplicable, the necessary adjustments to state the securities’ decrease in value.

*Listed securities-*

·                  Applying marketvalues

·                  If the marketvalue cannot be obtained from a reliable source or it is not representative,the fair value will be determined based on the equity method of accountingdescribed in Bulletin B-8, *Consolidated and CombinedFinancial Statements and Permanent Stock Investments*, or, in rarecases, based on the acquisition cost restated by a factor derived for the valueof UDI.

·                  Whenthe fair value of the securities cannot be determined, these will be stated atthe last fair value determined or at the acquisition cost, which should beadjusted to it net trading value.

The increase or decreaseof these securities’ valuation will be stated in the results (earnings). 

***Available-for-sale securities***-Available-for-sale securities are debt or equity securities acquired for apurpose other than obtaining profits from trading them in the market or holdingthem to maturity. They are valued in the same way as trading securities, withunrealized gains and losses recognized in stockholders’ equity, net of theirmonetary position result. The monetary position result generated by theacquisition cost of these securities is recorded in results of the year.

***Held-to-maturity securities***-Held-to-maturity securities consist of debt instruments whose payments can bedetermined and with known maturities exceeding 90 days, which are acquired withthe intent to hold them to maturity. They are initially recorded at acquisition cost and include accruedinterest. Accrued interest is recorded in the statement of income using thestraight-line method.

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If sufficient evidence exists that a securityrepresents a high credit risk and/or its estimated value decreases, the bookvalue could be modified based on the net realizable value determined by usingformal valuation techniques, with a charge to results recorded in the year ofthe write-down. 

Transfers of securities within these categories mustbe approved by the Commission.

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***Repurchase agreements -***Representthe temporary purchase or sale of certain financial instruments in exchange foran established premium with the obligation to resell or repurchase suchsecurities in the future.

When the Financial Group acts as the vendor ofsecurities, the net position represents the difference between the fair valueof the securities covered by the repurchase agreement (asset position) which,in turn, represents the securities to be received through the transaction,valued according to the investment valuation methods established for tradingsecurities, and at the present value of the price at maturity (liabilityposition).

When the Financial Group acts as the purchaser ofsecurities, the net position represents the difference between the presentvalue of the price at maturity (asset position) and the fair value of thesecurities received under the repurchase agreement (liability position) arevalued according to the method discussed in the preceding paragraph.

The debit or credit balance resulting fromtransactions involving repurchase agreements is presented under assets orliabilities in the consolidated balance sheet under the heading “Securities andderivative financial instruments”.

For repurchase transactions entered into for periodsexceeding three business days, a guarantee must be provided to mitigate marketand counterparty risks. Guarantees received for repurchase transactions notinvolving the transfer of ownership are recognized in memoranda accounts andare considered as restricted assets.

***Derivative financial instruments-***The Financial Group is authorized to perform two typesof transactions involving derivative financial instruments:

·                              *Transactions to hedge the Financial Group’s exposed position -*Such transactions involve purchasing or selling derivative financialinstruments to mitigate the risk resulting from a given transaction or grouptransactions.

·                              *Transactions entered into for trading purposes -* TheFinancial Group enters into such transactions as a market participant forreasons other than to hedge its exposed position.

For hedging transactions, offsetting asset andliability positions and the deferred charge or credit are presented net of theprimary position being hedged, while transactions entered into for tradingpurposes are recorded as separate assets or liabilities.

When entering into transactions involving derivativefinancial instruments, the Financial Group’s internal policies and proceduresrequire an assessment and risk exposure regarding the financial institutionacting as the counterparty to the transaction and that it be authorized by theBank of Mexico to enter into this type of transaction. Before entering intothese types of transactions with corporate customers, a precautionary creditline must be granted by the Credit Risk Committee or liquid guarantees giventhrough a securitized collateral contract. Transactions entered into withmedium and small sized companies and individuals provide for liquid guaranteesestablished in securitized collateral contracts. 

The recognition or cancellation of assets and/orliabilities derived from transactions involving derivative financialinstruments occurs when these transactions are entered into to, regardless ofthe respective settlement or delivery date of the goods.

*Forward and futures contracts-*****

The balance of these transactions entered into fortrading purposes represents the difference between the fair

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value of the contract and the established “forward”price. Asset and liability positions are individually offset; a resulting debitbalance is presented as an asset under the “Derivative financial instruments”heading, while a credit balance is presented as a liability under the sameheading.

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*Option contracts-*

The balance of these transactions entered into fortrading purposes is stated at fair value and recorded as an asset or liabilityunder the “Derivative financial instruments” heading.

These instruments are stated at their fair value withchanges in their fair value recognized in results of operations.

*Swaps-*

The balance of these transactions entered into fortrading purposes represents the difference between the fair value of the assetand liability positions.  Balances arepresented as assets or liabilities under the “Derivative financial instruments”heading.

***Loss sharing with the BankSavings Protection Fund (FOBAPROA) -***As discussed in Note12, according to the regulations established by the Commission, the FinancialGroup fully recognizes the shared losses generated by its participation inFOBAPROA loan portfolio cash flows.

During 2006 and 2005, the Financial Group recognizedreserves in its results of operations of $31 and $82, respectively, for theshared loss and incentive arrangements derived from its participation inFOBAPROA portfolio cash flows.

***Loan portfolio -***Representsthe balance of amounts effectively granted to borrowers plus uncollectedaccrued interest minus prepaid interest received. The allowance for loan lossesfrom credit risks is presented by deducting the balance from the loanportfolio.

The unpaid loan balance is classified in the past-dueportfolio as follows:

·                                Singlepayment loans upon the maturity of principal and interest, 30 calendar daysafter maturity.

·                                Loansinvolving a single principal payment upon maturity, but with periodic interestpayments, total principal and interest payment 30 and 90 calendar days aftermaturity, respectively.

·                                Loansfor which the payment of principal and interest is agreed based on partialperiodic payments, 90 calendar days after the first payment is due.

·                                Inthe case of revolving loans, whenever payment is outstanding for two billingperiods or 60 or more days have elapsed following maturity.

·                                Overdrawncustomer checking accounts are considered as part of the past-due portfoliowhen such situations arise.

Interest is recognized and accrued into income as itis earned. The accrual of interest income is suspended when loans aretransferred to the past-due portfolio.

Loan commissions are recognized as income whencollected.

Restructured past-due loans are not considered in thecurrent portfolio until evidence of sustained payment is obtained; this occurswhen financial institutions receive three timely consecutive payments, or apayment is received for periods exceeding 60 days.

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Renewed loans in which the borrower has not paid ontime or when the accrued interest balance equals at least 25% of the originalloan amount are considered past-due until evidence of sustained payment isobtained.

Accrued interest during the period in which the loanwas included in the past-due portfolio is recognized as income when collected.

***Allowance for loan losses***

***Application of new portfolio classification provisions –***

The loan portfolio is classified according to therules issued by the SHCP and the methodology established by the Commission.Internal methodologies may be used providing they are authorized by theCommission.

In the case of consumer and mortgage loans, theFinancial Group applies the general provisions applicable to financialinstitutions in classifying the loan portfolio as issued by the Commission onDecember 2, 2005 and the internal methodology authorized by the Commission forclassifying commercial loans. 

The Provisions also establish general methodologiesfor the classification and calculation of allowances for each type of loan,while also permitting financial institutions to classify and calculateallowances based on internal methodologies, when previously approved by theCommission.

As of June 2001, the Financial Group has theCommission’s approval to apply its own methodology, called Internal RiskClassification (CIR Banorte) to commercial loans equal to or greater than 900thousand UDIS in order to classify the debtor. Loan classification and reserveallowance are determined based on the rules set by the Commission. Thismethodology is explained later in this note.

·                                Thecommercial loan portfolio classification procedure requires that financialinstitutions apply the established methodology (general or internal) based onquarterly information for the periods ending in March, June, September andDecember of each year, while also recording the allowances determined at theclose of each period in their financial statements. Furthermore, during themonth following each quarterly close, financial institutions must apply therespective classification to any loan utilized at the close of the immediatelypreceding quarter, based on the outstanding balance in effect on the last dayof the aforementioned months. Similarly, the recovery of loan portfolio amountsthat have been previously written-off must be applied to the allowance for loanlosses instead of to results of the year.

·                                Derivedfrom the acquisition of INB, the Financial Group applied INB’s loanclassification methodologies confirming the risk degrees and adjusting theallowance for loan losses, derived from applying such methodologies.

As of December 14, 2006, the Commission issuedDocument No. 111-1/524348/2006, which renews for a two-year period, as ofDecember 1, 2006, the authorization for such internal loan classificationmethodology.

Commercial loans equal to or greater than 900 thousandUDIS are classified according to the following criteria:

·                                Debtor’scredit quality.

·                                Theloans, in relation with the value of the guarantees or the value of the assetsin trusts or in programs commonly known as “structured”, as applicable. 

The commercial loan segment includes loans granted tobusiness groups and corporations, state and municipal governments and theirdecentralized agencies, as well as financing to companies of the financialsector.

The Financial Group applied the internal riskclassification methodology, CIR Banorte, authorized by the

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Commission to rate the debtor, except in financinggranted to state and municipal governments and their decentralized agencies,loans intended for investment projects with their own source of payment andfinancing granted to trustees that act under trusts and loan programs commonlyknown as “structured” in which the affected assets allow for an individual riskevaluation associated with the scheme, for which the Financial Group appliedthe procedure established by the Commission.

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When evaluating a debtor’s credit quality utilizingthe CIR Banorte method, the following risks and payment experiences areclassified specifically and independently:
| Risk criteria                  | ** ** | **Risk factors**                                    |
|--------------------------------|------------|-----------------------------------------------------|
| 1. Financial  risk             |       | 1. Financial structure and payment capability       |
|                           |       | 2. Financing sources                                |
|                           |       | 3. Management and decision-making                   |
|                           |       | 4. Quality and timeliness of financial information  |
| 2. Industry risk               |       | 5. Position and market in which debtor participates |
|                           |       | - Target markets                                    |
|                           |       | - Risk  acceptance criteria                         |
| 3. Borrower’s  experience |       | 6. Borrower’s experience                       |
| 4. Country risk                |       | 7. Country risk                                     |

 

Each of the riskfactors is analyzed using descriptive evaluation tables, the result of whichindicates the borrower’s rating. This, in turn, is homologated with the riskdesignation established by the Commission.

 
| CIR Banorte | ** ** | **Risk level description**           | ** ** | **Commission  classification  equivalent** | ** ** |
|-------------|------------|--------------------------------------|------------|--------------------------------------------|------------|
|        |       |                                 |       |                                       |       |
| 1           |       | Substantially risk free              |       | A1                                         |       |
| 2           |       | Below minimal risk                   |       |                                       |       |
| 3           |       | Minimum risk                         |       | A2                                         |       |
| 4           |       | Low risk                             |       | B1                                         |       |
| 5           |       | Moderate risk                        |       | B2                                         |       |
| 6           |       | Average risk                         |       | B3                                         |       |
| 7           |       | Risk requiring  management attention |       | C1                                         |       |
| 8           |       | Potential partial loss               |       | C2                                         |       |
| 9           |       | High loss percentage                 |       | D                                          |       |
| 10          |       | Total loss                           |       | E                                          |       |

 

For the commercial loans under 900 thousand UDIS,loans to state and municipal governments and their decentralized agencies,mortgage loans and consumer loans, the Financial Group applied the generalprovisions applicable to financial institutions for classifying the loan portfolioas issued by the Commission. 

***Credit asset portfolio -***Theloan portfolio acquired is comprised of the acquisition cost of different loanpackages acquired by the Financial Group; i.e., amounts effectively paid by theFinancial Group to obtain rights to the cash flows generated by theseportfolios.

Furthermore, during the first three months followingits acquisition of loan portfolios, the Financial Group capitalizes therespective interest and monetary results derived from financing contracted toacquire such portfolio packages.

On November 12, 2004, the Commission issued DocumentNo. DGSIF “A” -601-II-96066, which establishes the accounting treatmentapplicable to portfolio acquisitions and loan settlements through payments inkind and/or the awarding of acquired portfolio goods.

Consequently, as the Commission and the CINIF have notissued a specific accounting standard, and based on the supplemental proceduresestablished by the Commission’s accounting circular A-3, *Supplemental*

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*Application of Accounting Treatments*,the accounting treatment applicable to portfolio acquisitions is Statement ofPosition (“SOP”) 03-3, *Accounting for CertainLoans or Debt Securities Acquired in a Transfer*, issued by theAmerican Institute of Certified Public Accountants (“AICPA”).

These standards establish that the proper treatment tobe applied is a collection right, so the transferred loan should be recorded atthe sale price.

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The Financial Group’s management has the policy ofamortizing portfolio investments made prior to December 15, 2004, within amaximum eight-year period as of the original acquisition date. 

Furthermore, portfolio investments acquired afterDecember 15, 2004, are amortized within a period not exceeding seven years inthe case of mortgage loans, or five years for commercial loans.

***Other accounts receivable andpayable -***Amounts involving the sundry debtors of theFinancial Group that are not recovered within 60 or 90 days following theirinitial recognition (depending on whether the balances are identified or not),are included in the allowance for loan losses, regardless of their likelihoodof recovery.

The balances of asset and liability settlementaccounts represent transactions involving the sale and purchase of currency andsecurities, which are recorded when entered into and settled within 48 hours.

***Impairment of the value oflong-lived assets and their disposal -***The FinancialGroup has established guidelines to identify and, if applicable, record lossesderived from the impairment or decrease in value of long-lived, tangible orintangible assets, including goodwill. The Financial Group’s management did notidentify any indicators that impairment exists.

***Foreclosed property or propertyreceived as payments in kind, net -***Foreclosed propertyor property received as payments in kind are recorded at the lower of their netrealizable value or cost. Cost is determined as the forced-sales valuedetermined by the judge upon foreclosure or, in the case of payments in kind,the price agreed between the parties involved.

If the book value of the loan exceeds that of theforeclosed property, the difference is recognized by canceling the allowancefor loan losses when such assets are awarded. If the book value of the loan islower than the value of the foreclosed property, the latter must be adjusted tomatch the loan’s book value.

The book value must only be modified when there isevidence that the net realizable value is lower than the recorded bookvalue.  The adjustments resulting fromthese estimates are applied to the results of the year as they arise.

When recognizing the effects of inflation in financialinformation, foreclosed property is considered to be a monetary item.

The provisions applicable to the new valuationmethodology for the allowance for loan losses mentioned above, define thevaluation methodology for reserves related to either foreclosed property orthose assets received as payment in kind, establishing that additionalquarterly provisions must be created to recognize the potential decrease invalue over time of property awarded under legal proceedings, out-of-court orreceived as payment in kind and the investments in securities received asforeclosed goods or payment in kind, based on the following procedure:

I.                               Inthe case of collection rights and real property, the provisions referred to bythe preceding paragraph must be treated as follows:
| Personal property reserves                                                                 | ** ** | ** **                  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Time elapsed as of  awarding or payment in kind (months)** | ** ** | **Reserve percentage** | ** ** |
|                                                                                                 |       |                        |       |
| Up to 6                                                                                              |       | 0                           | %          |
| More than 6 and up to 12                                                                             |       | 10                          | %          |
| More than 12 and up to 18                                                                            |       | 20                          | %          |
| More than 18 and up to 24                                                                            |       | 45                          | %          |
| More than 24 and up to 30                                                                            |       | 60                          | %          |
| More than 30                                                                                         |       | 100                         | %          |

 

F-83

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The amount of the reserves to be created will be theresult of applying the reserve percentage determined under the preceding tableto the value of collection rights or real property foreclosed or received aspayment in kind or awarded, based on the accounting criteria.

II.                           Investmentsin securities must be valued in accordance with the provisions of theCommission’s accounting circular B-2, *Investments in Securities*,using annual audited financial statements and monthly reports of the entity inwhich the investment is held.

Following the valuation of foreclosed assets or thosereceived as payment in kind, the reserves resulting from applying thepercentages established in the table of Section I above to the estimated value,must be created.

III.                       In the caseof real property, provisions must be created as follows:
| Real property reserves                                                                     | ** ** | ** **                  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Time elapsed as of  awarding or payment in kind (months)** | ** ** | **Reserve percentage** | ** ** |
|                                                                                                 |       |                        |       |
| Up to 12                                                                                             |       | 0                           | %          |
| More than 12 and up to 24                                                                            |       | 10                          | %          |
| More than 24 and up to 30                                                                            |       | 15                          | %          |
| More than 30 and up to 36                                                                            |       | 25                          | %          |
| More than 36 and up to 42                                                                            |       | 30                          | %          |
| More than 42 and up to 48                                                                            |       | 35                          | %          |
| More than 48 and up to 54                                                                            |       | 40                          | %          |
| More than 54 and up to 60                                                                            |       | 50                          | %          |
| More than 60                                                                                         |       | 100                         | %          |

 

The amount of the reserves to be created will be theresult of applying the reserve percentage determined under the preceding tableto the awarding value of the property based on the accounting criteria.Furthermore, when problems are identified regarding the realization of thevalue of the foreclosed property, the Financial Group records additionalreserves based on management’s best estimates.

If appraisals subsequent to the foreclosure or paymentin kind result in the recording of a decrease in the value of the collectionrights, securities, personal or real property, the reserve percentagescontained in the preceding table can be applied to the adjusted value.

In conformity with the accounting practicesestablished by the Commission, the initial effect of recognizing thesereserves, net of the tax effects, was charged to the “results of prior years”account, in stockholders’ equity. During 2006, the Commission ordered theFinancial Group the initial recognition of the reserve to lower the value offoreclosed assets promised for sale in the amount of $58. 

***Property, furniture and fixtures-*** Are recorded at acquisition cost, restated as explainedearlier in this Note.

Depreciation is calculated using the straight-linemethod based on the useful lives of the assets as estimated by Financial Group’smanagement. 

***Permanent stock investments -***TheFinancial Group recognizes its unconsolidated investments in subsidiaries andassociated companies using the equity method, based on the book values shown inthe most recent financial statements of such entities.

***Income taxes, tax on assets andemployee statutory profit-sharing -***Provisions for incometaxes (ISR) and employee statutory profit-sharing (PTU) are recorded in theresults of the year in which they are incurred.

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Deferred income tax assets and liabilities arerecognized for temporary differences resulting from comparing the accountingand tax bases of assets and liabilities plus any future benefits from tax losscarryforwards.

The net effect of the aforementioned items ispresented in the consolidated balance sheet under the “Deferred taxes, net”heading.

Paid deferred asset tax that is expected to be recoveredis recorded as an advance on income tax and is presented in the general balancesheet under “Other receivables, net”.

***Intangible assets -***Arerecognized in the consolidated balance sheet provided they are identifiable andgenerate future economic benefits that are controlled by the Financial Group.Intangible assets with indefinite lives are amortized systematically over theperiod expected to receive benefits.  Thevalue of these assets is subject to annual impairment tests.

***Goodwill -***Goodwilloriginated from a surplus in the cost over the subsidiaries’ accounting valueon the date of acquisition, was evaluated as per the provisions of NIF C-15 “Impairmentof long—lived assets and their disposal”, subject to the annual impairmenttests. No impairment to goodwill value was detected in 2006.

***Deposits -***Liabilitiesderived from deposits, including promissory notes with liquid yields uponmaturity, are recorded at their procurement or placement cost plus accruedinterest, determined according to the number of days elapsed at each monthlyclose and charged to results as incurred.

***Provisions -***Arerecognized when the Financial Group has a current obligation that results froma past event, are probable to result in the use of economic resources and canbe reasonably estimated.

***Employee retirement obligations -***According to Mexican Federal Labor Law, the FinancialGroup has obligations derived from severance payments and seniority premiumspayable to employees that cease to render their services under certain circumstances.

The Financial Group records a liability for bothseniority premiums and medical services after retirement, which are recognizedas costs over employee years of service and are calculated by independentactuaries using the projected unit credit method at net discount rates asestablished by Bulletin D-3, *Labor Obligations*.

Accordingly, the liability is being accrued which, atpresent value, will cover the obligation from benefits projected to theestimated retirement date of the Company’s current employees, as well as theobligation related to retired personnel.

As of January 1, 2005, the Financial Group adopted thenew provision of NIF D-3, related to recognition of the liability for severancepayments at the end of the work relationship for reasons other thanrestructuring, which is recorded using the projected unit credit method basedon calculations by independent actuaries. 

***Foreign currency transactions -***Foreigncurrency transactions are recorded at the applicable exchange rate in effect atthe transaction date. Monetary assets and liabilities denominated in foreigncurrency are translated into Mexican pesos at the applicable exchange ratepublished by Banco de México in effect at the balance sheet date.  Exchange fluctuations are recorded in theresults of operations.

***Interest from outstandingsubordinated debentures -***Accrued interest fromoutstanding subordinated debentures is recognized as it is accrued andtranslated according to the exchange rate in effect at each balance sheet date.

***Excess (or insufficiency) inrestated stockholders’ equity -***Represents theaccumulated monetary position result through the initial restatement.

F-85

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***Contributed capital restatementeffects -***Contributed and earned capital is restated byusing a factor derived from the UDI.

***Transfer of financial assets -***Inthose transactions where the Financial Group can act as the assignor orassignee, as applicable, possession of financial assets is obtained such thatthe ownership of such assets may or may not be transferred.  Transactions involving the transfer ofownership of financial assets establish that the assignor has effectively lostcontrol of the assets being transferred, with the related effects subsequentlyrecognized in the financial statements.

F-86

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***Securitization -***Throughthis type of transaction, the Financial Group seeks to sell and transfercertain financial assets to a securitization vehicle, which in turn issuessecurities for sale to public investors representing rights to the yields orproceeds derived from the sale of the transferred assets.  The Financial Group as the assignor canreceive cash, securities or derivative financial instruments as payment.

However, if the assignor does not transfer ownershipof the financial assets, i.e., if it retains the direct risk associated withsuch assets, the transaction is considered to be a financing securitization,whereby the payment made to the assignor is guaranteed by assets for which thelatter assumes the related risk. Accordingly, the assignor cannot derecognizesuch transferred assets from its financial statements and recognizes them asrestricted assets held as collateral in the consolidated balance sheet.

**6.****                            Cashand cash equivalents**

As of December 31, 2006 and 2005, this line item wascomposed as follows:
|                                            | ** ** | ** **             | ** ** | ** **                     | ** ** | **US dollars** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Mexican pesos** | ** ** | **converted to MXP** | ** ** | **Total**           | ** ** |
| ** **                                 | ** ** | **2006**               | ** ** | **2005**                       | ** ** | **2006**            | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
| Cash                                       |       | $                      | 6,554      |                           | $          | 5,202               |       | $          | 711        |       | $          | 622 |   | $ | 7,265 |   | $ | 5,824 |   |
| Deposits with  foreign credit institutions |       | —                 |       | —                         |       | 6,806               |       | 4,666      |       | 6,806      |       | 4,666 |   |
| Domestic banks                             |       | 328                    |       | 210                            |       | —              |       | 8          |       | 328        |       | 218 |   |
| Deposits with  Banco de México        |       | 25,771                 |       | 26,853                         |       | 7                   |       | 2          |       | 25,778     |       | 26,855 |   |
| Call money                                 |       | 368                    |       | 1,563                          |       | —              |       | —     |       | 368        |       | 1,563 |   |
| Other deposits  and available funds        |       | 2,858                  |       | 1,277                          |       | —              |       | —     |       | 2,858      |       | 1,277 |   |
|                                       |       | $                      | 35,879     |                           | $          | 35,105              |       | $          | 7,524      |       | $          | 5,298 |   | $ | 43,403 |   | $ | 40,403 |   |

 

On November 25, 2005, Telefax Circular 22/2005 issuedby Banco de México became effective, eliminating monetary regulation depositsestablished according to applicable provisions at that date, which wereintended to regulate money market liquidity surpluses.  Furthermore, the Circular established a newmonetary regulation deposit for all financial institutions for an unlimitedperiod, on which interest is payable every 28 days and is accrued beginning onDecember 5, 2005, the date of the first deposit. As of December 31, 2006 and2005, the Financial Group had made monetary regulation deposits of $25,771 and$26,853, respectively.

As of December 31, 2006 and 2005, the total sum ofrestricted cash and cash equivalents is $28,532 and $27,923, respectively.

**7.****                            Investmentsin securities:**

a)                            ***Trading securities -***As of December31, 2006 and 2005, trading securities are as follows: 
|                                                            | ** ** | **2006**              | ** ** | **2005**              | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **Acquisition  cost** | ** ** | **Accrued  interest** | ** ** | **Valuation  increase  (decrease)** | ** ** | **Book value** | ** ** | **Book value** | ** ** |
| Government bonds                                           |       | $                     | (440       | )                     | $          | — |   | $ | 1 |   | $ | (439 | ) | $ | — |   |
| Government CBIC                                            |       | 23                    |       | 4                     |       | — |   | 27 |   | — |   |
| CETES                                                      |       | (127                  | )          | 1                     |       | — |   | (126 | ) | 934 |   |
| Bank securities                                            |       | 15,004                |       | 118                   |       | (4 | ) | 15,118 |   | 6,002 |   |
| Commercial paper                                           |       | 371                   |       | —                |       | 11 |   | 382 |   | 1,942 |   |
| Saving  Protection Bonds (BPAS)                            |       | (730                  | )          | —                |       | 1 |   | (729 | ) | 125 |   |
| Treasury bonds                                             |       | 54                    |       | —                |       | — |   | 54 |   | — |   |
| UMS                                                        |       | (23                   | )          | —                |       | — |   | (23 | ) | — |   |
| Securitization  certificates                               |       | 624                   |       | 5                     |       | 12 |   | 641 |   | 328 |   |
| BREMS                                                      |       | 50                    |       | —                |       | — |   | 50 |   | 1 |   |
| Shares listed in  the International Quotation System (SIC) |       | 2                     |       | —                |       | — |   | 2 |   | 8 |   |
| Futures  guarantees                                        |       | 1                     |       | —                |       | — |   | 1 |   | 1 |   |
| Investment funds                                           |       | 57                    |       | —                |       | — |   | 57 |   | 27 |   |
| Hedging swaps                                              |       | —                |       | —                |       | — |   | — |   | 1 |   |
|                                                       |       | $                     | 14,866     |                  | $          | 128 |   | $ | 21 |   | $ | 15,015 |   | $ | 9,369 |   |

 

F-87

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During 2006 and 2005, the Financial Group recognized avaluation effect for the net amount of $17 and $(12), respectively, in theresults of operations related to its trading securities.

As of December 31, 2006,these investments mature as follows (stated at their acquisition cost):
|                              | ** ** | **From 1 to 179  days** | ** ** | **From 6 to 12  months** | ** ** | **From 1 to 2  years** | ** ** | **More than 2  years** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|-----------|------------|
|                         |       |                                   |       |                                    |       |                                  |       |                             |       |      |       |
| Government bonds             |       | $                                      | (441       | )                                       | $          | —                                |       | $                                | —     |      | $          | 1 |   | $ | (440 | ) |
| Government CBIC              |       | 23                                     |       | —                                  |       | —                                |       | —                           |       | 23        |       |
| CETES                        |       | (127                                   | )          | —                                  |       | —                                |       | —                           |       | (127      | )          |
| Bank securities              |       | 14,898                                 |       | —                                  |       | —                                |       | 106                              |       | 15,004    |       |
| Commercial paper             |       | 371                                    |       |                                    |       |                                  |       |                             |       | 371       |       |
| BPAS                         |       | (730                                   | )          | —                                  |       | —                                |       | —                           |       | (730      | )          |
| Treasury bonds               |       | —                                 |       | —                                  |       | —                                |       | 54                               |       | 54        |       |
| UMS                          |       | —                                 |       | —                                  |       | —                                |       | (23                              | )          | (23       | )          |
| Securitization  certificates |       | 460                                    |       | —                                  |       | —                                |       | 164                              |       | 624       |       |
| BREMS                        |       | —                                 |       | 50                                      |       | —                                |       | —                           |       | 50        |       |
| Futures  guarantees          |       | 1                                      |       | —                                  |       | —                                |       | —                           |       | 1         |       |
| SIC                          |       | 2                                      |       | —                                  |       | —                                |       | —                           |       | 2         |       |
| Investment funds             |       | 57                                     |       | —                                  |       | —                                |       | —                           |       | 57        |       |
|                         |       |                                   |       |                                    |       |                                  |       |                             |       |      |       |
|                         |       | $                                      | 14,514     |                                    | $          | 50                                    |       | $                                | —     |      | $          | 302 |   | $ | 14,866 |   |

 

b)                           ***Available-for-sale securities -***Asof December 31, 2006 and 2005, available-for-sale securities were as follows:
|                             | ** ** | **2006**                  | ** ** | **2005**                  | ** ** |
|-----------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Acquisition cost** | ** ** | **Accrued interest** | ** ** | **Valuation  increase  (decrease)** | ** ** | **Book value** | ** ** | **Book value** | ** ** |
| U.S. Government  bonds      |       | $                         | 3,879      |                      | $          | 15 |   | $ | (80 | ) | $ | 3,814 |   | $ | — |   |
| UMS                         |       | 1,649                     |       | 70                        |       | 52 |   | 1,771 |   | — |   |
| Treasury bonds              |       | 218                       |       | 1                         |       | (3 | ) | 216 |   | — |   |
| Bonds                       |       | 68                        |       | —                    |       | — |   | 68 |   | — |   |
| Structured notes            |       | 108                       |       | —                    |       | — |   | 108 |   | — |   |
| Subordinated  securities    |       | 21                        |       | —                    |       | — |   | 21 |   | — |   |
| Bank securities             |       | 805                       |       | 13                        |       | (19 | ) | 799 |   | 112 |   |
| CYDSA, S.A. de  C.V. shares |       | 19                        |       | —                    |       | 19 |   | 38 |   | 29 |   |
| Hedging swaps               |       | (452                      | )          | (47                       | )          | (82 | ) | (581 | ) | — |   |
|                        |       |                      |       |                      |       |   |   |   |   |   |   |
|                        |       | $                         | 6,315      |                      | $          | 52 |   | $ | (113 | ) | $ | 6,254 |   | $ | 141 |   |

 

F-88

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During December 2006, theFinancial Group cancelled, directly to retained earnings, the monetary positionresult and result of restatement from prior years of $112 related to thevaluation generated by available-for-sale securities.

c)                            ***Held-to-maturity securities -*** As ofDecember 31, 2006 and 2005, held-to-maturity securities were as follows:

Medium and long-term debtinstruments:
|                                                                              | ** ** | **2006**                  | ** ** | **2005**                  | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                   | ** ** | **Acquisition cost** | ** ** | **Accrued interest** | ** ** | **Book value** | ** ** | **Book value** | ** ** |
|                                                                         |       |                      |       |                      |       |   |   |   |   |
| Government  bonds- support program for Special Federal Treasury Certificates |       | $                         | 606        |                      | $          | 7 |   | $ | 613 |   | $ | 604 |   |
| Fiduciary rights                                                             |       | 9                         |       | —                    |       | 9 |   | 26 |   |
| UMS                                                                          |       | —                    |       | —                    |       | — |   | 9,137 |   |
| U.S. Government  bonds                                                       |       | 10                        |       | —                    |       | 10 |   | — |   |
| PEMEX bonds                                                                  |       | 3,964                     |       | 39                        |       | 4,003 |   | 4,089 |   |
| Strip and MYRA  bonds                                                        |       | 59                        |       | —                    |       | 59 |   | 127 |   |
| Hedging swaps                                                                |       | (268                      | )          | (23                       | )          | (291 | ) | (1,168 | ) |
|                                                                         |       |                      |       |                      |       |   |   |   |   |
|                                                                         |       | $                         | 4,380      |                      | $          | 23 |   | $ | 4,403 |   | $ | 12,815 |   |

 

As of December 31, 2006,these investments mature as follows:
|                                                                              | ** ** | **From 1 to 179  days** | ** ** | **From 6 to 12  months** | ** ** | **From 1 to 2  years** | ** ** | **More than 2  years** | ** ** | **Total acquisition  cost** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                                                                         |       |                                   |       |                                    |       |                                  |       |                             |       |                             |       |
| Government  bonds- support program for Special Federal Treasury Certificates |       | $                                      | —     |                                    | $          | —                                |       | $                                | —     |                             | $          | 606 |   | $ | 606 |   |
| Fiduciary rights                                                             |       | —                                 |       | —                                  |       | —                                |       | 9                                |       | 9                                |       |
| US Government  bonds                                                         |       | —                                 |       | —                                  |       | —                                |       | 10                               |       | 10                               |       |
| PEMEX bonds                                                                  |       | —                                 |       | —                                  |       | —                                |       | 3,964                            |       | 3,964                            |       |
| Strip and Myra  bonds                                                        |       | —                                 |       | —                                  |       | —                                |       | 59                               |       | 59                               |       |
| Hedging swaps                                                                |       | (15                                    | )          | —                                  |       | (38                                   | )          | (215                             | )          | (268                             | )          |
|                                                                         |       |                                   |       |                                    |       |                                  |       |                             |       |                             |       |
|                                                                         |       | $                                      | (15        | )                                       | $          | —                                |       | $                                | (38        | )                                | $          | 4,433 |   | $ | 4,380 |   |

 

**8.****                          Transactionsinvolving securities and derivative financial instruments:**

As of December 31, 2006and 2005, transactions involving securities and derivative financialinstruments were as follows:

F-89

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a.                           ***Debtor and creditor balances derived fromrepurchase transactions -***

·                                *Acting as seller of securities:*
| ** **                   | ** ** | **2006**                                  | ** ** | **2005**                            | ** ** |
|------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **Asset  position**                       | ** ** | **Liability  position**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Asset  position** | ** ** | **Liability  position** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Instrument**               | ** ** | **Value of  securities  receivable** | ** ** | **Creditor  repurchase  agreement** | ** ** | **Debit  difference** | ** ** | **Credit  difference** | ** ** | **Value of  securities  receivable** | ** ** | **Creditor  repurchase  agreement** | ** ** | **Debit  difference** | ** ** | **Credit  difference** | ** ** |
|                         |       |                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| CETES                        |       | $                                         | 3,507      |                                | $          | 3,507 |   | $ | — |   | $ | — |   | $ | 1,115 |   | $ | 1,115 |   | $ | — |   | $ | — |   |
| Development  bonds           |       | 850                                       |       | 850                                 |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Bonds 182                    |       | 107                                       |       | 107                                 |       | — |   | — |   | 450 |   | 449 |   | 1 |   | — |   |
| Bonds IPAB                   |       | 18,667                                    |       | 18,667                              |       | 2 |   | 2 |   | 46,537 |   | 46,616 |   | 8 |   | 87 |   |
| Quarterly IPAB  bonds        |       | 120,497                                   |       | 120,586                             |       | 12 |   | 101 |   | 76,081 |   | 76,221 |   | 45 |   | 185 |   |
| Semiannual IPAB  bonds       |       | 535                                       |       | 536                                 |       | — |   | 1 |   | 1,031 |   | 1,041 |   | — |   | 10 |   |
| BREMS                        |       | 2,105                                     |       | 2,104                               |       | 1 |   | — |   | 38,622 |   | 38,623 |   | 3 |   | 4 |   |
| 5-year bonds                 |       | 3,167                                     |       | 3,167                               |       | — |   | — |   | 8,592 |   | 8,596 |   | — |   | 4 |   |
| 7-year bonds                 |       | 148                                       |       | 148                                 |       | — |   | — |   | 3 |   | 3 |   | — |   | — |   |
| 10-year bonds                |       | 4,060                                     |       | 4,067                               |       | 1 |   | 8 |   | 4,096 |   | 4,098 |   | 2 |   | 4 |   |
| 20-year bonds                |       | 17,520                                    |       | 17,529                              |       | 1 |   | 10 |   | 123 |   | 122 |   | 1 |   | — |   |
| PACFARAC                     |       | 300                                       |       | 300                                 |       | — |   | — |   | — |   | — |   | — |   | — |   |
| UDIBONOS                     |       | 370                                       |       | 370                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 10-year UDIBONDS             |       | 74                                        |       | 74                                  |       | — |   | — |   | 15 |   | 15 |   | — |   | — |   |
| Government  securities       |       | 171,907                                   |       | 172,012                             |       | 17 |   | 122 |   | 176,665 |   | 176,899 |   | 60 |   | 294 |   |
|                         |       |                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Promissory notes             |       | 4,797                                     |       | 4,798                               |       | — |   | 1 |   | 3,848 |   | 3,848 |   | — |   | — |   |
| CEDES                        |       | 11,170                                    |       | 11,248                              |       | — |   | 78 |   | 14,464 |   | 14,471 |   | 1 |   | 8 |   |
| Bank acceptances             |       | 5                                         |       | 5                                   |       | — |   | — |   | 8 |   | 8 |   | — |   | — |   |
| Bank  securities             |       | 15,972                                    |       | 16,051                              |       | — |   | 79 |   | 18,320 |   | 18,327 |   | 1 |   | 8 |   |
|                         |       |                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Private paper                |       | 4,814                                     |       | 4,839                               |       | — |   | 25 |   | 25,550 |   | 25,565 |   | 1 |   | 16 |   |
| CEBUR government             |       | 3,019                                     |       | 3,018                               |       | 1 |   | — |   | 3,745 |   | 3,745 |   | — |   | — |   |
| CEBUR Bank                   |       | 2,380                                     |       | 2,382                               |       | — |   | 2 |   | 25,529 |   | 25,546 |   | 1 |   | 18 |   |
| Securitization  certificates |       | 279                                       |       | 279                                 |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Private  securities          |       | 10,492                                    |       | 10,518                              |       | 1 |   | 27 |   | 54,824 |   | 54,856 |   | 2 |   | 34 |   |
|                         |       | $                                         | 198,371    |                                | $          | 198,581 |   | $ | 18 |   | $ | 228 |   | $ | 249,809 |   | $ | 250,082 |   | $ | 63 |   | $ | 336 |   |

 

With the Financial Groupacting as the vendor, accrued premiums were charged to the results ofoperations in the amount of $15,175 ($18,459 in 2005).

During 2006 and 2005, theperiod of repurchase transactions entered into by the Financial Group in itscapacity as vendor ranged from 3 to 91 days.

·                                *Acting as securities purchaser:*
| ** **             | ** ** | **2006**                                  | ** ** | **2005**                                     | ** ** |
|------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|
| ** **             | ** ** | **Liability  position**                   | ** ** | **Asset  position**                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Liability  position** | ** ** | **Asset  position** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Instrument**         | ** ** | **Value of  securities  receivable** | ** ** | **Repurchase  agreement  from debtors** | ** ** | **Debit  difference** | ** ** | **Credit  difference** | ** ** | **Value of  securities  receivable** | ** ** | **Repurchase  agreement  from debtors** | ** ** | **Debit  difference** | ** ** | **Credit  difference** | ** ** |
|                   |       |                                      |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| CETES                  |       | $                                         | 1,448      |                                         | $          | 1,448 |   | $ | — |   | $ | — |   | $ | 677 |   | $ | 677 |   | $ | — |   | $ | — |   |
| Development  bonds     |       | 850                                       |       | 850                                          |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Bonds  182             |       | —                                    |       | —                                       |       | — |   | — |   | 445 |   | 445 |   | — |   | — |   |
| Bonds  IPAB            |       | 500                                       |       | 500                                          |       | — |   | — |   | 9,362 |   | 9,315 |   | 48 |   | 1 |   |
| Quarterly  IPAB bonds  |       | 6,622                                     |       | 6,622                                        |       | 5 |   | 5 |   | 12,632 |   | 12,609 |   | 25 |   | 2 |   |
| Semiannual  IPAB bonds |       | —                                    |       | —                                       |       | — |   | — |   | 418 |   | 418 |   | — |   | — |   |
| BREMS                  |       | 2,074                                     |       | 2,075                                        |       | — |   | 1 |   | 8,978 |   | 8,978 |   | — |   |   |   |
| 5-year  bonds          |       | 3,160                                     |       | 3,161                                        |       | — |   | 1 |   | 8,545 |   | 8,546 |   | 5 |   | 6 |   |
| 7-year  bonds          |       | 145                                       |       | 145                                          |       | — |   | — |   | — |   | — |   | — |   | — |   |
| 10-year  bonds         |       | 6                                         |       | 6                                            |       | — |   | — |   | 2,335 |   | 2,331 |   | 4 |   | — |   |
| 20-year  bonds         |       | 527                                       |       | 527                                          |       | — |   | — |   | 109 |   | 109 |   | — |   | — |   |
| UDIBONOS               |       | 370                                       |       | 370                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| PICFARAC               |       | 300                                       |       | 300                                          |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Government securities  |       | 16,002                                    |       | 16,004                                       |       | 5 |   | 7 |   | 43,501 |   | 43,428 |   | 82 |   | 9 |   |
|                   |       |                                      |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Promissory  notes      |       | 2,525                                     |       | 2,525                                        |       | — |   | — |   | 2,353 |   | 2,353 |   | — |   | — |   |
| CEDES                  |       | 765                                       |       | 763                                          |       | 2 |   | — |   | 3,778 |   | 3,776 |   | 2 |   | — |   |
| Bank securities        |       | 3,290                                     |       | 3,288                                        |       | 2 |   | — |   | 6,131 |   | 6,129 |   | 2 |   | — |   |
|                   |       |                                      |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Private paper          |       |                                      |       |                                         |       |   |   |   |   | 23,471 |   | 23,458 |   | 15 |   | 2 |   |
| CEBUR  government      |       | 226                                       |       | 226                                          |       | — |   | — |   | 948 |   | 948 |   | — |   | — |   |
| Private  securities    |       | 226                                       |       | 226                                          |       | — |   | — |   | 24,419 |   | 24,406 |   | 15 |   | 2 |   |
|                   |       |                                      |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                   |       | $                                         | 19,518     |                                         | $          | 19,518 |   | $ | 7 |   | $ | 7 |   | $ | 74,051 |   | $ | 73,963 |   | $ | 99 |   | $ | 11 |   |

F-90

----

With the Financial Groupacting as the purchaser, accrued premiums were recognized in the results ofoperations in the amount of $2,490 ($5,566 in 2005).

During 2006 and 2005, theperiod of repurchase transactions entered into by the Financial Group in itscapacity as purchaser ranged from 3 to 28 days.

b.                            ***Transactions entered into involving derivativefinancial instruments -***

The transactions enteredinto by the Financial Group involving derivative financial instruments includeswap and option contracts. These transactions are entered into to hedge variousrisks and for trading purposes.

Trading transactions arestated based on their fair market values; similarly, the effect derived fromtheir market value adjustment is recorded in the results of the year.

Management’s policy withregards to hedge contracts is to protect the Financial Group’s individualbalances and stockholders’ equity by anticipating interest rate movements.

Accordingly, theFinancial Group documents its hedging transactions are based on the followingguidelines:

·                                *Interest rate swaps:*

The Financial Group’saccounting model is intended to hedge cash flows, whereby interest rate hedgesare entered into and not adjusted to fair market value as they are adjustedbased on the accrued interest as stated in the contracts.

·                                *Foreign currency swaps:*

The Financial Group’saccounting model is intended to hedge cash flows, whereby the transactionsubject to hedging is the exchange risk. Market valuation is not performed.

·                                *Interest rate options and swaptions:*

As of December 31, 2006,the Financial Group has evaluated the effectiveness of transactions enteredinto involving derivative financial instruments for hedging purposes and hasconcluded that they are highly effective.

As of December 31, 2006and 2005, the positions of the Financial Group’s derivative financialinstrument held for trading purposes are as follows: 
|               | ** ** | **2006**                  | ** ** |
|---------------|------------|---------------------------|------------|
| **Concept**   | ** ** | **Receivable flows** | ** ** | **Deliverable flows** | ** ** | **Net flows** | ** ** |
|          |       |                      |       |   |   |   |   |
| Swaps:        |       |                      |       |   |   |   |   |
| Interest rate |       | $                         | 1,449      |   | $ | 1,443 |   | $ | 6 |   |
|               |            |                           |            |  |  |  |  |  |  |  |

 
|                                      | ** ** | **Purchase** | ** ** | **Sale** | ** ** | **Net** | ** ** |
|--------------------------------------|------------|--------------|------------|----------|------------|---------|------------|
| Foreign currency  forward contracts: |       |         |       |     |       |    |       |
| Market value                         |       | $            | 275        |     | $          | 328     |       | $ | 603 |   |
| Contract price                       |       | 281          |       | 321      |       | 602     |       |
|                                 |       |         |       |     |       |    |       |
| Net position                         |       | $            | (6         | )        | $          | 7       |       | $ | 1 |   |

 

F-91

----

 
|                    | ** ** | **Initial premium** | ** ** | **Fair value adjustment** | ** ** | **Premium fair  value** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| Call options:      | ** ** | ** **               | ** ** | ** **                          | ** ** | ** **                   | ** ** |
| Interest rate      |       | $                        | 9          |                                | $          | (1                           | )          | $ | 8 |   |
| Swaptions          |       | 1                        |       | 3                                   |       | 4                            |       |
|               |       |                     |       |                                |       |                         |       |
| Net position       |       | $                        | 10         |                                | $          | 2                            |       | $ | 12 |   |
|               |       |                     |       |                                |       |                         |       |
| Net asset position |       |                     |       |                                |       | $                            | 19         |   |

 
|                         | ** ** | **Initial premium** | ** ** | **Fair value adjustment** | ** ** | **Premium fair  value** | ** ** |
|-------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| Put options:            | ** ** | ** **               | ** ** | ** **                          | ** ** | ** **                   | ** ** |
| Interest rate           |       | $                        | (15        | )                                   | $          | 13                           |       | $ | (2 | ) |
| Swaptions               |       | —                   |       | —                              |       | —                       |       |
|                    |       |                     |       |                                |       |                         |       |
| Net position            |       | $                        | (15        | )                                   | $          | 13                           |       | $ | (2 | ) |
|                    |       |                     |       |                                |       |                         |       |
| Net liability  position |       |                     |       |                                |       | $                            | (2         | ) |

 
|                              | ** ** | **2005**                  | ** ** |
|------------------------------|------------|---------------------------|------------|
| ** **                   | ** ** | **Receivable flows** | ** ** | **Deliverable flows** | ** ** | **Net flows** | ** ** |
| Swaps for  trading purposes: |       |                      |       |   |   |   |   |
| Interest rate                |       | $                         | 414        |   | $ | 377 |   | $ | 37 |   |
|                              |            |                           |            |  |  |  |  |  |  |  |

 
|                                      | ** ** | **Purchase** | ** ** | **Sale** | ** ** | **Net** | ** ** |
|--------------------------------------|------------|--------------|------------|----------|------------|---------|------------|
| Foreign currency  forward contracts: |       |         |       |     |       |    |       |
| Market value                         |       | $            | 10         |     | $          | (34     | )          | $ | (24 | ) |
| Contract price                       |       | (11          | )          | 35       |       | 24      |       |
|                                 |       |         |       |     |       |    |       |
| Net position                         |       | $            | (1         | )        | 1          |    | —     |   |
|                                      |            |              |            |          |            |         |            |  |  |  |

 
|                    | ** ** | **Initial premium** | ** ** | **Fair value adjustment** | ** ** | **Premium fair  value** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| Call options:      | ** ** | ** **               | ** ** | ** **                          | ** ** | ** **                   | ** ** |
| Interest rate      |       | $                        | 197        |                                | $          | 1                            |       | $ | 198 |   |
| Indexes            |       | 257                      |       | (6                                  | )          | 251                          |       |
| Swaptions          |       | 1                        |       | 1                                   |       | 2                            |       |
|               |       |                     |       |                                |       |                         |       |
| Net position       |       | $                        | 455        |                                | $          | (4                           | )          | $ | 451 |   |
|               |       |                     |       |                                |       |                         |       |
| Net asset position |       |                     |       |                                |       | $                            | 488        |   |

 
|                         | ** ** | **Initial premium** | ** ** | **Fair value adjustment** | ** ** | **Premium fair  value** | ** ** |
|-------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| Put options:            |       |                     |       |                                |       |                         |       |
| Interest rate           |       | $                        | 187        |                                | $          | 4                            |       | $ | 191 |   |
| Indexes                 |       | 263                      |       | (5                                  | )          | 258                          |       |
| Swaptions               |       | 11                       |       | 5                                   |       | 16                           |       |
|                    |       |                     |       |                                |       |                         |       |
| Net position            |       | $                        | 461        |                                | $          | 4                            |       | $ | 465 |   |
|                    |       |                     |       |                                |       |                         |       |
| Net liability  position |       |                     |       |                                |       | $                            | 465        |   |

 
| ** **                                                    | ** ** | **2006**       | ** ** |
|---------------------------------------------------------------|------------|----------------|------------|
| **Swaps designated as hedging**                | ** ** | **Underlying** | ** ** | **Receivable  contract value** | ** ** | **Deliverable  contract value** | ** ** | **Receivable flows** | ** ** | **Deliverable flows** | ** ** | **Net position** | ** ** |
|                                                          | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| TIIE/IRS  (Interest rate swap)                                |       |           |       | $ | 11,138 |   | $ | 11,137 |   | $ | 36 |   | $ | 47 |   | $ | (10 | ) |
| MXP-US/CSF (Cross  Currency Swap – US Dollar fixed rate) |       |           |       | 10,597 |   | 10,818 |   | 162 |   | 61 |   | (120 | ) |
| TIIE                                                          |       | EU/CS          |       | 1,508 |   | 2,060 |   | 7 |   | 45 |   | (590 | ) |
| TIIE                                                          |       | US/CS          |       | 3,518 |   | 3,736 |   | 13 |   | 29 |   | (234 | ) |
| ** **                                                    |       |           |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                                    |       |           |       | $ | 26,761 |   | $ | 27,751 |   | $ | 218 |   | $ | 182 |   | $ | (954 | ) |

F-92

----

 

**Options designated as hedging**
| ** **     | ** ** | ** **                                       | ** ** | **2006**    | ** ** |
|----------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **     | ** ** | **Reference**                                    | ** ** | **Premium** | ** ** | ** ** | ** ** |
| **Instrument** | ** ** | **Underlying**                                   | ** ** | **amount**  | ** ** | **paid/received** | ** ** | **Fair Value** | ** ** |
|           |       |                                             |       |        |       |   |   |   |   |
| Purchases      |       | TIIE/CAP  (European Swaption- Physical delivery) |       | $           | 24,230     |   | $ | 29 |   | $ | (29 | ) |
|           |       | TIIE/OSE-F                                       |       | 16,500      |       | 29 |   | (29 | ) |
|           |       |                                             |       |        |       |   |   |   |   |
|           |       |                                             |       | $           | 40,730     |   | $ | 58 |   | $ | (58 | ) |

 

**Forwards designated as hedging**
|                 | ** ** | **2006**     | ** ** |
|-----------------|------------|--------------|------------|
| ** **      | ** ** | **Purchase** | ** ** | **Sale** | ** ** | **Net** | ** ** |
| Market  value   |       | $            | —     |   | $ | 2,754 |   | $ | 2,754 |   |
| Contract  price |       | —       |       | 2,800 |   | 2,800 |   |
|            |       |         |       |   |   |   |   |
| Net position    |       | $            | —     |   | $ | 46 |   | $ | 46 |   |

 

**Swaps designated as hedging**

 
| ** **                     | ** ** | **2005**                            | ** ** |
|--------------------------------|------------|-------------------------------------|------------|
| **Underlying**                 | ** ** | **Receivable  contract value** | ** ** | **Deliverable  contract value** | ** ** | **Receivable  flows** | ** ** | **Deliverable  flows** | ** ** | **Net position** | ** ** |
| TIIE/IRS  (Interest rate swap) |       | $                                   | 13,881     |   | $ | 13,880 |   | $ | 54 |   | $ | 61 |   | $ | (6 | ) |
| USLI/IRS                       |       | 911                                 |       | 911 |   | 13 |   | 14 |   | (1 | ) |
| IMPL - US/CS                   |       | 2,275                               |       | 2,755 |   | 23 |   | 61 |   | (518 | ) |
| TIIE - EU/CS                   |       | 1,376                               |       | 1,432 |   | 7 |   | 54 |   | (103 | ) |
| TIIE - US/CS                   |       | 9,940                               |       | 10,396 |   | 70 |   | 231 |   | (617 | ) |
| TIIE - US/BS                   |       | 2,216                               |       | 2,292 |   | 3 |   | 6 |   | (79 | ) |
|                           |       | $                                   | 30,599     |   | $ | 31,666 |   | $ | 170 |   | $ | 427 |   | $ | (1,324 | ) |

 

**Options designated as hedging**

 
| ** ** | ** ** | ** **                                       | ** ** | **2005**                  | ** ** |
|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** ** | ** ** | **Underlying**                                   | ** ** | **Reference amount** | ** ** | **Premium paid/received** | ** ** | **Fair value** | ** ** |
|       |       |                                             |       |                      |       |   |   |   |   |
| Purchases  |       |                                             |       |                      |       |   |   |   |   |
|       |       | TIIE/CAP  (European Swaption- Physical delivery) |       | $                         | ,375,990   |   | $ | 31 |   | $ | 7 |   |
|       |       | TIIE/OSE-F                                       |       | 10,937                    |       | 20 |   | (19 | ) |
|       |       |                                             |       |                      |       |   |   |   |   |
|       |       |                                             |       | ,386,927                  |       | 151 |   | (12 | ) |
|       |       |                                             |       |                      |       |   |   | $ | 39 |   |
| Sales      |       |                                             |       |                      |       |   |   |   |   |
|       |       | TIIE/CAP  (European Swaption- Physical delivery) |       | 1,359,324                 |       | 102 |   | 31 |   |
|       |       |                                             |       |                      |       |   |   |   |   |
|       |       |                                             |       | ,359,324                  |       | 02 |   | 31 |   |
|       |       |                                             |       |                      |       |   |   | $ | 133 |   |
|            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |

 

Transactions entered intofor hedging purposes have maturities from 2007 to 2018 and are intended tomitigate the financial risk derived from long-term loans offered by theFinancial

F-93

----

Group at fixed rates, aswell as the exchange rate risk generated by market instruments in the FinancialGroup’s portfolio.

The book value ofcollateral used to ensure compliance with obligations derived from currencyswap contracts as of December 31, 2006, is US$ 76,262 thousand. In the case ofinterest rate swaps, the collateral value as of December 31, 2006, is US$482,507 thousand represented by debt instruments.

F-94

----

**9.****                          Loanportfolio**

As of December 31, 2006and 2005, the loan portfolio by loan type is as follows:
|                                   | ** ** | **Current portfolio** | ** ** | **Past-due portfolio** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------------|------------|-----------|------------|
| ** **                        | ** ** | **2006**                   | ** ** | **2005**                    | ** ** | **2006**  | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Commercial  loans:                |       |                       |       |                        |       |      |       |   |   |   |   |   |   |
| Denominated in domestic currency- |       | $                          | 62,030     |                        | $          | 52,570    |       | $ | 609 |   | $ | 620 |   | $ | 62,639 |   | $ | 53,190 |   |
| Commercial                        |       | 53,913                     |       | 44,176                      |       | 609       |       | 619 |   | 54,522 |   | 44,795 |   |
| Rediscounted portfolio            |       | 8,117                      |       | 8,394                       |       | —    |       | 1 |   | 8,117 |   | 8,395 |   |
|                              |       |                       |       |                        |       |      |       |   |   |   |   |   |   |
| Denominated in USD -              |       | 18,263                     |       | 7,694                       |       | 121       |       | 79 |   | 18,384 |   | 7,773 |   |
| Commercial                        |       | 18,255                     |       | 7,674                       |       | 121       |       | 79 |   | 18,376 |   | 7,753 |   |
| Rediscounted portfolio            |       | 8                          |       | 20                          |       | —    |       | — |   | 8 |   | 20 |   |
| Total commercial loans            |       | 80,293                     |       | 60,264                      |       | 730       |       | 699 |   | 81,023 |   | 60,963 |   |
|                              |       |                       |       |                        |       |      |       |   |   |   |   |   |   |
| Loans to  financial institutions: |       | 2,373                      |       | 2,046                       |       | —    |       | — |   | 2,373 |   | 2,046 |   |
| Consumer loans-                   |       | 20,718                     |       | 16,157                      |       | 609       |       | 429 |   | 21,327 |   | 16,586 |   |
| Credit card                       |       | 9,482                      |       | 6,486                       |       | 359       |       | 221 |   | 9,841 |   | 6,707 |   |
| Other consumer loans              |       | 11,236                     |       | 9,671                       |       | 250       |       | 208 |   | 11,486 |   | 9,879 |   |
| Mortgage loans                    |       | 27,798                     |       | 24,772                      |       | 721       |       | 799 |   | 28,519 |   | 25,571 |   |
| Government loans                  |       | 10,784                     |       | 15,849                      |       | —    |       | — |   | 10,784 |   | 15,849 |   |
| FOBAPROA or IPAB loans            |       | —                     |       | 169                         |       | —    |       | — |   | — |   | 169 |   |
|                              |       | 61,673                     |       | 58,993                      |       | 1,330     |       | 1,228 |   | 63,003 |   | 60,221 |   |
|                              |       |                       |       |                        |       |      |       |   |   |   |   |   |   |
|                              |       | $                          | 141,966    |                        | $          | 119,257   |       | $ | 2,060 |   | $ | 1,927 |   | $ | 144,026 |   | $ | 121,184 |   |

 

The loans granted groupedinto economic sectors as of December 31, 2006 and 2005 are shown below:
|                                      | ** ** | **2006**   | ** ** | **2005**                      | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Amount** | ** ** | **Concentration  percentage** | ** ** | **Amount** | ** ** | **Concentration  percentage** | ** ** |
|                                 |       |       |       |                          |       |   |   |   |   |
| Private  (companies and individuals) |       | $          | 80,972     |                          | 56.22      | % | $ | 60,958 |   | 50.30 | % |
| Financial  institutions              |       | 2,374      |       | 1.65                          | %          | 2,046 |   | 1.69 | % |
| Credit card and  consumption         |       | 21,327     |       | 14.81                         | %          | 16,586 |   | 13.69 | % |
| Mortgage                             |       | 28,519     |       | 19.80                         | %          | 25,571 |   | 21.10 | % |
| Federal  Government loans            |       | 10,784     |       | 7.48                          | %          | 15,849 |   | 13.08 | % |
| FOBAPROA or IPAB  loans              |       | —     |       | 0.0                           | %          | 169 |   | 0.14 | % |
| Other past-due  loans                |       | 50         |       | 0.03                          | %          | 5 |   | 0.00 | % |
|                                 |       |       |       |                          |       |   |   |   |   |
|                                 |       | $          | 144,026    |                          | 100.00     | % | $ | 121,184 |   | 100.00 | % |

 

***Loansupport programs***- The Financial Group participates indifferent loan support programs established by the Federal Government and MexicanBankers’ Association, as detailed below:

a.                           SupportProgram for Housing Loan Debtors and the Agreement on Benefits for Housing LoanDebtors

b.                          Agreementon Agrarian and Fishery Sector Financing (FINAPE)

c.                           Agreementon the Financial Support and Promotion of Micro, Small and Medium Companies 

F-95

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(FOPYME)

d.                          AdditionalBenefits Program for Housing Loan Debtors - FOVI-type Housing Loans

F-96

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Furthermore, in December1998, the Federal Government and Banking Sector published a new and definitivedebtor support plan known as “Punto Final”, which, as of 1999, replaced thebenefits formerly granted by Housing Loan Debtor support programs. In the caseof FOPYME and FINAPE, these support plans were replaced in 1999 and 2000,respectively, and beginning in 2001 the benefits established by originalsupport programs continued to be applied.

The “Punto Final” plandefines housing loan discounts, which are determined based on the outstandingloan balance recorded at November 30, 1998, without considering late paymentcharges.  In the case of FOPYME andFINAPE loans, the discount is applied to payments and the discount percentageis determined based on the recorded loan balance at July 31, 1996, regardlessof whether the balance has been subsequently modified.

The Support Program forBusiness Loan Debtors (FOPYME) concluded on October 1, 2006, as established indocument 112-6/524549/2006.

In the case of borrowersparticipating in the above programs, the amount of principal and accruedinterest denominated in pesos is converted to the initial UDI value; interestis then set at an agreed-upon reference rate.

The trusts administeringeach of the aforementioned UDI programs issued long-term fiduciary securitiesto the Federal Government with fixed and variable interest rates depending onthe characteristics of each trust (this interest rate must be less than thatcollected from borrowers). Similarly, the Financial Group received federalbonds known as “Special CETES” from the Federal Government, which are tied tothe CETES interest rate

These federal bonds willmature based on the fiduciary securities issued by the trust to the FederalGovernment. Loan payments received by the trust are used to pay the principaland interest of the fiduciary securities; at the same time, the Federal Governmentexecutes a transaction for the same amount to pay the principal and accruedinterest on the Special CETES.

In the event ofnoncompliance with the payment obligations established for the restructuredloans under the UDI trusts, a portion of the fiduciary securities and SpecialCETES will generate interest at a rate equivalent to the UDI value. Thischaracteristic was included in October 2002 to reflect the fact that the UDIprograms were created to support debtors in compliance with their agreements.The Financial Group continues to manage and evaluate the risk derived from anypossible credit loss related to the programs. If a particular loan is fullyreserved, fiduciary securities will continue to generate interest at regularrates.

Commission regulationsrequire that the Financial Group consolidate the balances of trusts holdingrestructured loans in UDIS, so as to reflect the operating fund, which consistsof an interest rate swap contracted with the Federal Government.

As of December 31, 2006and 2005, the balances of the respective trust balances are made up as follows:
|                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Banks                       |       | $        | 13         |     | $          | 18 |   |
| Government securities       |       | 3        |       | 4        |       |
| Current loan portfolio      |       | 870      |       | 1,212    |       |
| Past-due loan portfolio     |       | 309      |       | 402      |       |
| Accrued interest on loans   |       | 6        |       | 3        |       |
| Past-due accrued interest   |       | 12       |       | 15       |       |
| Allowance for loan losses   |       | (548     | )          | (697     | )          |
| Total assets                |       | $        | 665        |     | $          | 957 |   |
|                        |       |     |       |     |       |
| Investment in trusts assets |       | 630      |       | 930      |       |
| Deferred tax liabilities    |       | 35       |       | 27       |       |
|                        |       |     |       |     |       |
|                        |       | $        | 665        |     | $          | 957 |   |

 

F-97

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***Policiesand procedures for granting loans*** - The granting, controland recovery of loans are regulated by the Financial Group’s Credit Manual,which has been authorized by the Board of Directors.  Accordingly, administrative portfolio controlis performed in the following areas:

I.                             BusinessManagement (includes corporate, commercial, business, governmental and consumerbanking), primarily through the branch network.

II.                         OperationsManagement

III.                     GeneralComprehensive Risk Management

IV.                     RecoveryManagement

Similarly, the FinancialGroup has manuals establishing the policies and procedures to be utilized forcredit risk management purposes.

The structure of thecredit management process is based on the following stages:

a.                           Productdesign

b.                          Promotion

c.                           Evaluation

d.                          Formalization

e.                           Operation

f.                             Administration

g.                          Recovery

Procedures have also beenimplemented to ensure that amounts related to the past-due portfolio are timelytransferred and recorded in the books and records and those loans with recoveryproblems are properly and timely identified.

The Financial Group’sTreasury Department is the central unit responsible for balancing resourcerequirement and eliminating the interest rate risk derived from transactionsentered into at fixed rates through the use of hedging and arbitragestrategies.

**10.****                   Loansrestructured in UDIS**

As of December 31, 2006and 2005, the total amount of the loan portfolio restructured in UDIS is asfollows:
|                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Current  portfolio         |       | $        | 870        |     | $          | 1,212 |   |
| Current accrued  interest  |       | 6        |       | 3        |       |
| Past-due  portfolio        |       | 309      |       | 402      |       |
| Past-due accrued  interest |       | 12       |       | 15       |       |
|                       |       |     |       |     |       |
|                       |       | $        | 1,197      |     | $          | 1,632 |   |

 

**11.****                   FOBAPROA - IPABtransactions**

As part of the measuresimplemented to offset the economic crisis that arose at the end of 1994, inDecember

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1998, the MexicanCongress enacted the Bank Savings Protection Law, which went into effect onJanuary 20, 1999, and established the creation of IPAB to replace FOBAPROA, forthe sole purpose of administering transactions entered into under “PortfolioCapitalization and Acquisition Programs” (PCCC).

The Bank SavingsProtection Law enacted on January 20, 1999, established an option for banksthat had participated in the PCCC to exchange their FOBAPROA promissory notesfor IPAB promissory notes under similar conditions.

In June 2002, IPABnotified banks participating in the PCCC of its intention to adopt certainprocedures and conditions that would be applicable to them regarding themechanism under which FOBAPROA promissory notes would be exchanged for theirIPAB counterparts.

F-99

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IPAB is also required toapply a series of preventive measures to avoid financial problems that could befaced by financial credit institutions, while ensuring such institution’scompliance with their depositors.

In exchange for theportfolio assigned to FOBAPROA, promissory notes were issued to the FinancialGroup with 10-year maturities as of the transaction date. The Financial Groupmaintained its obligation to share 29%, 25% and 0% of the loss suffered byFOBAPROA derived from the portfolio transferred to Trusts 1989-0, 1990-4 and1991-2, respectively. Consequently, these percentages have been maintained inthe new trusts created under the contract to exchange FOBAPROA promissory notesfor IPAB obligations, which was executed on July 12, 2004.

As payment for thesetransactions FOBAPROA-IPAB collection rights have been recognized, which, atDecember 31, 2005 and 2005, are composed as follows:
|                                       | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|
| Transactions:                         |       |     |       |
| Trust 1990-4                          |       | $        | 1,804      |   |
| Trust 1991-2                          |       | 14       |       |
| Cash flows owed to IPAB               |       | (15      | )          |
| Shared loss and incentive arrangement |       | (1,635   | )          |
|                                  |       | $        | 168        |   |

 

The characteristics ofeach of the aforementioned IPAB obligations are detailed below:
| Promissory Note   | ** ** | **Period** | ** ** | **Expiration** | ** ** | **Rate**                   | ** ** | **Interest paid** |
|-------------------|------------|------------|------------|----------------|------------|----------------------------|------------|-------------------|
| Trust 1989–0 |       | 10  years  |       | 2005           |       | CETES 91 days – 1.35% |       | Capitalizable     |
| Trust 1990–4 |       | 10  years  |       | 2006           |       | CETES 91 days – 1.35% |       | Capitalizable     |
| Trust 1991–2 |       | 10  years  |       | 2006           |       | CETES 91 days              |       | Capitalizable     |

 

IPAB payment obligationsand instruments have the same characteristics in terms of their duration andinterest rates as FOBAPROA promissory notes. Similarly, the loss sharing percentages and the incentive arrangementestablished in the contracts originally executed with FOBAPROA have been maintained.

During 2005, theManagement, Object Identity, Existence, Legitimacy and Legality (GEL) auditswere concluded, which resulted in an adjustment of $100 with regards to theaccounts receivable from IPAB.

Moreover, as of July 21,2005, IPAB made advance payment on the principal of the instruments it wasresponsible for. The weekly payments were $400, between the cited date and upto November 3, 2005, including a discount for $48, agreed to in the New ProgramContract, derived from the current value valuation of IPAB’s obligation at themoment of the advance payment. As of November 10, 2005 and up to December 8,2005, the advance payments were for lower amounts. The total amount of the netadvance payment of the described discounts received during 2005 totaled $6,970.

Finally, in conformitywith the agreements set forth in the New Program contract signed between IPABand the Financial Group in July 2004, in June 2006 all the promissory notebalances were paid in full, granting the parties ample releases from anycommitment or obligation with monetary effects from the new program.

**12.****                   Sale ofIPAB-Bancrecer portfolio to Banco JP Morgan, S.A., Institución de BancaMúltiple, JP Morgan Grupo Financiero, División Fiduciaria (Banco JP Morgan)**

On December 22, 2004, theIPAB-Bancrecer Promissory Note (loan contract executed between IPAB and Bancode México to capitalize Bancrecer) was sold for the amount of $45,940 (facevalue) to a Trust (the

F-100

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“Trust”) held by JPMorgan Bank, through which the Financial Group transferred its ownership ofinterest collection and capital amortization rights to enable the issuance ofSecuritization Certificates (BANORCB 04) with a value of $45,940 (face value).These instruments, which were issued for a five-year period, accrue interest atthe average daily Interbank Equilibrium Interest Rate (TIIE) plus 0.40 basispoints, to be paid monthly, with principal to be paid in one lump-sum.

F-101

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IPAB made prepaymentsduring 2005 and 2006 in the amount of $21,000 and $24,940, respectively,thereby paying the Trust the past-due loans in advance, while the latterprematurely settled the entirety of the Securitization Certificates.

**13.****                   Allowance forloan losses**

The Financial Group’sportfolio classification, which serves as the basis for recording the allowancefor loan losses, is detailed below:
|                       | ** ** | **2006**                | ** ** |
|-----------------------|------------|-------------------------|------------|
| ** **            | ** ** | ** **              | ** ** | **Required allowances for losses** | ** ** |
| ** **            | ** ** | **Loan portfolio** | ** ** | **Commercial  portfolio** | ** ** | **Consumer  portfolio** | ** ** | **Mortgage  portfolio** | ** ** | **Total** | ** ** |
| Exempt portfolio      |       | $                       | 385        |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Risk A                |       | 44,602                  |       | — |   | 94 |   | 90 |   | 184 |   |
| Risk A1               |       | 51,823                  |       | 241 |   | — |   | — |   | 241 |   |
| Risk A2               |       | 35,369                  |       | 323 |   | — |   | — |   | 323 |   |
| Risk B                |       | 3,611                   |       | — |   | 119 |   | 77 |   | 196 |   |
| Risk B1               |       | 7,992                   |       | 135 |   | — |   | — |   | 135 |   |
| Risk B2               |       | 1,835                   |       | 93 |   | — |   | — |   | 93 |   |
| Risk B3               |       | 828                     |       | 88 |   | — |   | — |   | 88 |   |
| Risk C                |       | 606                     |       | — |   | 209 |   | 46 |   | 255 |   |
| Risk C1               |       | 311                     |       | 70 |   | — |   | — |   | 70 |   |
| Risk C2               |       | 84                      |       | 34 |   | — |   | — |   | 34 |   |
| Risk D                |       | 829                     |       | 37 |   | 394 |   | 158 |   | 589 |   |
| Risk E                |       | 509                     |       | 237 |   | 57 |   | 213 |   | 507 |   |
| Unclassified          |       | (14                     | )          | — |   | — |   | — |   | — |   |
| Hedging swaps         |       | (50                     | )          | — |   | — |   | — |   | — |   |
|                  |       | $                       | 148,720    |   | $ | 1,258 |   | $ | 873 |   | $ | 584 |   | 2,715 |   |
| Recorded allowance    |       |                    |       |   |   |   |   |   |   | 3,533 |   |
| Additional  allowance |       |                    |       |   |   |   |   |   |   | $ | 818 |   |

 
|                      | ** ** | **2005**                | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** | **Required allowances for losses** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Loan portfolio** | ** ** | **Commercial  portfolio** | ** ** | **Consumer  portfolio** | ** ** | **Mortgage  portfolio** | ** ** | **Total** | ** ** |
|                 |       |                    |       |   |   |   |   |   |   |   |   |
| Exempt portfolio     |       | $                       | 1,366      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Risk A               |       | 39,834                  |       | — |   | 71 |   | 76 |   | 147 |   |
| Risk A1              |       | 40,641                  |       | 201 |   | — |   | — |   | 201 |   |
| Risk A2              |       | 29,273                  |       | 276 |   | — |   | — |   | 276 |   |
| Risk B               |       | 4,860                   |       | — |   | 122 |   | 107 |   | 229 |   |
| Risk B1              |       | 6,140                   |       | 153 |   | — |   | — |   | 153 |   |
| Risk B2              |       | 401                     |       | 23 |   | — |   | — |   | 23 |   |
| Risk B3              |       | 287                     |       | 43 |   | — |   | — |   | 43 |   |
| Risk C               |       | 539                     |       | — |   | 168 |   | 52 |   | 220 |   |
| Risk C1              |       | 177                     |       | 41 |   | — |   | — |   | 41 |   |
| Risk C2              |       | 146                     |       | 58 |   | — |   | — |   | 58 |   |
| Risk D               |       | 797                     |       | 52 |   | 293 |   | 217 |   | 562 |   |
| Risk E               |       | 517                     |       | 264 |   | 36 |   | 213 |   | 513 |   |
| Unclassified         |       | (18                     | )          | — |   | — |   | — |   | — |   |
| Hedging swaps        |       | (46                     | )          | — |   | — |   | — |   | — |   |
|                 |       |                    |       |   |   |   |   |   |   |   |   |
|                 |       | $                       | 124,914    |   | $ | 1,111 |   | $ | 690 |   | $ | 665 |   | 2,466 |   |
| Recorded  allowance  |       |                    |       |   |   |   |   |   |   | 3,195 |   |
|                 |       |                    |       |   |   |   |   |   |   |   |   |
| Additional allowance |       |                    |       |   |   |   |   |   |   | $ | 729 |   |

 

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The total portfoliobalance used as the basis for the classification above includes amounts relatedto irrevocable loans, letters of credit and guarantees, which are recorded inmemorandum accounts.

As of December 31, 2006and 2005, the estimated allowance for loan losses is determined based onportfolio balances at those dates. As of December 31, 2006 and 2005, theallowance for loan losses includes a reserve for 100% of delinquent interestowed.

As of December 31, 2006and 2005, the allowance for loan losses represents 172% and 166%, respectively,of the past-due portfolio.

The estimated allowanceincludes the classification of loans granted in foreign currency, which areevaluated at the exchange rate in effect as of December 31, 2006.

***Rollforwardof allowance for loan losses*** - A rollforward of theallowance for loan losses is detailed below:
|                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |
| Balance at the  beginning of the year       |       | $        | 3,195      |     | $          | 2,949 |   |
| Increase charged  to results                |       | 1,438    |       | 1,361    |       |
| Cancellation of  reserves                   |       | (19      | )          | —   |       |
| Debt forgiveness  and write-offs            |       | (1,542   | )          | (1,183   | )          |
| Valuation in  foreign currencies and UDIS   |       | 33       |       | 10       |       |
| Rebates granted  to housing debtors         |       | (102     | )          | (120     | )          |
| Created with  profit margin from UDI trusts |       | 22       |       | 39       |       |
| Advantages from  FOPYME and FINAPE programs |       | (1       | )          | (3       | )          |
| Recovery of  loans                          |       | 452      |       | 272      |       |
| Acquisition of  INB Financial Corp.         |       | 198      |       | —   |       |
| Other                                       |       | (13      | )          | (48      | )          |
| Restatement  effects                        |       | (128     | )          | (82      | )          |
|                                        |       |     |       |     |       |
| Year-end balance                            |       | $        | 3,533      |     | $          | 3,195 |   |

 

For the year endedDecember 31, 2006, the total allowance for loan losses recorded as an expensein operations totaled $1,530. This total is made up primarily of $1,438credited directly to the allowance, $22 related to the UDI trusts, $40 forrestatement effects and $30 from recognizing shared losses with the IPAB, dueto the punto-final program.

**14.****                   Credit assetportfolio**

As of December 31, 2006and 2005, the credit asset portfolio is made up as follows:
|                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |
| Bancrecer I            |       | $        | 189        |     | $          | 285 |   |
| Bancomer II            |       | 1        |       | 10       |       |
| Bancomer III           |       | 182      |       | 207      |       |
| Bancomer IV            |       | 803      |       | 869      |       |
| Bital I                |       | 362      |       | 420      |       |
| Bital II               |       | 123      |       | 168      |       |
| Banamex Mortgage       |       | 415      |       | 452      |       |
| Confia III             |       | 100      |       | 119      |       |
| GMAC Banorte           |       | 205      |       | 344      |       |
| Real property  trusts  |       | 127      |       | 143      |       |
| Serfin  Commercial I   |       | 217      |       | —   |       |
| Serfin  Commercial II  |       | 97       |       | —   |       |
| Serfin Mortgage        |       | 304      |       | —   |       |
| Real property  Banpais |       | 296      |       | —   |       |
| Real property  Bancen  |       | 96       |       | —   |       |
| Serfin                 |       | —   |       | 216      |       |
| GMAC Bancen            |       | —   |       | 6        |       |
| Santander              |       | 101      |       | 128      |       |
|                   |       |     |       |     |       |
|                   |       | $        | 3,618      |     | $          | 3,367 |   |

 

F-103

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As of December 31, 2006,the Financial Group recognized income from credit asset portfolios of $1,608,together with the respective amortization of $787, the effects of which wererecognized under the “Commissions and tariffs collected” and “Commissions andtariffs paid” headings, respectively, in the consolidated statement of income.For the year ended December 31, 2005, the Financial Group recognized income of$677, together with the respective amortization of $482.

**15.****                   Other accountsreceivable, net**

As of December 31, 2006and 2005, the other accounts receivable balance is as follows:
|                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Loans to officers and  employees  |       | $        | 1,110      |     | $          | 1,138 |   |
| Operating liquidation  receivable |       | 3,688    |       | 860      |       |
| Sundry debtors                    |       | 849      |       | 718      |       |
| Taxes receivable                  |       | 52       |       | 155      |       |
| Others                            |       | 48       |       | 124      |       |
|                              |       | 5,747    |       | 2,995    |       |
| Allowance for doubtful  accounts  |       | (108     | )          | (94      | )          |
|                              |       |     |       |     |       |
|                              |       | $        | 5,639      |     | $          | 2,901 |   |

 

**16.****                   Foreclosedassets, net**

As of December 31, 2006and 2005, the foreclosed assets balance is as follows:
|                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
|                                             |       |     |       |     |       |
| Personal  property                               |       | $        | 101        |     | $          | 137 |   |
| Real  property                                   |       | 545      |       | 464      |       |
| Goods  pledged for sale                          |       | 40       |       | 242      |       |
|                                             |       | 686      |       | 843      |       |
| Less:  Allowance for losses on foreclosed assets |       | (370     | )          | (378     | )          |
|                                             |       |     |       |     |       |
|                                             |       | $        | 316        |     | $          | 465 |   |

 

**17.****                   Property, furnitureand fixtures, net**

As of December 31, 2006and 2005, the property, furniture and fixtures balance is as follows:
|                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
|                                             |       |     |       |     |       |
| Furniture and equipment                          |       | $        | 3,620      |     | $          | 2,880 |   |
| Office furniture                                 |       | 5,005    |       | 4,833    |       |
| Installation costs                               |       | 1,498    |       | 1,417    |       |
|                                             |       | 10,123   |       | 9,130    |       |
| Less: Accumulated  depreciation and amortization |       | (3,477   | )          | (3,212   | )          |
|                                             |       |     |       |     |       |
|                                             |       | $        | 6,646      |     | $          | 5,918 |   |

 

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**18.****                     Permanentstock investments**

Investments in unconsolidated subsidiaries andassociated companies are valued according to the equity method, as detailedbelow:
|                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Sólida Administradora de Portafolios, S.A. de C.V. |       | $        | 761        |     | $          | 655 |   |
| Seguros Banorte Generali, S.A. de C.V.                  |       | 792      |       | 626      |       |
| Siefore Banorte Generali, S.A. de C.V., SIEFORE         |       | 633      |       | 479      |       |
| Pensiones Banorte Generali, S.A. de C.V.                |       | 481      |       | 170      |       |
| Fianzas Banorte, S.A. de C.V.                           |       | 139      |       | 111      |       |
| Banorte investment funds                                |       | 105      |       | 81       |       |
| Controladora PROSA, S.A. de C.V.                        |       | 53       |       | 50       |       |
| Bolsa Mexicana de Valores, S.A. de C.V.                 |       | 38       |       | 32       |       |
| Servicio Pan Americano de Protección, S.A. de C.V. |       | 31       |       | 27       |       |
| Bancen investment funds                                 |       | —   |       | 18       |       |
| Others                                                  |       | 131      |       | 70       |       |
|                                                    |       |     |       |     |       |
|                                                    |       | $        | 3,164      |     | $          | 2,319 |   |

 

As of December 31, 2006 and 2005, the investment inshares of Servicio Pan Americano de Protección, S.A. de C.V. is presented netof an impairment reserve of $77.

**19.****                     Deferredtaxes, net**

The tax incurred by the Financial Group is calculatedbased on the tax result of the year and current enacted tax regulations.However, due to temporary differences affecting the recognition of revenues andexpenses for accounting and tax purposes and differences between accounting andtax balance sheet accounts, the Financial Group has recognized a net deferredtax liability of $144 in 2006 and a net deferred tax asset of $420 in 2005, asdetailed below:
|                                                                      | ** ** | **2006**        | ** ** | **2005**                 | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|--------------------------|------------|
| ** **                                                           | ** ** | **Temporary**   | ** ** | **Deferred effect** | ** ** | **Temporary** | ** ** | **Deferred effect** | ** ** |
| ** **                                                           | ** ** | **differences** | ** ** | **ISR**                  | ** ** | **PTU** | ** ** | **differences** | ** ** | **ISR** | ** ** | **PTU** | ** ** |
| Temporary Differences -  Assets                                      |       |            |       |                     |       |   |   |   |   |   |   |   |   |
|                                                                 |       |            |       |                     |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                                           |       | $               | 125        |                     | $          | 42 |   | $ | — |   | $ | 61 |   | $ | 17 |   | $ | — |   |
| Tax loss  carryforwards                                              |       | —          |       | —                   |       | — |   | 434 |   | 122 |   | — |   |
| Shared FOBAPROA  losses                                              |       | —          |       | —                   |       | — |   | 1,635 |   | 474 |   | — |   |
| Recoverable  asset tax (IMPAC)                                       |       | 2               |       | 2                        |       | — |   | 2 |   | 2 |   | — |   |
| Unrealized loss  on available-for-sale securities                    |       | 80              |       | 28                       |       | — |   | — |   | — |   | — |   |
| Excess of tax  over book basis of foreclosed assets and fixed assets |       | 688             |       | 192                      |       | 68 |   | 882 |   | 247 |   | 86 |   |
| PTU incurred in  2006                                                |       | 611             |       | 171                      |       | — |   | 672 |   | 195 |   | — |   |
| Other assets                                                         |       | 622             |       | 175                      |       | 59 |   | 546 |   | 158 |   | 52 |   |
|                                                                 |       |            |       |                     |       |   |   |   |   |   |   |   |   |
| Total assets                                                         |       | $               | 2,128      |                     | $          | 610 |   | $ | 127 |   | $ | 4,232 |   | $ | 1,215 |   | $ | 138 |   |

 

F-105

----

 
|                                                                     | ** ** | **2006**        | ** ** | **2005**                 | ** ** |
|---------------------------------------------------------------------|------------|-----------------|------------|--------------------------|------------|
| ** **                                                          | ** ** | **Temporary**   | ** ** | **Deferred effect** | ** ** | **Temporary** | ** ** | **Deferred effect** | ** ** |
| ** **                                                          | ** ** | **differences** | ** ** | **ISR**                  | ** ** | **PTU** | ** ** | **differences** | ** ** | **ISR** | ** ** | **PTU** | ** ** |
| Temporary Differences -  Liabilities                                |       |            |       |                     |       |   |   |   |   |   |   |   |   |
|                                                                |       |            |       |                     |       |   |   |   |   |   |   |   |   |
| Excess of book  over tax basis of fixed assets and prepaid expenses |       | 943             |       | 264                      |       | 44 |   | 631 |   | 280 |   | 27 |   |
| Unrealized  capital gain from investments in SIEFORES               |       | 131             |       | 37                       |       | — |   | 91 |   | 27 |   | — |   |
| Payable ISR on  UDI Trusts                                          |       | 126             |       | 35                       |       | — |   | 93 |   | 27 |   | — |   |
| Portfolios  acquired                                                |       | 944             |       | 264                      |       | 94 |   | 1,411 |   | 409 |   | 141 |   |
| Costs of sales  reversal from Almacenadora Banorte                  |       | 51              |       | 14                       |       | — |   | 65 |   | 18 |   | — |   |
| Treasury shares                                                     |       | —          |       | —                   |       | — |   | 1 |   | — |   | — |   |
| Other  liabilities                                                  |       | 377             |       | 123                      |       | 6 |   | 14 |   | 4 |   | — |   |
|                                                                |       |            |       |                     |       |   |   |   |   |   |   |   |   |
| Total  liabilities                                                  |       | 2,572           |       | 737                      |       | 144 |   | 2,306 |   | 765 |   | 168 |   |
| Net asset  (liability)                                              |       | $               | (444       | )                        | $          | (127 | ) | $ | (17 | ) | $ | 1,926 |   | $ | 450 |   | $ | (30 | ) |
|                                                                |       |            |       |                     |       |   |   |   |   |   |   |   |   |
| Net deferred tax                                                    |       |            |       |                     |       | $ | (144 | ) |   |   |   |   | $ | 420 |   |
|                                                                     |            |                 |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As discussed in Note 28, as of January 1, 2005,Article 10 and Temporary Article 2 of the Mexican Income Tax Law were amended,whereby the income tax rate will be gradually reduced from 30% in 2005 to 29%in 2006 and 28% as of 2007 and thereafter. In accordance with NIF D-4, “Accountingfor Income Tax, Tax on Assets and Employee Statutory Profit-Sharing” and basedon projections of deferred tax recovery, the respective balance was adjustedaccording to the enacted rates expected to be in effect when such amounts arerecovered.

The Provisions issued by the Commission in 2004 establishthat credit institutions can recognize the accrued financial effect derivedfrom the initial application of the changes in enacted rates in stockholders’equity, under the “Result from prior years” heading. Furthermore, in compliancewith Commission requirements established in the Official Letter No. DGSIF “A”-601-II-50011issued on February 24, 2005, in 2005, the Financial Group recognized a deferredincome tax benefit of $161 derived from the reserve created for holdingforeclosed assets with a credit to the “Results from prior years” heading instockholders’ equity.

Derived from consolidating Banorte USA, the FinancialGroup integrated a net amount of $24 in deferred taxes determined at a rate of35% as per fiscal provisions of the USA. Banorte USA’s deferred tax assets andliabilities are determined using the demandability method or balance sheetmethod. According to this method, the net asset or liability of deferred taxesis determined based on the fiscal effects of the temporary differences betweenthe book and tax base of the general balance sheet assets or liabilities torecognize changes in the tax rates and in the laws.

F-106

----

**20.****                     Other assets**

As of December 31, 2006 and 2005, other assets are asfollows:
|                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Plan assets held for  employee pension plans            |       | $        | 2,006      |     | $          | 1,765 |   |
| Provision for employee  retirement obligations          |       | (1,905   | )          | (1,672   | )          |
| Other amortizable  expenses                             |       | 2,982    |       | 1,639    |       |
| Accumulated  amortization of other amortizable expenses |       | (1,488   | )          | (744     | )          |
| Storage inventories                                     |       | 81       |       | 188      |       |
| Preoperating expenses  (net)                            |       | —   |       | 75       |       |
| Goodwill                                                |       | 3,604    |       | 61       |       |
| Guarantee deposits                                      |       | 100      |       | 32       |       |
| Contingency reserve  investments                        |       | —   |       | 3        |       |
| Contingency provisions                                  |       | —   |       | (3       | )          |
| Other assets                                            |       | 62       |       | 2        |       |
|                                                    |       |     |       |     |       |
|                                                    |       | $        | 5,442      |     | $          | 1,346 |   |

 

**21.****                     Deposits**

***Liquidity coefficient -***The“Investment regime for transactions in foreign currency and conditions to befulfilled during the term of transactions in such currency”, designed forfinancial institutions by Banco de México, establishes the mechanism fordetermining the liquidity coefficient of liabilities denominated in foreigncurrency.

In accordance with such regime, during 2006 and 2005the Financial Group generated a liquidity requirement of US $179,305 thousandand US $169,125 thousand, respectively, and held investments in liquid assetsof US $339,067 thousand and US $502,024 thousand, holding a surplus of US$159,762 thousand and US $332,899 thousand, respectively.

***Deposits*** -The liabilities derived from traditional deposits are made up as follows:
|                                                                                 | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Immediately due and  payable deposits:                                          |       |       |       |       |       |
| Checking  accounts earning no interest                                          |       | $          | 34,893     |       | $          | 29,610 |   |
| Checking  accounts earning interest                                             |       | 28,374     |       | 25,053     |       |
| Checking  accounts in US dollars                                                |       | 6,600      |       | 4,182      |       |
| Checking accounts  in US dollars for individual residents on the Mexican border |       | 4,048      |       | 2,376      |       |
| Savings accounts                                                                |       | 162        |       | 4          |       |
| Demand deposits  accounts                                                       |       | 20,755     |       | 17,373     |       |
| IPAB checking  accounts                                                         |       | 528        |       | 608        |       |
|                                                                            |       | 95,360     |       | 79,206     |       |
| Time deposits:                                                                  |       |       |       |       |       |
| Over-the-counter  promissory notes                                              |       | 55,687     |       | 49,503     |       |
| Money desk  promissory notes                                                    |       | 2,695      |       | 3,097      |       |
| Fixed-term  deposits                                                            |       | 13,758     |       | 9,587      |       |
| Time deposits  from banks                                                       |       | 343        |       | 343        |       |
| Provision for  interest                                                         |       | 1,694      |       | 1,423      |       |
|                                                                            |       | 74,177     |       | 63,953     |       |
|                                                                            |       |       |       |       |       |
|                                                                            |       | $          | 169,537    |       | $          | 143,159 |   |

 

F-107

----

The funding rates which the Financial Group uses asreference are: a) for Mexican pesos, Interbank Interest Rate (TIIE), AverageCost of Funds (CCP) and; b) for foreign currency, the London Interbank OfferedRate (LIBOR).

These liabilities earn interest depending on the typeof instrument and average balance held in the investments. The average interestrates and their currency of reference are shown below:

*Immediately due and payable deposits*
|                           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| **Foreign exchange** | ** ** | **1Q**     | ** ** | **2Q**     | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mexican pesos and UDIS    |       | 0.99       | %          | 1.06       | %          | 0.99 | % | 0.94 | % | 1.14 | % | 1.34 | % | 1.36 | % | 1.21 | % |
|                      |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency          |       | 1.00       | %          | 1.11       | %          | 1.16 | % | 1.07 | % | 0.78 | % | 0.80 | % | 0.86 | % | 0.89 | % |
|                      |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Banorte USA:**          |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand, NOW and  savings  |       | —     |       | —     |       | — |   | 0.29 | % | — |   | — |   | — |   | — |   |
| Money market              |       | —     |       | —     |       | — |   | 4.40 | % | — |   | — |   | — |   | — |   |

 

*Timedeposits*

 
|                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| **Foreign exchange** | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| ** **                |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General public            |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos and UDIS    |       | 5.95     | %          | 5.43     | %          | 5.40 | % | 5.17 | % | 6.24 | % | 6.36 | % | 6.92 | % | 6.78 | % |
| Foreign currency          |       | 2.17     | %          | 2.73     | %          | 2.60 | % | 2.84 | % | 1.17 | % | 1.31 | % | 1.54 | % | 1.62 | % |
|                      |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Banorte USA:**          |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General public            |       | —   |       | —   |       | — |   | 4.94 | % | — |   | — |   | — |   | — |   |
|                      |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market              |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos and UDIS    |       | 8.52     | %          | 8.15     | %          | 9.98 | % | 10.19 | % | 9.73 | % | 10.32 | % | 10.38 | % | 8.29 | % |

 

As of December 31,2006 and 2005, the terms at which these deposits are negotiated are as follows:

 
|                                | ** ** | **2006**                | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **From 1 to** | ** ** | **From 6 to** | ** ** | **More than** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **179 days**       | ** ** | **12 months** | ** ** | **1 year** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Money market promissory  notes |       | $                       | 57,444     |   | $ | 2,136 |   | $ | 9,408 |   | $ | 68,988 |   |
| Time deposits                  |       | —                  |       | 242 |   | 3,253 |   | 3,495 |   |
| Provision for interest         |       | 120                     |       | 20 |   | 1,554 |   | 1,694 |   |
|                           |       |                    |       |   |   |   |   |   |   |
|                           |       | $                       | 57,564     |   | $ | 2,398 |   | $ | 14,215 |   | $ | 74,177 |   |

 

F-108

----

 

|                                | ** ** | **2005**                | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **From 1 to** | ** ** | **From 6 to** | ** ** | **More than** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **179 days**       | ** ** | **12 months** | ** ** | **1 year** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Money market  promissory notes |       | $                       | 48,929     |   | $ | 304 |   | $ | 3,367 |   | $ | 52,600 |   |
| Time deposits                  |       | 8,821                   |       | 589 |   | 520 |   | 9,930 |   |
| Provision for  interest        |       | 165                     |       | 8 |   | 1,250 |   | 1,423 |   |
|                           |       |                    |       |   |   |   |   |   |   |
|                           |       | $                       | 57,915     |   | $ | 901 |   | $ | 5,137 |   | $ | 63,953 |   |

 

**22.****                     Interbank andother loans:**

The loans received from other banks as of December 31,2006 and 2005 are as follows:
|                                  | ** ** | **Mexican pesos** | ** ** | **Denominated in US dollars** | ** ** | **Total** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------------------------|------------|-----------|------------|
| **Concept**                      | ** ** | **2006**               | ** ** | **2005**                                     | ** ** | **2006**  | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                             |       |                   |       |                                         |       |      |       |   |   |   |   |   |   |
| Bank deposits  and loans         |       | $                      | 907        |                                         | $          | 637       |       | $ | 25 |   | $ | 1,061 |   | $ | 932 |   | $ | 1,698 |   |
| Foreign bank  deposits and loans |       | —                 |       | —                                       |       | 2,016     |       | 995 |   | 2,016 |   | 995 |   |
| Rediscounted  portfolio loans    |       | 12,475                 |       | 12,431                                       |       | 94        |       | 433 |   | 12,569 |   | 12,864 |   |
| Issue of CPOs                    |       | —                 |       | —                                       |       | 536       |       | — |   | 536 |   | — |   |
| Call money                       |       | —                 |       | 1,532                                        |       | —    |       | — |   | — |   | 1,532 |   |
| FOVI rediscounts                 |       | 724                    |       | 3,204                                        |       | —    |       | — |   | 724 |   | 3,204 |   |
| Provision for  interest          |       | 66                     |       | 70                                           |       | 7         |       | 22 |   | 73 |   | 92 |   |
|                             |       |                   |       |                                         |       |      |       |   |   |   |   |   |   |
|                             |       | $                      | 14,172     |                                         | $          | 17,874    |       | $ | 2,678 |   | $ | 2,511 |   | $ | 16,850 |   | $ | 20,385 |   |

 

These liabilities earn interest depending on the typeof instrument and average balance of the loans. The average interest rates areshown below:

|                           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| **Foreign exchange** | ** ** | **1Q**     | ** ** | **2Q**     | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Call  money**           |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos  and UDIS   |       | 7.75       | %          | 7.40       | %          | 7.70 | % | 6.89 | % | 9.14 | % | 9.68 | % | 9.66 | % | 8.88 | % |
|                      |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  bank loans**     |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                      |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos and  UDIS   |       | 8.43       | %          | 6.71       | %          | 6.74 | % | 8.08 | % | 8.04 | % | 8.73 | % | 7.67 | % | 8.12 | % |
| Foreign currency          |       | 6.27       | %          | 6.62       | %          | 6.25 | % | 6.01 | % | 4.89 | % | 5.00 | % | 5.82 | % | 5.62 | % |

 

The liabilities contracted by Banorte USA Corporationaccrue interest at an average rate of 4.53%.

As of December 31, 2006 and 2005, the terms at whichthese financial liabilities are negotiated are as follows:

|                                  | ** ** | **2006**       | ** ** | **2005**      | ** ** |
|----------------------------------|------------|----------------|------------|---------------|------------|
| ** **                       | ** ** | **Short-term** | ** ** | **Long-term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | ** **     | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bank deposits  and loans         |       | $              | 123        |          | $          | 809 |   | $ | 932 |   | $ | 1,699 |   |
| Foreign bank  deposits and loans |       | —         |       | 2,016         |       | 2,016 |   | 995 |   |
| Rediscounted  portfolio loans    |       | 6,695          |       | 6,410         |       | 13,105 |   | 12,863 |   |
| Call money                       |       | —         |       | —        |       | — |   | 1,532 |   |
| FOVI rediscounts                 |       | —         |       | 724           |       | 724 |   | 3,204 |   |
| Provision for  interest          |       | 73             |       | —        |       | 73 |   | 92 |   |
|                             |       |           |       |          |       |   |   |   |   |
|                             |       | $              | 6,891      |          | $          | 9,959 |   | $ | 16,850 |   | $ | 20,385 |   |

 

F-109

----

**23.****                     Employeeretirement obligations**

The Financial Group recognizes the liabilities forpension plans and seniority premium by using the financing method known as the “Projectedunit credit method”, which considers the benefits accrued at the valuation dateand the benefits generated during the year.

The amount of current and projected benefits as ofDecember 31, 2006 and 2005, relative to the “Defined benefit pension plan,seniority premiums and retiree medical coverage” determined by independentactuaries, is analyzed below:
|                                       | ** ** | **2006**              | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **Pension plan** | ** ** | **Seniority  premiums** | ** ** | **Medical benefits** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Projected  benefit obligation (PBO)   |       | $                     | (679       | ) | $ | (107 | ) | $ | (1,093 | ) | $ | (1,879 | ) |
| Plan assets                           |       | 685                   |       | 146 |   | 495 |   | 1,326 |   |
| Funded status                         |       | 6                     |       | 39 |   | (598 | ) | (553 | ) |
|                                  |       |                  |       |   |   |   |   |   |   |
| Transition asset  (obligation)        |       | 83                    |       | (15 | ) | 424 |   | 492 |   |
| Unrecognized  prior service costs     |       | (32                   | )          | (4 | ) | — |   | (36 | ) |
| Unrecognized  actuarial losses        |       | 139                   |       | 2 |   | 67 |   | 208 |   |
| Net projected  asset (liability)      |       | 196                   |       | 22 |   | (107 | ) | 111 |   |
| Accumulated  benefit obligation (ABO) |       | $                     | 527        |   | $ | 75 |   | $ | — |   | $ | 602 |   |

 
|                                        | ** ** | **2005**              | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **Pension plan** | ** ** | **Seniority  premiums** | ** ** | **Medical services** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Projected  benefit obligation (PBO)    |       | $                     | (673       | ) | $ | (98 | ) | $ | (983 | ) | $ | (1,754 | ) |
| Plan assets                            |       | 678                   |       | 130 |   | 442 |   | 1,250 |   |
| Funded status                          |       | 5                     |       | 32 |   | (541 | ) | (504 | ) |
| Unrecognized  ítems:              |       |                  |       |   |   |   |   |   |   |
| Transition asset  (obligation)         |       | 83                    |       | (17 | ) | 452 |   | 518 |   |
| Unrecognized  prior service costs      |       | (33                   | )          | (3 | ) | — |   | (36 | ) |
| Unrecognized  actuarial (gains) losses |       | 143                   |       | 7 |   | (19 | ) | 131 |   |
| Net projected  asset (liability)       |       | 198                   |       | 19 |   | (108 | ) | 109 |   |
| Accumulated  benefit obligation (ABO)  |       | $                     | 643        |   | $ | 84 |   | $ | — |   | $ | 727 |   |

 

The Financial Group has a net prepaid pension asset of$4 generated from transferring personnel from Sólida Administradora dePortafolios, S.A. de C.V. (Sólida) to Banorte. As of December 31, 2006, the Financial Group had segregated plan assetsof $1,330 ($1,250 in 2005), which are used to cover the projected benefitobligations, which is recorded under “Other assets” in the consolidated balancesheets.

For the years ended December 31, 2006 and 2005, thenet period cost adjusted for inflation is made up as follows:
|                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Service cost                         |       | $        | 68         |     | $          | 66 |   |
| Interest cost                        |       | 94       |       | 87       |       |
| Expected return  on plan assets      |       | (90      | )          | (80      | )          |
|                                 |       |     |       |     |       |
| Amortization of  unrecognized items: |       |     |       |     |       |
| Transition liability                 |       | 34       |       | 33       |       |
| Prior service costs                  |       | (2       | )          | (1       | )          |
| Variance in assumptions              |       | 17       |       | 10       |       |
|                                 |       |     |       |     |       |
| Period cost                          |       | $        | 121        |     | $          | 115 |   |

 

F-110

----

The rates used in the calculation of the projectedbenefit obligation and return on plan assets as of December 31, 2006 and 2005are shown below:
|                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Discount rate                                                            |       | 5.50     | %          | 5.50     | %          |
| Rate of wage increase                                                    |       | 1.00     | %          | 1.00     | %          |
| Rate of increase in  costs and expenses of other postretirement benefits |       | 2.00     | %          | 2.00     | %          |
| Expected long-term rate of return on plan assets                         |       | 6.50     | %          | 6.50     | %          |

 

As of 2005, the Financial Group recognizes theliability for severance payments due to causes other than organizationalrestructuring (severance indemnities), which was also determined by independentactuaries, as follows:
|                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Projected  benefit obligation (PBO) |       | $        | (213       | )        | $          | (201 | ) |
| Plan assets                         |       | 131      |       | 109      |       |
| Funded status                       |       | (82      | )          | (92      | )          |
|                                |       |     |       |     |       |
| Transition  obligation              |       | 125      |       | 135      |       |
| Unrecognized  actuarial gains       |       | 30       |       | 46       |       |
|                                |       |     |       |     |       |
| Net projected  liability            |       | $        | 73         |     | $          | 89 |   |

 

For the years ended December 31, 2006 and 2005, thenet period cost adjusted for inflation is made up as follows:
|                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |
| Service cost           |       | $        | 24         |     | $          | 24 |   |
| Interest cost          |       | 7        |       | 6        |       |
| Transition  obligation |       | 14       |       | 13       |       |
|                   |       |     |       |     |       |
| Period cost            |       | $        | 45         |     | $          | 43 |   |

 

The balance of the employee retirement obligationspresented in this note refer to the Financial Group’s defined benefit pensionplan for those employees who elected to remain enrolled.

Furthermore, beginning in January 2001 the FinancialGroup instituted a defined contribution pension plan. The participatingemployees in this plan are all those who were hired from that date forward, aswell as all those who, hired before such a date, enrolled voluntarily.  Moreover, this plan maintains a fund, as ofDecember 31, 2006, amounting to $710, which is recorded under “Other assets”.

The employees who were hired before January 2001 anddecided to enroll voluntarily in the defined contribution pension plan receiveda benefit for past services equivalent to the actuarial benefits accrued in theprevious plan and were immediately assigned 50% (January 2001) and theremaining 50% will be contributed over 10 years.

The initial assignment of the prior service costs tothe defined contribution plan was financed by funds from the defined benefitplan and was treated as a modification to the plan in accordance with BulletinD-3.

F-111

----

Costs associated with the defined contribution pensionplan do not require an actuarial valuation because the costs of this plan areequivalent to the Financial Group’s contributions made to the plan’sparticipants during the year.

F-112

----

**24.****                     Subordinateddebentures**
|                                                                                                                                                                                                                                                                                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                                                                                                                   |       |     |       |     |       |
| Senior  subordinated debentures, non-convertible, maturing in January 2014,  denominated in U.S. dollars, at an annual interest rate of 5.875%, payable  semiannually with a final principal payment upon maturity (10-year term).                                                                                                     |       | $        | 3,313      |     | $          | 3,312 |   |
| Senior  subordinated debentures, non-convertible, representative securities BANORTE  02D debentures maturing in November 2012, at an annual interest rate of 8.0%  for the first 10 semiannual periods and subject to adjustment in the  following 10 semiannual periods, which will not be less than 8% nor greater  than 10% a year. |       | 1,219    |       | 1,241    |       |
| Senior  subordinated debentures, non-convertible, maturing in April 2021, denominated  in U.S. dollars, at an annual interest rate of 6.862%%, payable semiannually  with a final principal payment upon maturity (15-year term).                                                                                                      |       | 2,194    |       | —   |       |
| Preferred  subordinated debentures, non-convertible, maturing in April 2016, denominated  in U.S. dollars, at an annual interest rate of 6.135%%, payable semiannually  with a final principal payment upon maturity (10-year term).                                                                                                   |       | 4,382    |       | —   |       |
| Preferred  subordinated debentures maturing in April 2009, denominated in U.S. dollars,  at an annual interest rate of 2.72%.                                                                                                                                                                                                          |       | 111      |       | —   |       |
| Preferred  subordinated debentures maturing in June 2034, denominated in U.S dollars, at  an annual interest rate of 2.75%.                                                                                                                                                                                                            |       | 111      |       | —   |       |
| Accrued interest  payable and hedging swaps                                                                                                                                                                                                                                                                                            |       | 36       |       | 191      |       |
|                                                                                                                                                                                                                                                                                                                                   |       |     |       |     |       |
|                                                                                                                                                                                                                                                                                                                                   |       | $        | 11,366     |     | $          | 4,744 |   |

 

The costs related to these debentures are amortizedusing the straight-line method over the term of the debt. The amount charged toresults from amortization rose to $5 and $5 in 2006 and 2005, respectively.

**25.****                     Transactionsand balances with subsidiaries and associated companies**

The balances and transactions with subsidiaries andassociated companies as of December 31, 2006, 2005 and 2004 are as follows:
|                                         | ** ** | **Revenues** | ** ** | **Accounts receivable** | ** ** |
|-----------------------------------------|------------|--------------|------------|------------------------------|------------|
| **Institution**                         | ** ** | **2006**     | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | ** **   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Arrendadora  Banorte, S.A. de C.V.      |       | $            | 95         |                         | $          | 80 |   | $ | 65 |   | $ | 1,263 |   | $ | 923 |   | $ | 628 |   |
| Casa de Bolsa  Banorte, S.A. de C.V.    |       | 473          |       | 339                          |       | 54 |   | — |   | — |   |   |   |
| Banco del  Centro, S. A.                |       | —       |       | 1,383                        |       | 204 |   | — |   | 2,244 |   | 1,646 |   |
| Almacenadora  Banorte, S.A. de C.V.     |       | 10           |       | 6                            |       | 8 |   | — |   | 111 |   | 120 |   |
| Factor Banorte,  S.A. de C.V.           |       | 65           |       | 53                           |       | 42 |   | 346 |   | 690 |   | 186 |   |
| Inmobiliaria  Bancrecer, S. A. de C. V. |       | —       |       | —                       |       | — |   | — |   | — |   | 246 |   |
| Inmobiliaria  Innova, S. A. de C. V.    |       | —       |       | —                       |       | — |   | — |   | — |   | 84 |   |
| Inmobiliaria  Banorte, S. A. de C. V.   |       | —       |       | —                       |       | — |   | — |   | — |   | 26 |   |
| Inmobiliaria  Bra, S.A. de C.V.         |       | —       |       | —                       |       | — |   | — |   | 2 |   | — |   |
| Créditos  Pronegocio, S.A. de C.V. |       | 45           |       | 20                           |       | — |   | 526 |   | 299 |   | — |   |
| Banorte USA  Corporation                |       | —       |       | —                       |       | — |   | 92 |   | — |   | — |   |
|                                    |       |         |       |                         |       |   |   |   |   |   |   |   |   |
| Total                                   |       | $            | 688        |                         | $          | 1,881 |   | $ | 373 |   | $ | 2,227 |   | $ | 4,269 |   | $ | 2,936 |   |

 

F-113

----

 
|                                         | ** ** | **Expenses** | ** ** | **Accounts payable** | ** ** |
|-----------------------------------------|------------|--------------|------------|---------------------------|------------|
| **Institution**                         | ** ** | **2006**     | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Grupo Financiero  Banorte, S.A. de C.V. |       | $            | 5          |                      | $          | 7 |   | $ | 5 |   | $ | 41 |   | $ | 66 |   | $ | 62 |   |
| Arrendadora  Banorte, S.A. de C.V.      |       | 126          |       | 31                        |       | 72 |   | 9 |   | 15 |   | 53 |   |
| Casa de Bolsa  Banorte, S.A. de C.V.    |       | 1,316        |       | 2,363                     |       | 1,430 |   | — |   | — |   | 4 |   |
| Banco del  Centro, S.A.                 |       | —       |       | 201                       |       | 6 |   | — |   | 401 |   | 1,850 |   |
| Banorte  Generali, S.A. de C.V. AFORE   |       | —       |       | —                    |       | — |   | 4 |   | 2 |   | 2 |   |
| Almacenadora  Banorte, S.A. de C.V.     |       | 4            |       | 4                         |       | 3 |   | 6 |   | 4 |   | 74 |   |
| Factor Banorte,  S.A. de C.V.           |       | —       |       | —                    |       | — |   | 16 |   | 42 |   | 39 |   |
| Inmobiliaria  Banorte, S.A. de C.V.     |       | 68           |       | 66                        |       | 52 |   | 139 |   | 156 |   | 46 |   |
| Constructora  Primero, S.A. de C.V.     |       | 23           |       | 27                        |       | 25 |   | 133 |   | 93 |   | 18 |   |
| Inmobiliaria  Bancrecer, S.A. de C.V.   |       | 50           |       | 50                        |       | 35 |   | 63 |   | 59 |   | 32 |   |
| Inmobiliaria  Innova, S.A. de C.V.      |       | 27           |       | 20                        |       | 10 |   | 99 |   | 112 |   | 28 |   |
| Inmobiliaria  Banormex, S.A. de C.V.    |       | 4            |       | 3                         |       | 1 |   | 4 |   | 5 |   | 6 |   |
| Inmobiliaria  Finsa, S.A. de C.V.       |       | 7            |       | 9                         |       | 2 |   | 18 |   | 17 |   | 19 |   |
| Inmobiliaria  Bra, S.A. de C.V.         |       | 11           |       | 19                        |       | 15 |   | 3 |   | 10 |   | 6 |   |
| Inmuebles de  Occidente, S.A. de C.V.   |       | 4            |       | 4                         |       | 2 |   | 14 |   | 12 |   | 14 |   |
| Inmuebles de  Tijuana, S.A. de C.V.     |       | —       |       | —                    |       | — |   | 3 |   | 3 |   | 3 |   |
| Créditos  Pronegocio, S.A. de C.V. |       | —       |       | 1                         |       | — |   | 1 |   | 1 |   | — |   |
| Total                                   |       | $            | 1,645      |                      | $          | 2,805 |   | $ | 1,658 |   | $ | 553 |   | $ | 998 |   | $ | 2,256 |   |

 

All the balances and transactions with thesubsidiaries indicated in Note 3 have been eliminated in consolidation process.

Pursuant to article 73 of the LIC, the loans grantedby Banorte to related parties (belonging to the financial sector or not) cannotexceed 75% of the basic portion of their net capital. As of December 31, 2006 and 2005, the amount of the loans granted torelated parties is $5,619 and $6,335, respectively, representing 34% and 51%,respectively, of the limit established by the LIC.

***Portfolio sales***

*Sale of portfolio packagesbetween related parties:*

In February 2003 Banorte sold $1,925 (nominal value)of its own portfolio (with interest) to its subsidiary Sólida Administradora dePortafolios, S.A. de C.V. (“Sólida”) at a price of $378 (nominal value). Ofthis transaction, $1,891 (nominal value) related to past-due amounts and $64(nominal value) to the current portfolio. The transaction was recorded based onfigures as of August 2002, for which reason the final amount affecting theFebruary 2003 balance sheet was $1,856 (nominal value), considering thecollections made since August 2002. In conjunction with the sold portfolio,$1,577 (nominal value) of the associated allowance for loan losses wastransferred as well.

In official letter 601-II-323110 dated November 5,2003, the Commission set forth the accounting criteria to be applied to thistransaction and issued a series of rulings whereby the Financial Group mustprovide detailed information on the activities of this transaction throughoutits duration, in the understanding that this transaction was a one-time eventand not a recurring portfolio transfer procedure.

Pursuant to the foregoing, below is a summary of theactivity of the loan portfolio sold to Sólida since August 2002 and for theyears of 2005 and 2006:
|                                 | ** ** | **Mexican pesos** | ** ** | **Foreign currency value** | ** ** | **Total**          | ** ** |
|---------------------------------|------------|------------------------|------------|--------------------------------------|------------|--------------------|------------|
| **Type of portfolio** | ** ** | **Aug. 2002**     | ** ** | **Dec. 2005**                   | ** ** | **Dec. 2006** | ** ** | **Aug. 2002** | ** ** | **Dec. 2005** | ** ** | **Dec. 2006** | ** ** | **Aug. 2002** | ** ** | **Dec. 2005** | ** ** | **Dec. 2006** | ** ** |
| Current portfolio               |       |                   |       |                                 |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                      |       | $                      | 5          |                                 | $          | 2                  |       | $ | 1 |   | $ | 5 |   | $ | — |   | $ | — |   | $ | 10 |   | $ | 2 |   | $ | 1 |   |
| Mortgage                        |       | 54                     |       | 93                                   |       | 89                 |       | — |   | — |   | — |   | 54 |   | 93 |   | 89 |   |
| Total                           |       | 59                     |       | 95                                   |       | 90                 |       | 5 |   | — |   | — |   | 64 |   | 95 |   | 90 |   |
| Past-due portfolio              |       |                   |       |                                 |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                      |       | 405                    |       | 435                                  |       | 385                |       | 293 |   | 154 |   | 126 |   | 698 |   | 589 |   | 511 |   |
| Consumer                        |       | 81                     |       | 78                                   |       | 74                 |       | — |   | — |   | — |   | 81 |   | 78 |   | 74 |   |
| Mortgage                        |       | 1,112                  |       | 613                                  |       | 504                |       | — |   | — |   | — |   | 1,112 |   | 613 |   | 504 |   |
| Total                           |       | 1,598                  |       | 1,126                                |       | 963                |       | 293 |   | 154 |   | 126 |   | 1,891 |   | 1,280 |   | 1,089 |   |
| Total portfolio                 |       | $                      | 1,657      |                                 | $          | 1,221              |       | $ | 1,053 |   | $ | 298 |   | $ | 154 |   | $ | 126 |   | $ | 1,955 |   | $ | 1,375 |   | $ | 1,179 |   |
| Allowance for loan losses (1)   |       |                   |       |                                 |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                      |       | $                      | 326        |                                 | $          | 419                |       | $ | 368 |   | $ | 246 |   | $ | 146 |   | $ | 120 |   | $ | 572 |   | $ | 565 |   | $ | 488 |   |
| Consumer                        |       | 77                     |       | 77                                   |       | 74                 |       | — |   | — |   | — |   | 77 |   | 77 |   | 74 |   |
| Mortgage                        |       | 669                    |       | 558                                  |       | 468                |       | — |   | — |   | — |   | 669 |   | 558 |   | 468 |   |
| Total allowance for loan losses |       | $                      | 1,072      |                                 | $          | 1,054              |       | $ | 910 |   | $ | 246 |   | $ | 146 |   | $ | 120 |   | $ | 1,318 |   | $ | 1,200 |   | $ | 1,030 |   |

 

F-114

----

----

(1) Allowance required based onthe classification methodology applied by Banorte.

(2) Banorte holds 99.99% of thestockholders’ equity of Sólida.

As of December 31, 2006, thecomposition of the Financial Group’s loan portfolio, including the loanportfolio sold to Sólida, is as follows:
|                                 | ** ** | **Mexican pesos** | ** ** | **Foreign currency value** | ** ** | **Total**          | ** ** |
|---------------------------------|------------|------------------------|------------|--------------------------------------|------------|--------------------|------------|
| **Type of portfolio** | ** ** | **Dec. 2006**     | ** ** | **Dec. 2005**                   | ** ** | **Dec. 2006** | ** ** | **Dec. 2005** | ** ** | **Dec. 2006** | ** ** | **Dec. 2005** | ** ** |
|                            |       |                   |       |                                 |       |               |       |   |   |   |   |   |   |
| Commercial loans                |       | $                      | 55,833     |                                 | $          | 45,316             |       | $ | 17,361 |   | $ | 7,695 |   | $ | 73,194 |   | $ | 53,011 |   |
| Loans to financial institutions |       | 3,761                  |       | 2,968                                |       | 478                |       | 836 |   | 4,239 |   | 3,804 |   |
| Consumer loans                  |       | 20,570                 |       | 13,428                               |       | 145                |       | 1 |   | 20,715 |   | 13,429 |   |
| Mortgage loans                  |       | 27,128                 |       | 24,648                               |       | 760                |       | — |   | 27,888 |   | 24,648 |   |
| Government loans                |       | 10,328                 |       | 15,254                               |       | 442                |       | 544 |   | 10,770 |   | 15,798 |   |
| IPAB loans                      |       | —                 |       | 168                                  |       | —             |       | — |   | — |   | 168 |   |
| Current portfolio               |       | 117,620                |       | 101,782                              |       | 19,186             |       | 9,076 |   | 136,806 |   | 110,858 |   |
| Commercial loans                |       | 986                    |       | 901                                  |       | 200                |       | 232 |   | 1,186 |   | 1,133 |   |
| Consumer loans                  |       | 682                    |       | 491                                  |       | 1                  |       | — |   | 683 |   | 491 |   |
| Government loans                |       | —                 |       | —                               |       | —             |       | — |   | — |   | — |   |
| Mortgage loans                  |       | 1,221                  |       | 1,398                                |       | 4                  |       | — |   | 1,225 |   | 1,398 |   |
| Past-due portfolio              |       | 2,889                  |       | 2,790                                |       | 205                |       | 232 |   | 3,094 |   | 3,022 |   |
| Total portfolio                 |       | 120,509                |       | 104,572                              |       | 19,391             |       | 9,308 |   | 139,900 |   | 113,880 |   |
| Allowance for loan losses       |       | 3,861                  |       | 3,782                                |       | 616                |       | 344 |   | 4,477 |   | 4,126 |   |
|                            |       |                   |       |                                 |       |               |       |   |   |   |   |   |   |
| Net portfolio                   |       | $                      | 116,648    |                                 | $          | 100,790            |       | $ | 18,775 |   | $ | 8,964 |   | $ | 135,423 |   | $ | 109,754 |   |
| Allowance for loan losses       |       |                   |       |                                 |       |               |       |   |   | 144.70 | % | 136.53 | % |
| %  of past-due portfolio        |       |                   |       |                                 |       |               |       |   |   | 2.28 | % | 2.75 | % |

 

**26.****                     Informationby segment**

To analyze the financial information of the FinancialGroup, the data of the most representative segments as of December 31, 2006,2005 and 2004 are presented, without considering the eliminations relative tothe consolidation of the financial statements.

The balances by service sector of the Financial Groupare as follows:
|                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Banking sector**                          |       |     |       |     |       |     |       |
| Net income                                  |       | $        | 5,185      |     | $          | 5,636    |       | $ | 2,560 |   |
| Stockholders’  equity                  |       | 23,786   |       | 19,551   |       | 15,142   |       |
| Total portfolio                             |       | 138,721  |       | 116,430  |       | 107,447  |       |
| Past-due  portfolio                         |       | 1,962    |       | 1,844    |       | 1,893    |       |
| Allowance for  loan losses                  |       | 3,447    |       | 3,091    |       | 2,887    |       |
| Total net assets                            |       | 182,607  |       | 190,209  |       | 182,166  |       |
| **Brokerage sector**                        |       |     |       |     |       |     |       |
| Net income                                  |       | $        | 184        |     | $          | 77       |       | $ | 83 |   |
| Stockholders’  equity                  |       | 709      |       | 572      |       | 561      |       |
| Portfolio in  custody                       |       | 162,764  |       | 124,382  |       | 114,688  |       |
| Total net assets                            |       | 935      |       | 936      |       | 681      |       |
| **Long-term savings sector:**               |       |     |       |     |       |     |       |
| Net income                                  |       | $        | 1,028      |     | $          | 797      |       | $ | 497 |   |
| Stockholders’  equity                  |       | 3,475    |       | 2,439    |       | 2,062    |       |
| Total net assets                            |       | 17,527   |       | 13,579   |       | 11,853   |       |
| **Auxiliary credit organizations  sector:** |       |     |       |     |       |     |       |
| Net income                                  |       | $        | 247        |     | $          | 190      |       | $ | 122 |   |
| Stockholders’  equity                  |       | 1,092    |       | 848      |       | 659      |       |
| Total portfolio                             |       | 7,426    |       | 6,880    |       | 5,587    |       |
| Past-due  portfolio                         |       | 40       |       | 69       |       | 41       |       |
| Allowance for  loan losses                  |       | 70       |       | 97       |       | 63       |       |
| Total net assets                            |       | 8,234    |       | 7,675    |       | 6,203    |       |

 

F-115

----

The current loan portfolio, grouped by economic sectorand geographical location as of December 31, 2006 and 2005 is as follows:
|                                      | ** ** | **2006**                       | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Geographical location** | ** ** |
| **Sector**                           | ** ** | **North**                      | ** ** | **Center** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
|                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Agriculture                          |       | $                              | 2,135      |   | $ | 1,300 |   | $ | 592 |   | $ | 451 |   | $ | 4,478 |   |
| Mining                               |       | 93                             |       | 23 |   | 12 |   | 22 |   | 150 |   |
| Manufacturing                        |       | 5,564                          |       | 3,186 |   | 1,479 |   | 522 |   | 10,751 |   |
| Construction                         |       | 2,858                          |       | 2,062 |   | 177 |   | 285 |   | 5,382 |   |
| Public utilities                     |       | 46                             |       | 11 |   | 1 |   | 1 |   | 59 |   |
| Commerce                             |       | 6,259                          |       | 4,435 |   | 2,384 |   | 3,282 |   | 16,360 |   |
| Transportation                       |       | 2,631                          |       | 693 |   | 81 |   | 95 |   | 3,500 |   |
| Financial  services                  |       | 6,357                          |       | 6,463 |   | 218 |   | 1,691 |   | 14,729 |   |
| Communal, social  services           |       | 4,454                          |       | 5,881 |   | 1,701 |   | 566 |   | 12,602 |   |
| Business groups                      |       | 88                             |       | 217 |   | 3 |   | 10 |   | 318 |   |
| Public  administration services      |       | 3,303                          |       | 3,177 |   | 1,247 |   | 2,348 |   | 10,075 |   |
| International  Organization Services |       | 1                              |       |   |   | 1 |   |   |   | 2 |   |
| INB                                  |       |                           |       |   |   |   |   |   |   | 8,504 |   |
| Credit card                          |       |                           |       |   |   |   |   |   |   | 9,482 |   |
| Consumer                             |       |                           |       |   |   |   |   |   |   | 11,102 |   |
| Mortgage                             |       |                           |       |   |   |   |   |   |   | 27,038 |   |
| Others                               |       |                           |       |   |   |   |   |   |   | 84 |   |
| Loans from  Arrendadora Banorte      |       |                           |       |   |   |   |   |   |   | 2,682 |   |
| Loans from  Factor Banorte           |       |                           |       |   |   |   |   |   |   | 4,114 |   |
| Loans from  Créditos Pronegocio |       |                           |       | — |   |   |   | — |   | 554 |   |
| Total                                |       | $                              | 33,789     |   | $ | 27,448 |   | $ | 7,896 |   | $ | 9,273 |   | $ | 141,966 |   |

 
|                                                      | ** ** | **2005**                       | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **Geographical location** | ** ** |
| **Economic sector**                             | ** ** | **North**                      | ** ** | **Center** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | $                              | 1,648      |   | $ | 1,256 |   | $ | 545 |   | $ | 420 |   | $ | 3,869 |   |
| Mining                                               |       | 44                             |       | 14 |   | 8 |   | 19 |   | 85 |   |
| Manufacturing                                        |       | 5,566                          |       | 2,773 |   | 1,489 |   | 384 |   | 10,212 |   |
| Construction                                         |       | 1,666                          |       | 1,514 |   | 298 |   | 246 |   | 3,724 |   |
| Public utilities                                     |       | 25                             |       | 8 |   | 1 |   | — |   | 34 |   |
| Commerce,  restaurants, hotels                       |       | 4,534                          |       | 3,529 |   | 2,564 |   | 2,341 |   | 12,968 |   |
| Transportation  & communications                 |       | 2,694                          |       | 923 |   | 118 |   | 286 |   | 4,021 |   |
| Financial  services                                  |       | 6,542                          |       | 4,684 |   | 630 |   | 1,471 |   | 13,327 |   |
| Communal, social  & personal services            |       | 1,587                          |       | 4,918 |   | 481 |   | 624 |   | 7,610 |   |
| Business,  professional & civic groups           |       | 9                              |       | 225 |   | 22 |   | 2 |   | 258 |   |
| Public  Administration Services                      |       | 4,903                          |       | 4,567 |   | 855 |   | 4,900 |   | 15,225 |   |
| International  Organization Services                 |       | 2                              |       | — |   | 1 |   |   |   | 3 |   |
| Credit card                                          |       | —                         |       | — |   | — |   | — |   | 6,484 |   |
| Consumer                                             |       | —                         |       | — |   | — |   | — |   | 9,691 |   |
| Mortgage                                             |       | —                         |       | — |   | — |   | — |   | 24,773 |   |
| Loans to FOBAPROA  or IPAB, ADE, FOPYME & FINAPE |       | —                         |       | — |   | — |   | — |   | 332 |   |
| Consumer                                             |       | —                         |       | — |   | — |   | — |   | (17 | ) |
| Hedging swaps                                        |       | —                         |       | — |   | — |   | — |   | (45 | ) |
| Loans from  Arrendadora Banorte                      |       |                           |       |   |   |   |   |   |   | 2,402 |   |
| Loans from  Factor Banorte                           |       |                           |       |   |   |   |   |   |   | 3,964 |   |
| Loans from  Créditos Pronegocio                 |       | —                         |       | — |   | — |   | — |   | 337 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Current loan  portfolio:                             |       |                           |       |   |   |   |   |   |   | $ | 119,257 |   |
|                                                      |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-116

----

The past-due loan portfolio, grouped by economicsegment and geographical location, is summarized as follows:
|                                      | ** ** | **2006**                       | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Geographical location** | ** ** |
| **Sector**                           | ** ** | **North**                      | ** ** | **Center** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
|                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Agriculture                          |       | $                              | 13         |   | $ | 34 |   | $ | 7 |   | $ | 3 |   | $ | 57 |   |
| Mining                               |       | 2                              |       | 2 |   | — |   | — |   | 4 |   |
| Manufacturing                        |       | 26                             |       | 62 |   | 44 |   | 6 |   | 138 |   |
| Construction                         |       | 5                              |       | 35 |   | 3 |   | 3 |   | 46 |   |
| Public utilities                     |       | —                         |       | — |   | — |   | — |   | — |   |
| Commerce                             |       | 74                             |       | 91 |   | 52 |   | 19 |   | 236 |   |
| Transportation                       |       | 3                              |       | 9 |   | 5 |   | — |   | 17 |   |
| Financial  services                  |       | 2                              |       | 6 |   | — |   | — |   | 8 |   |
| Communal, social  services           |       | 12                             |       | 13 |   | 2 |   | 2 |   | 29 |   |
| Business groups                      |       | —                         |       | — |   | — |   | — |   | — |   |
| Public  Administration Services      |       | —                         |       | — |   | — |   | — |   | — |   |
| International  Organization Services |       | —                         |       | — |   | — |   | — |   |   |   |
| INB                                  |       | —                         |       | — |   | — |   | — |   | 96 |   |
| Credit card                          |       | —                         |       | — |   | — |   | — |   | 358 |   |
| Consumer                             |       | —                         |       | — |   | — |   | — |   | 249 |   |
| Mortgage                             |       | —                         |       | — |   | — |   | — |   | 717 |   |
| Other past-due  loans                |       | —                         |       | — |   | — |   | — |   | 7 |   |
| Loans from  Arrendadora Banorte      |       | —                         |       | — |   | — |   | — |   | 22 |   |
| Loans from  Factor Banorte           |       | —                         |       | — |   | — |   | — |   | 18 |   |
| Loans from  Créditos Pronegocio |       | —                         |       | — |   | — |   | — |   | 58 |   |
|                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Total                                |       | $                              | 137        |   | $ | 252 |   | $ | 113 |   | $ | 33 |   | $ | 2,060 |   |

 
|                                           | ** ** | **2005**                       | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **Geographical location** | ** ** |
| **Economic sector**                  | ** ** | **North**                      | ** ** | **Center** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
|                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Agriculture                               |       | $                              | 16         |   | $ | 35 |   | $ | 34 |   | $ | 1 |   | $ | 86 |   |
| Mining                                    |       | 1                              |       | — |   | 2 |   | — |   | 3 |   |
| Manufacturing                             |       | 49                             |       | 69 |   | 64 |   | 7 |   | 189 |   |
| Construction                              |       | 6                              |       | 35 |   | 2 |   | 1 |   | 44 |   |
| Commerce,  restaurants, hotels            |       | 56                             |       | 70 |   | 65 |   | 10 |   | 201 |   |
| Transportation  & communications      |       | 1                              |       | 19 |   | 1 |   | 3 |   | 24 |   |
| Financial  services                       |       | 7                              |       | 1 |   | 5 |   | — |   | 13 |   |
| Communal, social  & personal services |       | 10                             |       | 32 |   | 4 |   | 4 |   | 50 |   |
| Business groups                           |       | 1                              |       | — |   | — |   | — |   | 1 |   |
| Credit card                               |       | —                         |       | — |   | — |   | — |   | 222 |   |
| Consumer                                  |       | —                         |       | — |   | — |   | — |   | 207 |   |
| Mortgage                                  |       | —                         |       | — |   | — |   | — |   | 799 |   |
| Others                                    |       | —                         |       | — |   | — |   | — |   | 5 |   |
| Loans from  Arrendadora Banorte           |       | —                         |       | — |   | — |   | — |   | 33 |   |
| Loans from  Factor Banorte                |       | —                         |       | — |   | — |   | — |   | 34 |   |
| Loans from Créditos  Pronegocio      |       | —                         |       | — |   | — |   | — |   | 16 |   |
| Past-due loan  portfolio:                 |       |                           |       |   |   |   |   |   |   | $ | 1,927 |   |
|                                           |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-117

----

a.        Deposit accounts groupedby product and geographical location are as follows:
| ** **                                    | ** ** | **2006**                       | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **Geographical location** | ** ** |
| ** **                                    | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Treasury** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Product**                                   | ** ** | **Monterrey**                  | ** ** | **Mexico City** | ** ** | **West** | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **and others** | ** ** | **Abroad** | ** ** | **Total** | ** ** |
|                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest earning  checking accounts       |       | $                              | 9,813      |   | $ | 11,896 |   | $ | 3,634 |   | $ | 4,559 |   | $ | 4,894 |   | $ | 94 |   | $ | — |   | $ | 34,890 |   |
| Interest earning  checking accounts           |       | 7,097                          |       | 15,314 |   | 2,784 |   | 4,130 |   | 4,657 |   | 88 |   | — |   | 34,070 |   |
| Savings                                       |       | 2                              |       | 1 |   | — |   | — |   | — |   | — |   | — |   | 3 |   |
| Current account in MxP  and preestablished    |       | 2,622                          |       | 3,313 |   | 1,058 |   | 1,746 |   | 1,837 |   | 65 |   | — |   | 10,641 |   |
| Non-interest bearing  demand deposits, U.S.D. |       | 222                            |       | 245 |   | 95 |   | 658 |   | 124 |   | — |   | 2,912 |   | 4,256 |   |
| Interest bearing demand  deposits, U.S.D.     |       | 2,253                          |       | 998 |   | 400 |   | 2,189 |   | 200 |   | (2 | ) | 4,318 |   | 10,356 |   |
| Savings U.S.D.                                |       | —                         |       | — |   | — |   | — |   | — |   | — |   | 158 |   | 158 |   |
| Over-the-counter  promissory notes            |       | 8,958                          |       | 16,130 |   | 4,028 |   | 3,876 |   | 5,748 |   | — |   | — |   | 38,740 |   |
| Time deposits, U.S.D.                         |       | 1,932                          |       | 2,681 |   | 1,277 |   | 1,190 |   | 737 |   | 14 |   | 7,347 |   | 15,178 |   |
| Money desk customers                          |       | 5,277                          |       | 5,936 |   | 1,798 |   | 1,263 |   | 1,255 |   | — |   | — |   | 15,529 |   |
| Financial intermediaries                      |       | —                         |       | — |   | — |   | — |   | — |   | 3,495 |   | — |   | 3,495 |   |
| FOBAPROA checking  earning interest           |       | 526                            |       | — |   | — |   | — |   | — |   | 1,695 |   | — |   | 2,221 |   |
|                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total deposits                                |       |                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 169,537 | ** ** |
|                                               |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **2005**                       | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **Geographical location** | ** ** |
| ** **                                    | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| **Product**                                   | ** ** | **Monterrey**                  | ** ** | **Mexico City** | ** ** | **West** | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **and others** | ** ** | **Total** | ** ** |
|                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  checking accounts       |       | $                              | 7,352      |   | $ | 9,849 |   | $ | 3,987 |   | $ | 3,867 |   | $ | 4,034 |   | $ | 73 |   | $ | 29,162 |   |
| Interest earning  checking accounts           |       | 6,047                          |       | 13,987 |   | 3,839 |   | 4,556 |   | 4,965 |   | 78 |   | 33,472 |   |
| Savings                                       |       | 1                              |       | 1 |   | — |   | — |   | — |   | — |   | 2 |   |
| Current account in MxP  and preestablished    |       | 1,738                          |       | 2,864 |   | 1,066 |   | 1,629 |   | 1,486 |   | 48 |   | 8,831 |   |
| Non-interest bearing  demand deposits, U.S.D. |       | 89                             |       | 205 |   | 68 |   | 360 |   | 119 |   | — |   | 841 |   |
| Interest bearing demand  deposits, U.S.D.     |       | 1,553                          |       | 1,861 |   | 487 |   | 2,167 |   | 223 |   | (1 | ) | 6,290 |   |
| Over-the-counter  promissory note             |       | 6,520                          |       | 14,159 |   | 4,858 |   | 4,161 |   | 4,980 |   | 178 |   | 34,856 |   |
| Time deposits, U.S.D.                         |       | 1,699                          |       | 2,285 |   | 1,512 |   | 795 |   | 632 |   | 14 |   | 6,937 |   |
| Money desk customers                          |       | 3,752                          |       | 5,212 |   | 3,026 |   | 1,195 |   | 1,250 |   | — |   | 14,435 |   |
| Financial intermediaries                      |       | —                         |       | — |   | — |   | — |   | — |   | 6,495 |   | 6,495 |   |
| FOBAPROA checking  earning interest           |       | 623                            |       | — |   | — |   | — |   | — |   | 1,220 |   | 1,843 |   |
| Hedging swaps                                 |       | —                         |       | — |   | — |   | — |   | — |   | (5 | ) | (5 | ) |
|                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total deposits                                |       |                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 143,159 | ** ** |
|                                               |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**27.****       Tax environment**

***Income tax and asset tax regime***- The Financial Group and its subsidiaries are subject to ISR and asset tax(IMPAC). ISR is calculated by considering certain effects of inflation astaxable or deductible, such as depreciation calculated on values in constantpesos, and the effect of inflation on certain monetary assets and liabilitiesis accrued or deducted through the annual adjustment for inflation which issimilar to results from monetary position. In 2005, the rate was 30%; in 2006,29%; and as of 2007 it will be 28%; as per the modifications to the tax laws ineffect as of 2007, it is possible to obtain a tax credit of 0.5% or 0.25% overthe tax results in the case of taxpayers certified for tax purposes and whomeet certain requirements.

IMPAC is incurred at the rate of 1.8% on the averagenet amount of assets not subject to brokerage (at restated values) and ofcertain liabilities, and is paid only on the amount by which it exceeds ISR forthe year. According to the decree that amends, adds or eliminates variousprovisions of the Asset Tax Law published in the Official Gazette of theFederation on December 27, 2006 for the fiscal year of 2007 and thereafter,

F-118

----

IMPAC will be incurred at a rate of 1.25% over theaverage assets not subject to financial trading without reducing liabilities.

F-119

----

Any payment made can be recovered against the amountby which ISR exceeds IMPAC over the next ten fiscal years.  For the year 2006, the Financial Group didnot incurr IMPAC as the ISR was higher than the former.

***Accounting-tax reconciliation***-The principal items affecting the determination of the tax result of theFinancial Group were the annual adjustment for inflation, the deduction of theallowance for loan losses, without exceeding 2.5% of the average loanportfolio, the deduction of the reserve for shared losses with the IPAB and thevaluation of financial instruments.

***Employee statutory profit sharing***- The Financial Group determines employee statutoryprofit sharing based on the criteria established in the guidelines set forth bythe Mexican Constitution.

**28.****       Stockholders’ Equity**

At the General Ordinary Stockholders’ Meetings held onApril 28 and October 12, 2006, the following resolutions were adopted, amongothers:

a.          To transfer the profitsfrom 2005 equal to $5,957 ($5,719 at nominal value) to earnings from prioryears, and increase the legal reserve by $294 ($286 at nominal value)equivalent to 5% of net income for the year.

b.         Declare cash dividends of$763 ($757 at nominal value).

The Extraordinary Stockholders’ Meeting held onDecember 13, 2006, resolved, among other things, to reform the Financial Group’sbylaws to adjust them to the new Stock Market Law provisions. This new lawestablishes that business corporations with representative shares of theirShareholders’ Equity registered in the National Securities Register will, as ofthe law’s effective date, become securities business corporations.Consequently, the company “Grupo Financiero Banorte” will be followed by “SecuritiesBusiness Corporation of Variable Capital” or its abbreviation in Spanish,S.A.B. de C.V. However, authorization for this modification is still pending inthe SHCP.

The Financial Group’s stockholders’ equity as ofDecember 31, 2006, 2005 and 2004 is made up as follows:
| ** **           | ** ** | **Number of shares with a nominal value of $3.50** | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares issued** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares issued** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                                                                                 | ** ** | **Shares issued** | ** ** | ** ** | ** ** | ** ** | ** ** | **(not ** | ** ** | ** ** | ** ** | **Common** | ** ** | **(not ** | ** ** | **Paid-in** | ** ** |
| ** **           | ** ** | **Common stock**                                                                      | ** ** | **(not subscribed)** | ** ** | **Paid-in capital** | ** ** | **Common stock** | ** ** | **subscribed)** | ** ** | **Paid-in capital** | ** ** | **stock** | ** ** | **subscribed)** | ** ** | **Capital** | ** ** |
| ** **           | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| “O” Series |       | 2,018,347,548                                                                              |       | — |   | 2,018,347,548 |   | 2,018,554,148 |   | — |   | 2,018,554,148 |   | 504,586,887 |   | — |   | 504,586,887 |   |

 
| ** **                             | ** ** | **Historical Amounts** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **Common stock**       | ** ** | **Shares issued   (not subscribed** | ** ** | **Paid-in capital** | ** ** | **Common stock** | ** ** | **Shares issued   (not   subscribed)** | ** ** | **Paid-in capital** | ** ** | **Common   Stock** | ** ** | **Shares issued   (not   subscribed)** | ** ** | **Paid-in   Capital** | ** ** |
| ** **                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| “O” Series                   |       | $                           | 7,064      |   | $ | — |   | $ | 7,064 |   | $ | 7,065 |   | $ | — |   | $ | 7,065 |   | $ | 1,766 |   | $ | — |   | $ | 1,766 |   |
|                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Restatement in  pesos of December 2006 |       | —                      |       | — |   | 4,516 |   | — |   | — |   | 4,516 |   | — |   | — |   | 4,259 |   |
|                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                        |       |   |   | $ | 11,580 |   |   |   |   |   | $ | 11,581 |   |   |   |   |   | $ | 6,025 |   |
|                                        |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-120

----

***Restrictions on profits***-Stockholders’ equity distributions, except restated paid-in capital and taxretained earnings, will be subject to a tax payable by the Financial Group atthe rate in effect when the dividend is distributed. Any tax paid on suchdistributions may be credited against the income tax payable of the year inwhich the tax on the dividend is paid and the two fiscal years following suchpayment against the year’s tax.

F-121

----

The Financial Group’s net profit is subject to therequirement that at least 5% of net income of each year be transferred to thelegal reserve until the reserve equals 20% of capital stock at par value. Thelegal reserve may not be distributed to the stockholders during the life of theFinancial Group, except in the form of a stock dividend.

***Capitalreserves*** - In accordance with official letter No.601-II-77797 dated October 16, 2000, in which the Commission authorized theFinancial Group, on a one-time basis and as an exception, to affect capitalreserves and establish the allowance for loan losses determined to covercontingencies for loss sharing and the “Incentive arrangement” related to the “Arrangementfor sharing loan portfolio flows with FOBAPROA”. In accordance with thecreation of such reserves, deferred taxes were recorded directly in the “Capitalreserves” account in stockholders’ equity.

Pursuant to the expiration of the trust contractnumber 1990-4, during June 2006, Banorte cancelled part of the respective losssharing reserve, recognizing the cancellation of deferred taxes which it hadcreated in the “Capital reserves” account in the amount of $300, nominal value.

***Capitalization ratio***-The capitalization rules for financial institutions determined by the SHCPestablish requirements for specific levels of net capital, as a percentage ofassets subject to both market and credit risk.

The information as of December 31, 2006 sent for Bancode México to review is shown below.

The capitalization ratio of Banorte as of December 31,2006 was 17.35% of total risk (market and credit), and 24.05% of credit risk,which in both cases exceed the current regulatory requirements.

The amount of net capital, divided by basic andcomplementary capital as of December 31, 2006, is detailed below (these figuresmay differ from those in the basic financial statements):
|                                                                                                                      | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Stockholders’  equity                                                                                           |       | $        | 23,560     |   |
| Subordinated  debentures and capitalization instruments                                                              |       | 2,807    |       |
|                                                                                                                 |       |     |       |
| Deduction of  investment in subordinated instruments-                                                                |       |     |       |
| Deduction of investments in shares of financial  entities                                                            |       | 3,449    |       |
| Deduction of investments in shares of non-financial  entities                                                        |       | 779      |       |
| Deduction of  financing granted for the acquisition of bank shares or shares of the  Financial Group’s entities |       |     |       |
| Deduction of deferred taxes                                                                                          |       | —   |       |
| Deduction of intangibles and expenses or deferred  costs                                                             |       | 619      |       |
| Other assets to deduct                                                                                               |       | —   |       |
| Basic capital                                                                                                        |       | 21,520   |       |
| Debentures and capitalization instruments                                                                            |       | 8,301    |       |
| Allowance for loan loss reserves                                                                                     |       | 714      |       |
| Complementary capital                                                                                                |       | 9,015    |       |
| Net capital                                                                                                          |       | $        | 30,535     |   |

 

Characteristicsof the subordinated debentures:
| Concept                                | ** ** | **Amount** | ** ** | **Maturity** | ** ** | **Basic capital   proportion** | ** ** | **Complementary   capital proportion** | ** ** |
|----------------------------------------|------------|------------|------------|--------------|------------|------------------------------------------|------------|--------------------------------------------------|------------|
| Debentures  indexed to U.S.D. 2002     |       | $          | 1,219      |         | 28/11/2012 |                                     | 100        | %                                                | 0          | % |
| Complementary  capital debentures 2004 |       | 3,313      |       | 17/02/2014   |       | 0                                        | %          | 100                                              | %          |
| Complementary  capital debentures 2006 |       | 4,382      |       | 13/10/2016   |       | 0                                        | %          | 100                                              | %          |
| Basic capital  debentures 2006         |       | 2,194      |       | 13/10/2021   |       | 72                                       | %          | 28                                               | %          |
|                                        |            |            |            |              |            |                                          |            |                                                  |            |  |

 

F-122

----

Assets subject to risk are detailed below:

Assets subject to market risk:
| Concept                                                                                | ** ** | **Positions weighted by  risk** | ** ** | **Capital requirement** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|
| ** **                                                                             | ** ** | ** **                                | ** ** | ** **                   | ** ** |
| Transactions in  Mexican pesos with nominal interest rate                              |       | $                                         | 34,879     |                         | $          | 2,790 |   |
| Transactions  with debt instruments in Mexican pesos with surcharge and revisable rate |       | 9,145                                     |       | 732                          |       |
| Transactions in  Mexican pesos with real interest rates or in UDIS                     |       | 725                                       |       | 58                           |       |
| Transactions in  UDIS or with yields referenced to the NCPI                            |       | 4                                         |       | 1                            |       |
| Transactions in  foreign currency with nominal interest rate                           |       | 2,729                                     |       | 218                          |       |
| Exchange  transactions                                                                 |       | 97                                        |       | 8                            |       |
| Share  transactions                                                                    |       | 228                                       |       | 18                           |       |
|                                                                                   |       |                                      |       |                         |       |
| Total                                                                                  |       | $                                         | 47,807     |                         | $          | 3,825 |   |

 

Assets subject to credit risk:
| Concept                                                                                        | ** ** | **Assets weighted by  risk** | ** ** | **Capital requirement** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                                                                                     | ** ** | ** **                             | ** ** | ** **                   | ** ** |
| Group II  (weighted at 20%)                                                                    |       | $                                      | 11,975     |                         | $          | 58 |   |
| Group II Others  (weighted at 10%)                                                             |       | 50                                     |       | 4                            |       |
| Group II Others  (weighted at 23%)                                                             |       | 543                                    |       | 43                           |       |
| Group III  (weighted at 100%)                                                                  |       | 104,541                                |       | 8,363                        |       |
| Group III Others  (weighted at 11.5%)                                                          |       | 41                                     |       | 4                            |       |
| Group III Others  (weighted at 50%)                                                            |       | 1,130                                  |       | 90                           |       |
| Group III Others  (weighted at 115%)                                                           |       | 1,675                                  |       | 134                          |       |
| Group III Others  (weighted at 150%)                                                           |       | 1,432                                  |       | 115                          |       |
| Sum                                                                                            |       | 121,837                                |       | 9,711                        |       |
| For permanent  shares, furniture and real property, and advance payments and deferred  charges |       | 5,591                                  |       | 447                          |       |
|                                                                                           |       |                                   |       |                         |       |
| Total                                                                                          |       | $                                      | 126,978    |                         | $          | 10,158 |   |

 

**29.****       Foreign currency position**

As of December 31, 2006 and 2005, the Financial Groupholds certain assets and liabilities in foreign currency, mainly U.S. dollars,converted to the exchange rate issued by Banco de México at MX$10.8116 andMX$10.6344 per US $1.00, respectively, as shown below:
|                                      | ** ** | **Thousands of U.S. dollars** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Assets                               |       | 3,560,079                                    |       | 1,594,589 |   |
| Liabilities                          |       | 3,263,390                                    |       | 1,548,066 |   |
| Net asset position in U.S. dollars   |       | 296,689                                      |       | 46,523 |   |
|                                 |       |                                         |       |   |   |
| Net asset  position in Mexican pesos |       | $                                            | 3,208      |   | $ | 495 |   |
|                                      |            |                                              |            |  |  |  |  |

 

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**30.****       Position in UDIS**

As of December 31, 2006 and 2005, the Financial Groupholds certain assets and liabilities denominated in UDIS, converted to Mexicanpesos based on the current equivalency of $3.788954 and $3.637532, per UDI,respectively, as shown below:
|                                      | ** ** | **Thousands of UDIS** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                 |       |                            |       |   |   |
| Assets                               |       | 146,081                         |       | 122,203 |   |
| Liabilities                          |       | 103,296                         |       | 94,509 |   |
| Net asset  position in UDIS          |       | 42,785                          |       | 27,694 |   |
|                                 |       |                            |       |   |   |
| Net asset position in  Mexican pesos |       | $                               | 162        |   | $ | 101 |   |
|                                      |            |                                 |            |  |  |  |  |

 

**31.****       Net income per share**

The net income per share is the result of dividing thenet income by the weighted average of the Financial Group’s shares incirculation during the period.

The results prior to December 31, 2006, 2005 and 2004are shown below:
|                      | ** ** | ** ** | ** ** | **2006**                              | ** **    | ** **                     | ** ** | **2005**                       | ** ** | **2004**                       | ** ** |
|----------------------|------------|------------|------------|---------------------------------------|---------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **Income** | ** ** | **Weighted average shares** | ** **    | **Income per share** | ** ** | **Income per share** | ** ** | **Income per share** | ** ** |
|                 |       |       |       |                                  |          |                           |       |                           |       |                           |       |
| Net income per share |       | $          | 5,959      |                                  | 2,019,019,115 |                           | $          | 2.9514                         |       | $                              | 2.9516     |   | $ | 1.3919 |   |
|                      |            |            |            |                                       |               |                                |            |                                |            |                                |            |  |  |  |  |

 

Earnings per share in 2005 and 2004 differs from theamount previously reported as it retroactively reflects the split (4:1) inNovember 2005.

**32.****       Saving preventive andprotection mechanism**

In December 1998, the Federal Congress approved adraft law establishing the gradual elimination of FOBAPROA as of January 1,1999, and the creation of IPAB, which assumed the assets of FOBAPROA, and theobligations assumed by the latter as a result of the bank salvage process.

Pursuant to Temporary Article 5 of the Bank SavingsProtection Law, on July 18, 1999 IPAB issued the general rules forimplementation of the PCCC, which were applied to those institutions thatelected to terminate the contracts executed with FOBAPROA and to subsequentlyexecute contracts of the New Program with IPAB.

As a result of the changes described above, the NewProgram Contract was executed with IPAB, which allows IPAB to perform the GELAudits of all loans generating resources for IPAB. These audits were completedin the first half of 2005, which once their consequences were applied it waspossible to exchange IPAB obligations for IPAB Instruments, most of which werepaid in full in 2005. Two were paid in full in June 2006 as per the New ProgramContract.

During 2006, 2005 and 2004, the amount ofcontributions to the IPAB payable by Banorte for fees amounted to $659, $624and $838 respectively.

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**33.****       Risk management**

**Authorized bodies**

To ensure adequate risk management of the FinancialGroup, as of 1997 the Financial Group’s Board of Directors created the RiskPolicy Committee (CPR), whose purpose is to manage the risks to which theFinancial Group is exposed, and ensure that the performance of operationsadheres to the established risk management objectives, guidelines, policies andprocedures.

Furthermore, the CPR provides oversight on the globalrisk exposure limits approved by the Board of Directors, and also approves thespecific risk limits for exposure to different types of risk.

The CPR is composed of regular members of the Board ofDirectors, the Managing Director of the Financial Group, the General Directorof Comprehensive Risk Management, the General Director of Banking, Savings andWelfare, and the General Director of the Securities Firm, as well as theGeneral Director of Audits, who has the right to speak but not to vote.

To adequately carry out its duties, the CPR performsthe following functions, among others:

1.          Propose for the approvalof the Board of Directors:

·           Theobjectives, guidelines and policies for comprehensive risk management

·           Theglobal limits for risk exposure

·           Themechanisms for implementing corrective measures

·           Thespecial cases or circumstances in which the global and specific limits may beexceeded

2.          Approve and review atleast once a year:

·           Thespecific limits for discretionary risks, as well as tolerance levels fornondiscretionary risks

·           Themethodology and procedures to identify, measure, oversee, limit, control,report and disclose the different kinds of risks to which the Holding Companyis exposed

·           Themodels, parameters and scenarios used to perform the valuation, measurement andcontrol of risks proposed by the Comprehensive Risk Management Unit

3.          Approve:

·           Themethodologies for identification, valuation, measurement and control of risksof the new operations, products and services which the Financial Group intendsto introduce into the market

·           Thecorrective measures proposed by the Comprehensive Risk Management Unit

·           Themanuals for comprehensive risk management

4.          Appoint and remove theperson responsible for the Comprehensive Risk Management Unit, who is ratifiedby the Board of Directors.

5.          Inform the Board ofDirectors, at least once a month, of the exposure to risk and its possiblenegative effects, as well as follow up on limits and tolerance levels.

6.          Inform the Board of thecorrective measures implemented.

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**34.****       Comprehensive Risk Management Unit (UAIR) (Unaudited)**

The function of the UAIR is to identify, measure,oversee, limit, control, report and disclose the different kinds of risk towhich the Financial Group is exposed, and it is the responsibility of theOffice of Risk Management (DGAR).

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The DGAR reports to the CPR in compliance with therequirements set forth in the Commission’s circular, the “General RiskManagement Rules Applicable to Credit Financial Groups”, in relation to theindependence of the different business areas.

The DGAR focuses Comprehensive Risk Management effortsthrough four different departments:

·           CreditRisk Management

·           MarketRisk Management

·           OperatingRisk Management, and

·           RiskPolicy Management

The Financial Group currently has methodologies formanaging risk in its different phases, such as credit, market, liquidity andoperating risk.

The primary objectives of the DGAR are summarized asfollows:

·           Providethe different business areas with clear rules that facilitate theirunderstanding so as to minimize risks and ensure that they are within the parametersestablished and approved by the Board of Directors and the Risk PolicyCommittee.

·           Establishmechanisms that provide for follow-up on risk-taking within the FinancialGroup, ensuring that they are preventive as much as possible, and supported byadvanced systems and processes.

·           Standardizerisk measurement and control.

·           Protectthe Financial Group’s capital against unexpected losses from market movements,credit losses and operating risks.

·           Developvaluation methods for the different types of risks.

·           Establishprocedures for portfolio optimization and loan portfolio management.

The Financial Group has segmented risk assessment andmanagement into the following headings:

***Credit risk:***Volatilityof revenues due to the creation of provisions for impairment of credits andpotential credit losses due to nonpayment by a borrower or counterpart.

***Market risk:***Volatility of revenues due to changes in the market, which affect the valuationof the positions from operations involving assets, liabilities or generatingcontingent liabilities, such as interest rates, exchange rates, price indexes,etc.

***Liquidity risk:***Potential loss derived from the difficulty of renewing debts or obtainingothers under normal conditions for the Financial Group, due to the anticipatedor forced sale of assets at unusual discounts to meet its obligations.

***Operating risk:***Loss resulting from lack of adaptation or failure in processes, personnel,internal systems or external events. This definition includes Technological Risk and Legal Risk.  Technological Risk includes all potentiallosses from damage, interruption, alteration or failures derived from the useof or dependence on hardware, software, systems, applications, networks and anyother information distribution channel, while Legal Risk involves the potentialloss from penalties for noncompliance with legal and administrative regulationsor the issuance of adverse final court rulings in relation to the operationsperformed by the Financial Group.

During 2006, different audits were performed ofcomprehensive risk management activities, both by internal and independentexternal auditors, whose reports showed satisfactory results for the FinancialGroup in terms of compliance with the prudential Comprehensive Risk Managementregulations established by the Commission.

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***Credit risk***

Credit Risk is the risk that the customers will notcomply with their payment obligations; therefore, adequate risk management isessential to maintain a high quality loan portfolio.

The Financial Group’s management credit riskobjectives are as follows:

a.          Improve the quality,diversification and composition of the loan portfolio to optimize therisk-return ratio.

b.         Provide senior managementwith reliable and timely information to support decision-making in creditmatters.

c.          Provide the businessdepartments with clear and sufficient tools to support credit placement andfollow up.

d.         Support the creation ofeconomic value for shareholders by means of efficient credit risk management.

e.          Define and constantlyupdate the regulatory framework for credit risk management.

f.          Comply with the creditrisk management reporting requirements established by the relevant authorities.

g.         Perform risk managementin accordance with best practices; implementing models, methodologies,procedures and systems based on the latest international advances.

***Individual credit risk***

The Financial Group’s banks segment the loan portfoliointo two large groups: the consumer and corporate portfolios.

Individual credit risk for the consumer portfolio isidentified, measured and controlled by means of a parametric system (scoring)which includes models for each of the consumer products: mortgage, automotive,payroll credit, personal and credit card.

Individual risk for the corporate portfolio isidentified, measured and controlled by means of the Target Markets, the RiskAcceptance Criteria and the Banorte Internal Risk Classification (CIR Banorte).

The Target Markets and Risk Acceptance Criteria aretools which, together with the CIR Banorte, form part of the credit strategy ofthe Financial Group and support the estimate of the credit risk level.

The Target Markets are activities selected by regionand economic activity - supported by economic studies and portfolio behavioranalyses - in which the Financial Group wishes to place credits.

The Risk Acceptance Criteria are parameters whichdescribe the risks identified by industries, facilitating an estimate of therisk involved for the Financial Group in granting a credit to a customer dependingon the economic activity which it performs. The types of risks evaluated in the Risk Acceptance Criteria are thefinancial risk, operating risk, market risk, company lifecycle risk, legal andregulatory risk, credit history and quality of management.

The CIR Banorte is in line with the “GeneralRegulations applicable to the classification methodology for the loan portfolioof credit institutions” issued by the Comisión Nacional de Valores (MexicanSecurities Commission) on August 20, 2004. The CIR Banorte has been certifiedby the Commission and by an

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international external auditor since 2001.

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The CIR Banorte is applied to a commercial portfolioequal to or exceeding an amount equivalent in Mexican pesos to 900,000 UDIS atthe classification date.

***Portfolio credit risk***

The Financial Group has designed a portfolio creditrisk methodology which, while also including the best and most currentinternational practices with regard to identification, measurement, control andfollow up, has been adapted to function within the context of the Mexicanfinancial system.

The credit risk methodology identifies the exposure ofall the loan portfolios of the Financial Group, overseeing risk concentrationlevels based on risk classifications, geographical regions, economicactivities, currencies and type of product, for the purpose of ascertaining theportfolio profile and taking actions to diversify it and maximize profit withthe lowest possible risk.

The calculation of loan exposure involves thegeneration of the cash flow from each of the loans, both in terms of principaland interest, for their subsequent discount. This exposure is sensitive to market changes, and facilitates theperformance of calculations under different economic scenarios.

Apart from considering loan exposure, the methodologytakes into account the probability of default, the recovery level associatedwith each customer and the sorting of the borrowers based on the Mertonmodel.  The probability of default is theprobability that a borrower will not comply with its debt obligation to thebank on the terms and conditions originally agreed. The probability of defaultis based on the transition matrixes which the Financial Group calculates as ofthe migration of the borrowers to different risk classification levels.  The recovery level is the percentage of thetotal exposure that is expected to be recovered if the borrower defaults on itsobligations.  The sorting of the borrowersbased on the Merton model is intended to tie the future behavior of theborrower to credit and market factors on which, using statistical techniques,the borrower’s “credit health” depends.

The primary results obtained are the expected loss andunexpected loss over a one-year time horizon. The expected loss is the median of the distribution of losses of theloan portfolio, which enables a measurement of the average loss expected in thefollowing year due to noncompliance or variations in the credit status of theborrowers.  The unexpected loss is anindicator of the loss expected under extreme circumstances, and is measured asthe difference between the maximum loss based on the distribution of losses, ata specific confidence level, which in the case of the Financial Group is 95%,and the expected loss.

The results obtained are used as a tool for betterdecision-making in granting loans and portfolio diversification, in accordancewith the global strategy of the Financial Group.  The individual risk identification tools andthe portfolio credit risk methodology are reviewed and updated periodically toincorporate new techniques that can support or strengthen them.

As of December 31, 2006, the total portfolio of theFinancial Group is $129,976. The expected loss represents 1.8% and theunexpected loss represents 3.4% of the total operating portfolio.  The average of the expected loss was 1.8%during the period from October to December 2006. For December 31, 2005, theFinancial Group’s total operating portfolio was $112,184 and the expected losswas 1.9% of this portfolio, while the unexpected loss was 4.1%.

***General rules for thediversification of risk in performing asset and liability transactionsapplicable to credit institutions:***

In December 2005, the CNBV issued the “General rulesfor risk diversification in performing asset and liability transactionsapplicable to credit institutions”.

These regulations require that the Financial Groupperform an analysis of the borrowers and/or loans they

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hold to determine the amount of their “Common Risk”.Also, the Financial Group must have the necessary documentation to support thata person or group of persons represents a common risk in accordance with theassumptions established under such rules.

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The Financial Group, in granting financing to a personor group of persons representing common risk, must adjust to the maximumfinancing level resulting from applying to basic capital a factor tied to theFinancial Group’s capitalization level.

Furthermore, in terms of securing public resources,the Financial Group should diversify their risks, ensuring an adequatecomposition of liabilities based on the placement of the resources secured.

In compliance with the risk diversification rules forasset and liability transactions, the following information is provided below:
| Basic capital as of  September 30, 2006                                       |   | $      | 21,858 |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|
| Financing whose  individual amount represents more than 10% of basic capital: |   |   |   |
| Credit transactions                                                           |   |   |   |
| Number of financings                                                          |   | — |   |
| Amount of  financings taken as a whole                                        |   | — |   |
| % in relation to  basic capital Money market transactions                     |   | — | %      |
| Number of  financings                                                         |   | 5      |   |
|                                                                          |   |   |   |
| Amount of  financings taken as a whole                                        |   | $      | 16,076 |   |
|                                                                          |   |   |   |
| % in relation to  basic capital                                               |   | 74     | %      |
| Maximum amount  of financing with the                                         |   |   |   |
| 3 largest debtors and  Common Risk groups                                     |   | $      | 12,770 |   |

 

**Market risk**

***Value at risk***

The exposure to market risk is determined through thecalculation of the Value at Risk (“VaR”). The meaning of the VaR under this method is the potential one day losswhich could be generated in the valuation of the portfolios at a givendate.  This methodology is used both forthe calculation of market risk and for the establishment and control ofinternal limits.

The Financial Group applies the nonparametrichistorical simulation method to calculate the VaR, considering for such purposea 99% confidence level, using the 500 immediate historical scenarios,multiplying the result by a security factor that ensures the coverage ofunforeseen volatilities in the primary risk factors affecting such portfolios,which is established based on the behavior of the principal risk factors.

Such methodology is applied to all financialinstrument portfolios within and beyond the scope of the Financial Group,including money market and treasury transactions, capital, foreign-exchange andderivatives held for trading and hedging purposes, which are exposed tovariations in their value due to changes in the risk factors affecting theirmarket valuation (domestic and foreign interest rates, exchange rates andindexes, among others).

The average VaR of the portfolio for the fourthquarter of 2006 is $312.
| Millions of pesos | ** ** | **4Q05** | ** ** | **1Q06** | ** ** | **2Q06** | ** ** | **3Q06** | ** ** | **4Q06** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |     |       |     |       |
| VaR Banorte*                |       | 296      |       | 246      |       | 191      |       | 213      |       | 312      |       |
| Banorte net  capital**      |       | 18,170   |       | 19,351   |       | 19,833   |       | 25,865   |       | 30,535   |       |
| VaR / net capital  Banorte  |       | 1.63     | %          | 1.27     | %          | 0.96     | %          | 0.82     | %          | 1.02     | %          |

 

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*Quarterly average

**Sum of net capital atthe close of the quarter

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Also, the average of the VaR for the risk factor ofthe portfolio of instrument described for the Financial Group behaved asfollows during the fourth quarter of 2006:
| Risk factor              | ** ** | **VaR**    | ** ** |
|-------------------------------|------------|------------|------------|
| ** **                    | ** ** | ** ** | ** ** |
| Domestic  interest rate       |       | 294        |       |
| Foreign interest  rate        |       | 52         |       |
| Exchange rate                 |       | 97         |       |
| Capital                       |       | 4          |       |
| Foreign currency  bond prices |       | 36         |       |
| Total VaR                     |       | 312        |       |

 

The VaR for each of the risk factors presented isdetermined by simulating 500 historical scenarios of the variables comprisingeach of such factors, maintaining constant the variables that affect the otherrisk factors shown.  By the same token,the consolidated VaR for the Financial Group considers the correlations of allthe risk factors influencing the valuation of the portfolios, for which reasonthe arithmetical sum of the VaR Factor does not match.

***Backtesting analysis***

To validate the effectiveness of the measurements ofthe calculation of the daily VaR as a measurement of market risk, theBacktesting analysis is updated each week. This analysis makes it possible to compare the estimated results throughthe VaR with the actual results generated.

***Sensitivity analysis and tests underextreme conditions***

To improve analysis and obtain the impact of anymovements in risk factors, sensitivity analyses and tests under extremeconditions are performed periodically.  These analyses foresee potential situations in which the Financial Groupmight suffer extraordinary losses from the valuation of the financialinstruments in which it holds positions.

***Liquidity and balance sheet risk***

In order to provide a measurement of liquidity risk inthe Financial Group and provide follow-up consistently, the Financial Grouprelies on the use of financial ratios, which include the Liquidity Ratio(Liquid Assets/Liquid Liabilities). Liquid assets include funds available, marketable securities andsecurities available for sale.   By thesame token, liquid liabilities include immediately due and payable deposits,immediately due and payable interbank loans and short-term loans.  The liquidity ratio at the end of the fourthquarter of 2006 is 64.7%, while the average during the quarter is 67.3%, asshown below:
|                     | ** ** | **End of quarter** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **4Q05**                     | ** ** | **1Q06**   | ** ** | **2Q06**   | ** ** | **3Q06**   | ** ** | **4Q06**   | ** ** |
|                |       |                         |       |       |       |       |       |       |       |       |       |
| Liquid assets       |       | 47,984                       |       | 58,843     |       | 55,787     |       | 51,094     |       | 64,013     |       |
| Liquid  liabilities |       | 81,587                       |       | 81,044     |       | 86,537     |       | 82,685     |       | 98,883     |       |
| Liquidity index     |       | 58.8                         | %          | 72.6       | %          | 64.5       | %          | 61.8       | %          | 64.7       | %          |

 
|                     | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **4Q05**    | ** ** | **1Q06**   | ** ** | **2Q06**   | ** ** | **3Q06**   | ** ** | **4Q06**   | ** ** |
|                |       |        |       |       |       |       |       |       |       |       |       |
| Liquid assets       |       | 42,801      |       | 47,441     |       | 51,318     |       | 52,511     |       | 58,764     |       |
| Liquid  liabilities |       | 74,744      |       | 79,738     |       | 84,317     |       | 84,846     |       | 87,371     |       |
| Liquidity index     |       | 57.3        | %          | 59.5       | %          | 60.9       | %          | 61.8       | %          | 67.3       | %          |

 

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**Average calculation using the Liquidity Index’sweekly estimates**

To quantify and follow up on the liquidity risk forits dollar portfolio, the Financial Group uses the criteria established byBanco de México for the determination of the Liquidity Ratio.  It facilitates an evaluation of thedifferences between the flows of assets and liabilities in different timeperiods.  The above promotes a healthierdistribution of terms for these assets.

Also, to prevent concentration risks in relation topayment terms and dates for the Financial Group, gap analysis is performed tomatch the resources with the funding sources, which detects any concentrationin a timely fashion.  These analyses areperformed separately by currency (Mexican pesos, foreign currency and UDIS).

Furthermore, balance sheet simulation analyses areprepared for the Financial Group, which provides either a systematic or dynamicevaluation of the future behavior of the balance sheet.  The base scenario is used to prepare sensitivityanalyses for movements in domestic, foreign and real interest rates.  Also, tests are performed under extremeconditions to evaluate the result of extreme changes in interest, funding andexchange rates.

As an evaluation measure of the effectiveness of thesimulation model, the projections are periodically compared with actualdata.  Using these tests, the assumptionsand methodology used can be evaluated and, if necessary, adjusted.

***Operating risk***

As of January 2003, the Financial Group established aformal operating risk department denominated “Operating Risk ManagementDepartment” as part of its Risk Management Strategy.  The department prepared an implementationmaster plan (2004–2007) in accordance with the requirements of the localregulator, and approved by the Risk Policies Committee (CPR).  The plan generally covers the corporatemanagement of operating risk, the recording of loss events and the calculationof the capital requirement for operating risk.

The master plan consists of the following phases:

·      Closecoordination with the Controllership, Internal Audit and Risk Analysis areas,

·      Identifythe main sources of information

·      Createa database

·      Determinethe type of software for Operating Risk Management and for calculation of thecapital requirement for Operation Risk,

·      Acquireand develop software

·      Installthe software and perform tests, and

·      Generatereports through the management information system.

As the cornerstone of operating risk management, andbearing in mind the Basle II Agreement, the Financial Group has begun to recordevents that result in a real or potential economic loss, in order to have thebases to be able to calculate the capital requirement.

The Operating Risk department coordinates with theInternal Audit and Controllership departments in order to promote and providesupport in the other two key areas, which are to ensure effective internalcontrol to establish procedures for processes and their compliance, andpermanent audit supervision. Coordination also takes place with the Business, Technology andOperations departments, which continually develop Operating Risk mitigationstrategies.

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***Risk management model***

The Financial Group has defined objectives, which areachieved through different plans, programs and projects.  Compliance with such objectives may beadversely affected due to operating risks, for which reason a methodology mustbe in place to manage them within the organization. Consequently, operatingrisk management is now an institutional policy defined and supported by seniormanagement.

To perform Operating Risk Management, each of theoperating risks involved in the processes must be identified in order toanalyze them.  In this regard, the risksidentified are processed in order to eliminate or mitigate them (seeking toreduce their severity or frequency) by defining tolerance levels, as the casemay be.  Work is currently under way onthe development of an Institutional Operating Risk Management Model, in which thefirst step is the recording of operating loss events.

***Recording of events***

Given the inherent nature of operating risk, anhistorical database must be in place containing the operating eventsexperienced by the Financial Group in order to be able to determine therespective trends, frequency, impact and distribution.

To record operating loss events, a system has beendeveloped internally known as the “Operating Loss and Events Capture System”(SCERO).  This system enables the centralinformation supplier areas to directly record such events online, which areclassified by type of event in accordance with the following categories (inline with those proposed by the Basle II Agreement):
| Types of events                   | ** ** | **Description**                                                                                                                                                         |
|-----------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                        | ** ** | ** **                                                                                                                                                              |
| Internal fraud                    |       | Actions intended to defraud, illegally seize  ownership or evade the regulations, law or policies of the institution  involving at least one internal party             |
| External fraud                    |       | Actions taken by third parties intended to defraud,  illegally seize ownership or evade the law                                                                         |
| Labor relations                   |       | Actions inconsistent with laws or employment, health  or safety agreements, or which result in the payment of claims for damages to  personnel or discrimination claims |
| Practices with customers          |       | Negligence or unintentional breaches which prevent  compliance with professional obligations with customers or due to the nature  or design of a product or service     |
| Damage to assets                  |       | Damage or loss to physical assets due to natural  disasters or other events                                                                                             |
| System failures                   |       | Interruption in business activities due to  information systems failures                                                                                                |
| Execution, delivery and processes |       | Failures in processing of transactions or in process  management and in relations with counterparties and suppliers                                                     |

 

***Technology risk***

Technology risk forms an inherent part of operatingrisk, for which reason its management is performed throughout the entireorganization.   The Technology andOperations departments carry out the functions established by the Commission interms of technology risk management related to the establishment of controls,the evaluation of weaknesses and potential contingency plans.

To address the operating risk caused by high impactexternal events, the Financial Group is working on a project to improve theirBusiness Continuity Plan (BCP) and Business Recovery Plan (BRP) based on a

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same-time data replication system at an alternatecomputer site.  The project leader is theControllership Executive Management, due to its association with processes,procedures and regulatory compliance. However, the areas of Technology and Operations, Business, and AROLeadership are also significantly involved. The project’s current progress covers the back-up and recovery of themain critical applications with a wider scope than the one previously reachedwith external providers.

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***Legal risk***

For the recording and follow-up of legal,administrative and tax issues that may arise from an adverse unfavorableruling, an internal system called “Legal Risk Issues Monitoring System” (SMARL)was developed.  This system enables thecentral data supplying areas to record such events directly and on-line, whichare then classified by company, sector and legal issue, among others.

As part of the Financial Group’s legal risk managementinitiative, legal contingencies are estimated by the attorneys that process theissues based on their knowledge in each case. This facilitates the creation ofaccounting provisions necessary to mitigate any estimated contingencies.

The Legal Risk must be measured as an inherent part ofOperating Risk in order to understand and estimate its impact.  Therefore, those legal issues which result inreal operating losses are recorded in the SCERO in accordance with apredetermined classification.

Based on the statistics of the current legal issuesand real loss events, the Financial Group can identify specific legal oroperating risks, which are analyzed in order to eliminate or mitigate them inan attempt to reduce or limit their future occurrence or impact.

**35.****       Memorandum accounts**
|                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |
| Bank customers  (current accounts)                                 |       | $        | 11         |     | $          | 15 |   |
| Settlement of  customer transactions                               |       | 420      |       | (130     | )          |
| Customer  valuables received in custody                            |       | 162,764  |       | 123,852  |       |
| Customer  repurchase agreements                                    |       | 22,027   |       | 26,328   |       |
| Customer call  options transactions                                |       | —   |       | 163      |       |
| Managed trusts                                                     |       | 2,768    |       | 2,886    |       |
|                                                               |       |     |       |     |       |
|                                                               |       | $        | 187,990    |     | $          | 153,114 |   |
|                                                               |       |     |       |     |       |
| Guarantees  granted                                                |       | $        | —     |     | $          | 28 |   |
| Other contingent  obligations                                      |       | 262      |       | 1,184    |       |
| Opening of  irrevocable credits                                    |       | 2,282    |       | 2,260    |       |
| Amounts  committed in transactions with IPAB                       |       | 526      |       | 623      |       |
| Deposits of  assets                                                |       | 1,186    |       | 766      |       |
| Financial Group  securities delivered into custody                 |       | 204      |       | 221      |       |
| Financial Group  government securities held in custody             |       | 292      |       | 388      |       |
| Assets in trusts  or under mandate                                 |       | 84,355   |       | 70,597   |       |
| Managed assets  in custody                                         |       | 93,378   |       | 86,818   |       |
| Investment  banking transactions on account of third parties (net) |       | 92,723   |       | 93,689   |       |
|                                                               |       |     |       |     |       |
|                                                               |       | $        | 275,208    |     | $          | 256,574 |   |
|                                                               |       |     |       |     |       |
| Securities to be  received in repurchase agreements                |       | $        | 198,372    |     | $          | 249,809 |   |
| Minus: Creditor  repurchase agreement                              |       | (198,582 | )          | (250,082 | )          |
|                                                               |       |     |       |     |       |
|                                                               |       | $        | (210       | )        | $          | (273 | ) |
|                                                               |       |     |       |     |       |
| Repurchase  agreement from debtors                                 |       | $        | 19,518     |     | $          | 74,051 |   |
| Minus:  Securities to be delivered in repurchase agreements        |       | (19,518  | )          | (73,963  | )          |
|                                                               |       |     |       |     |       |
|                                                               |       | $        | —     |     | $          | 88 |   |

 

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**36.****                     Commitments**

As of December 31, 2006 and2005, the Financial Group had the following contingent obligations andcommitments:

·                                Third-party guarantees granted, other contingentobligations and opening of credits totaling $2,544 ($3,472 in 2005), which arerecorded in memorandum accounts.

·                                Certain real property and operating equipment areleased.  The leases establish periodicrental adjustments based on changes in different future economic factors.  Total property lease payments for the periodsended December 31, 2006 and December 31, 2005, were $160 and $169,respectively. Total operating equipment rental payments for the periods endedDecember 31, 2006 and December 31, 2005, were $59 and $33, respectively.

·                                Future minimum lease commitments are:
| 2007       |   |   | $      | 7      |   |
|------------|--------|--------|--------|--------|--------|
| 2008       |   |   | 7      |   |
| 2009       |   |   | 6      |   |
| 2010       |   |   | 6      |   |
| Thereafter |   |   | 10     |   |
|       |   |   |   |   |
| Total      |   |   | $      | 36     |   |

 

**37.****                     Contingencies**

As of December 31, 2006,there are lawsuits filed against the Financial Group in civil and mercantilecourt. However, the Financial Group’s attorneys consider that the claims filedare unsubstantiated and, in the event of an adverse ruling, they would notaffect the Financial Group’s financial situation significantly. A reserve of$139 is recorded for such contentious matters.

Furthermore, contingencies mayarise due to differences in taxes derived from a potential review of the taxreturns filed by the Financial Group and differences in the interpretation oflegal provisions between the Financial Group and the tax authorities.

**38.****                     Subsequentevents**

**Acquisition of “UNITELLER”**

In January 2007, the Financial Group announced thecompletion of its purchase of 100% of the outstanding shares of UniTellerHoldings, Inc. (UniTeller), which is a remittances company based in the UnitedStates of America. The acquisition was completed after receiving the approvalof the SHCP in Mexico and of all the states in the U.S. where UniTelleroperates and that regulate the money transfer industry in that country.

The sum of the transaction totaled USD 19 million,which the Financial Group covered with its own resources. UniTeller has totalassets equivalent to USD 10 million and a stockholders’ equity of USD 5million. It is based in New Jersey, U.S.A. and has a network of nearly 1,000agents in that country. It also has agreements with various financialinstitution and companies in Latin America and the Philippines with over 4,000paying point in 19 countries, including Mexico.

F-139

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**Sale of Fianzas Banorte, S.A. de C.V.**

On July 27, 2006, the Board of Directors in sessionapproved the sale of 100% of the stockholders’ equity representative shares ofthe Bonding Company. This purchase-sale transaction was carried out between theFinancial Group and Grupo Valores Operativos Monterrey, Sociedad Anónima deInversión de Capital Variable on September 22, 2006. A modifying agreement onthe same date establishes that such transaction is subject to obtaining eachand every one of the authorizations required by the sellers and buyers no laterthan February 28, 2007. In the event of failure to comply by such a date, thepurchase-sale contract will be resolved automatically without any liability oneither party.

**Agreement to purchase Motran ServicesIncorporated**

On January 24, 2007, Banorte USA Corporation signed anagreement to purchase 100% of the shares in circulation of Motran ServicesIncorporated (“Motran”).

Motran is located mainly in the state of California,in the United States of America and is dedicated to sending remittances toforeign countries. The agreement establishes that Banorte USA will pay US $2million for the outstanding shares. It is expected that the purchase price willexceed the market value of the net assets acquired by approximately US $1.3million.

**39.****                     Differencesbetween Mexican Banking GAAP and Mexican Financial Reporting Standards**

The FinancialGroup’s consolidated financial statements are prepared in accordance with theAccounting Practices established by the Commission, which differ in certainrespects from Mexican Financial Reporting Standards (NIF).

The principaldifferences and the effect on consolidated net income and consolidatedstockholders’ equity are presented below with an explanation of theadjustments:
|                                                                 | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| **Reconciliation of stockholders’ equity:** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Stockholders’  equity under Mexican Banking GAAP**       |       | $                     | 27,505     |   | $ | 22,369 |   |
|                                                            |       |                  |       |   |   |
| Adjustments:                                                    |       |                  |       |   |   |
| Loan loss reserves (See B)                                      |       | 376                   |       | 326 |   |
| Loan origination fees and costs (See A)                         |       | (253                  | )          | (376 | ) |
| Foreclosed assets (See C)                                       |       | 330                   |       | 305 |   |
| Insurance & postretirement activities (See A)               |       | 1,345                 |       | 1,630 |   |
| Derivatives (See A)                                             |       | (620                  | )          | (355 | ) |
| Business combinations (See D)                                   |       | (1,208                | )          | — |   |
| Purchased loan portfolio (See A)                                |       | (967                  | )          | (865 | ) |
| Securitizations (See E)                                         |       | (12                   | )          | — |   |
| Repurchase agreements (See A)                                   |       | (47                   | )          | (46 | ) |
| Investment valuation (See A)                                    |       | (35                   | )          | (134 | ) |
| Capitalized costs (See A)                                       |       | (217                  | )          | (434 | ) |
| Share based payment (See F)                                     |       | (44                   | )          | (110 | ) |
| Deferred taxes (See G)                                          |       | (64                   | )          | (96 | ) |
| Total  adjustments                                              |       | (1,416                | )          | (155 | ) |
| Tax effect on  adjustments                                      |       | 183                   |       | 111 |   |
| Minority  interest attributable to adjustments                  |       | (289                  | )          | (462 | ) |
| ** **                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Stockholders’ equity under NIF**                         |       | $                     | 25,983     |   | $ | 21,863 |   |

 

F-140

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|                                                   | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **Reconciliation of net income:**  | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| **Net  income under Mexican Banking GAAP**        |       | $                                          | 5,959      |   | $ | 5,957 |   |
|                                              |       |                                       |       |   |   |
| Adjustments:                                      |       |                                       |       |   |   |
| Loan loss reserves (See B)                        |       | 50                                         |       | 73 |   |
| Loan origination fees and costs (See A)           |       | 123                                        |       | (72 | ) |
| Foreclosed assets (See C)                         |       | (44                                        | )          | (123 | ) |
| Insurance & postretirement activities (See A) |       | (285                                       | )          | 201 |   |
| Derivatives (See A)                               |       | (265                                       | )          | 255 |   |
| Business combinations (See D)                     |       | —                                     |       | — |   |
| Purchased loan portfolio (See A)                  |       | (102                                       | )          | 543 |   |
| Securitizations (See E)                           |       | 11                                         |       | — |   |
| Repurchase agreements (See A)                     |       | (1                                         | )          | (21 | ) |
| Investment valuation (See A)                      |       | (90                                        | )          | (62 | ) |
| Capitalized costs (See A)                         |       | 222                                        |       | 199 |   |
| Share based payment (See F)                       |       | (18                                        | )          | (54 | ) |
| Deferred taxes (See G)                            |       | (367                                       | )          | (674 | ) |
| Total  adjustments                                |       | (766                                       | )          | 265 |   |
| Tax effect on  adjustments                        |       | 153                                        |       | (335 | ) |
| Minority  interest attributable to adjustments    |       | 167                                        |       | (53 | ) |
| ** **                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| **Net income under NIF**                          |       | $                                          | 5,513      |   | $ | 5,834 |   |

 

***Explanation of reconciling items:***

**A)****       ****General**

This difference between Mexican Banking GAAP and NIFis explained in Note 40, as the accounting treatment under NIF and U.S. GAAPare the same for this item.

**B)****       ****Loan loss reserves**

Mexican Banking GAAP establishes rules for loanportfolio ratings and general methodologies for the rating and constitution ofpreventive allowances for loan losses for each type of loan and allows creditinstitutions to rate and develop preventive allowances based on internalmethodologies, previously authorized by the Commission. In addition, Mexicanbanks are allowed to establish additional loan loss allowances in excess ofthose required by the Commission.  UnderNIF, such excess allowances must be reversed.

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**C)****        Foreclosed assets**

Under Mexican Banking GAAP, reserves for foreclosedassets are required based on their nature and number of months outstanding.Under NIF, these assets are recognized at the lower of the corresponding loans’book value or the fair value of the foreclosed asset. Potential impairmentshould also be evaluated and recognized, as necessary, on these assets.

Additionally, for Mexican Banking GAAP foreclosedassets are considered to be monetary assets, while for NIF these are treated asnon-monetary assets.

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**D)****        Business combinations**

Under Mexican BankingGAAP, the Financial Group recorded the put option held by the shareholders’ ofINB at its contractual value, which increased the amount of goodwill recordedin the preliminary purchase price allocation. Under NIF, the put optionrepresents a transaction between common shareholders and is therefore reflectedin stockholders’ equity according to the formula agreed by both parties.

**E)****          Securitizations**

Under Mexican BankingGAAP, the Financial Group accounts for its securitization transactions asdisclosed in Note 40 J).  If it hastransferred a financial asset, NIF requires the Financial Group to assesswhether it has transferred substantially all the risks and rewards of ownershipof the transferred asset.  If it hasretained substantially all such risks and rewards, it continues to recognizethe transferred asset.  If it hastransferred substantially all such risks and rewards, it derecognizes thetransferred asset.  If the FinancialGroup concludes that it has neither transferred nor retained substantially allthe risks and rewards of ownership of the transferred asset, it assesseswhether it has retained control over the transferred asset.  If it has retained control, it continues torecognize the transferred asset to the extent of its continuing involvement inthe transferred asset.  If it has notretained control, it derecognizes the transferred asset.

**F)****          Share based payment**

Under Mexican BankingGAAP the shares held in trust are recorded as an asset, and no compensationcost is recognized for share-based payment awards. NIF establishes therecognition and presentation criteria of the Financial Group’s share-basedpayment awards provided to employees. Compensation cost is determined based onthe grant date fair value of the awards at and is recognized over the requisiteservice period.

**G)****        Deferredtaxes**

The Financial Grouprecognizes the benefits related to tax loss carryforwards and asset tax creditcarryforwards in its Mexican Banking GAAP financial statements when suchamounts are realized.  Under NIF,deferred income tax assets are recognized for the estimated future effects oftax loss carryforwards and asset tax credit carryforwards when it is highlyprobable that sufficient future taxable income will be generated to recoversuch deferred tax assets.

**40.****       Differences between MexicanBanking GAAP and U.S. GAAP**

The Financial Group’s consolidated financialstatements are prepared in accordance with the accounting practices asprescribed by the Commission, which differ in certain significant respects fromU.S. GAAP. The Mexican Banking GAAP consolidated financial statements includethe effects of inflation as provided for under Bulletin B-10, “Recognition ofthe Effects of Inflation in Financial Information”, whereas financial statementsprepared under U.S. GAAP are presented on a historical cost basis.  Notwithstanding the prior comments, thefollowing reconciliation to U.S. GAAP does not include the reversal of theadjustments required under Bulletin B-10, as permitted by the rules andregulations of the Securities and Exchange Commission (the “SEC”). Theapplication of Bulletin B-10 represents a comprehensive measure of the effectsof price level changes in the 

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inflationary Mexican economy and, as such, isconsidered a more meaningful presentation than historical cost-based financialreporting for both Mexican and U.S. accounting purposes. The principaldifferences, other than inflation accounting, between Mexican Banking GAAP andU.S. GAAP and the effect on consolidated net income and consolidatedstockholders’ equity are presented below, with an explanation of theadjustments.

F-144

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|                                                                 | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| **Reconciliation of stockholders’ equity:** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Stockholders’  equity under Mexican Banking GAAP**       |       | $                     | 27,505     |   | $ | 22,369 |   |
|                                                            |       |                  |       |   |   |
| U.S. GAAP  adjustments:                                         |       |                  |       |   |   |
| Loan loss reserves (See A)                                      |       | 1,335                 |       | 1,153 |   |
| Loan origination fees and costs (See B)                         |       | (253                  | )          | (376 | ) |
| Purchased loan portfolio (See C)                                |       | (967                  | )          | (865 | ) |
| Derivatives (See D)                                             |       | (620                  | )          | (355 | ) |
| Foreclosed assets (See E)                                       |       | 250                   |       | 238 |   |
| Insurance & postretirement activities (See F)               |       | 1,345                 |       | 1,630 |   |
| Business combinations (See G)                                   |       | 191                   |       | 179 |   |
| Employee retirement obligations (See H)                         |       | (728                  | )          | (355 | ) |
| Capitalized costs (See I)                                       |       | (217                  | )          | (434 | ) |
| Securitizations (See J)                                         |       | 343                   |       | (2 | ) |
| Share based payment (See K)                                     |       | (44                   | )          | — |   |
| Other adjustments (See L)                                       |       | (129                  | )          | (314 | ) |
| Deferred taxes (See M)                                          |       | (1,661                | )          | (1,664 | ) |
| Total U.S. GAAP  adjustments                                    |       | (1,155                | )          | (1,165 | ) |
| Tax effect on  U.S. GAAP adjustments                            |       | (60                   | )          | (74 | ) |
| Minority  interest under Mexican Banking GAAP (See N)           |       | (1,408                | )          | (1,020 | ) |
| Minority  interest attributable to U.S. GAAP adjustments        |       | (291                  | )          | (415 | ) |
| ** **                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Stockholders’ equity under U.S.  GAAP**                  |       | $                     | 24,591     |   | $ | 19,695 |   |

 
|                                                          | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| **Reconciliation of net income:**         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  income under Mexican Banking GAAP**               |       | $                                          | 5,959      |   | $ | 5,957 |   | $ | 2,809 |   |
| U.S. GAAP  adjustments:                                  |       |                                       |       |   |   |   |   |
| Loan loss reserves (See A)                               |       | 182                                        |       | 280 |   | (556 | ) |
| Loan origination fees and costs (See B)                  |       | 123                                        |       | (72 | ) | (89 | ) |
| Purchased loan portfolio (See C)                         |       | (102                                       | )          | 543 |   | (101 | ) |
| Derivatives (See D)                                      |       | (265                                       | )          | 255 |   | 222 |   |
| Foreclosed assets (See E)                                |       | (57                                        | )          | (135 | ) | 53 |   |
| Insurance & postretirement activities (See F)        |       | (285                                       | )          | 201 |   | 77 |   |
| Business combinations (See G)                            |       | 12                                         |       | 42 |   | 11 |   |
| Employee retirement obligations (See H)                  |       | (38                                        | )          | (105 | ) | 1 |   |
| Capitalized costs (See I)                                |       | 222                                        |       | 199 |   | 137 |   |
| Securitizations (See J)                                  |       | 345                                        |       | (2 | ) | — |   |
| Share based payment (See K)                              |       | (44                                        | )          | — |   | — |   |
| Other adjustments (See L)                                |       | (196                                       | )          | (75 | ) | 20 |   |
| Deferred taxes (See M)                                   |       | (397                                       | )          | (629 | ) | (915 | ) |
| Total U.S. GAAP  adjustments                             |       | (500                                       | )          | 502 |   | (1,140 | ) |
| Tax effect on  U.S. GAAP adjustments                     |       | (50                                        | )          | (410 | ) | 173 |   |
| Minority  Interest attributable to U.S. GAAP Adjustments |       | 198                                        |       | (46 | ) | 49 |   |
| **Net income under U.S. GAAP**                           |       | $                                          | 5,607      |   | $ | 6,003 |   | $ | 1,891 |   |

 

F-145

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A rollforward of the Financial Group’s U.S. GAAPstockholders’ equity balance is as follows:
|                                       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
|                                  |       |       |       |       |       |
| Balance at the  beginning of the year |       | $          | 19,695     |       | $          | 14,911 |   |
| Net income under  U.S. GAAP           |       | 5,607      |       | 6,003      |       |
| Dividends paid                        |       | (763       | )          | (664       | )          |
| Issuance  (repurchase) of shares      |       | 30         |       | (17        | )          |
| Other  comprehensive income (loss)    |       | 22         |       | (538       | )          |
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance at the end of the year**    |       | $          | 24,591     |       | $          | 19,695 |   |

 

·                  I.                                       Explanation ofreconciling items:

**A)****           Loan loss reserves**

Mexican Banking GAAP establishes rules for loanportfolio ratings and general methodologies for the rating and constitution ofpreventive allowances for loan losses for each type of loan and allows creditinstitutions to rate and develop preventive allowances based on internalmethodologies, previously authorized by the Commission. In addition, Mexicanbanks are allowed to establish additional loan loss allowances in excess ofthose required by the Commission.

TheFinancial Group assigns an individual risk category to each commercial loanbased on the borrower’s financial and operating risk level, its creditexperience and the nature and value of the loans’ collateral. A loan lossreserve is determined for each loan based on a prescribed range of reservesassociated to each risk category. In the case of the consumer and mortgage loanportfolio, the risk rating procedure and the establishment of loan reservesconsiders the accounting periods reporting past-due, the probability ofnoncompliance, and the severity of the loss in proportion to its amount and thenature of loan guarantees.

TheU.S. GAAP methodology for recognition of loan losses is provided by Statementof Financial Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies”and SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, whichestablish that an estimated loss should be accrued when, based on informationavailable prior to the issuance of the financial statements, it is probablethat a loan has been impaired at the date of the financial statements and theamount of the loss can be reasonably estimated.

Forlarger nonhomogeneous loans, the Financial Group assesses all individual loanswith an outstanding balance greater than 900,000 UDIS for impairment. Specificprovisions are calculated when it is determined that it is probable that theFinancial Group will not recover the full contractual principal and interest ona loan (impaired loan). Under U.S. GAAP, estimated losses on impaired loans,which are individually assessed, are required to be measured at the presentvalue of expected future cash flows discounted at the loan’s effective rate,the loan’s observable market price or at the fair value of the collateral ifthe loan is collateral dependent.

Tocalculate the allowance required for smaller-balance impaired loans andunimpaired loans, historical loss ratios are determined by analyzing historicaltrends.  These ratios are determined byloan type to obtain loss estimates for homogeneous groups of clients. Suchhistorical ratios are updated to incorporate the most recent 

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datareflective of current economic conditions, in conjunction with industryperformance trends, geographic or obligor concentrations within each portfoliosegment, and any other pertinent information, resulting in the estimation ofthe allowance for loan losses.

Under Mexican Banking GAAP, loans may be charged-offwhen collection efforts have been exhausted or when they have been fullyprovisioned. On the other hand for U.S. GAAP, loans (or portions of particularloans) should be written-off in the period that they are deemed uncollectible.

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U.S. GAAP loan loss reserves are as follows:

 
| Loan loss reserves              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loan loss  reserves for SFAS No. 114      |       | $        | 44         |     | $          | 73       |       | $ | 111 |   |
| Loan loss  reserves for SFAS No. 5        |       | 2,046    |       | 1,969    |       | 1,966    |       |
| Loan loss reserves  US GAAP               |       | 2,090    |       | 2,042    |       | 2,077    |       |
| Loan loss  reserves Mexican Banking GAAP  |       | 3,533    |       | 3,195    |       | 2,950    |       |
| Stockholders’  equity adjustment (1) |       | 1,335    |       | 1,153    |       | 873      |       |
| Net income adjustment                     |       | $        | 182        |     | $          | 280      |       | $ | (556 | ) |

 

----

(1) As a result of the FinancialGroup’s acquisition of INB as disclosed in Note 40 G), $ 108 of additionalreserves were recorded with an offset to goodwill in its Mexican Banking GAAPconsolidated financial statements.

**Rollforward of loan loss reserves:**
|                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |     |       |
| Beginning of the  year         |       | $        | 2,042      |     | $          | 2,077    |       | $ | 3,728 |   |
| Charge-offs net  of recoveries |       | (1,108   | )          | (1,141   | )          | (2,919   | )          |
| Charges                        |       | 1,238    |       | 1,164    |       | 1,461    |       |
| Restatement  effect            |       | (82      | )          | (58      | )          | (193     | )          |
|                           |       |     |       |     |       |     |       |
| Ending of the year             |       | $        | 2,090      |     | $          | 2,042    |       | $ | 2,077 |   |

 

**Ratios:**
|                                                                   | ** ** | **December 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|
| **Loan loss reserves for  SFAS No. 114** | ** ** | **2006**              | ** ** | **2005**       | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                              |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Total reserves                                                    |       | $                     | 44         |           | $          | 73 |   | $ | 111 |   |   |   |   |   |   |   |
| Total balances  of impaired loans                                 |       | $                     | 202        |           | $          | 254 |   | $ | 290 |   | 21.78 | % | 28.74 | % | 38.28 | % |
| Total balances of  outstanding loans                              |       | $                     | 310        |           | $          | 1,648 |   | $ | 2,143 |   | 14.19 | % | 4.43 | % | 5.18 | % |

 
|                                                                 | ** ** | **December 31,** | ** ** | **Percentage** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|
| **Loan loss reserves for  SFAS No. 5** | ** ** | **2006**              | ** ** | **2005**       | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                            |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Total reserves                                                  |       | $                     | 2,046      |           | $          | 1,969 |   | $ | 1,966 |   |   |   |   |   |   |   |
| Total balances  of impaired loans                               |       | $                     | 1,722      |           | $          | 1,656 |   | $ | 1,635 |   | 118.82 | % | 118.90 | % | 120.24 | % |
| Total balances of  outstanding loans (1)                        |       | $                     | 143,716    |           | $          | 119,536 |   | $ | 109,463 |   | 1.42 | % | 1.65 | % | 1.80 | % |

 

----

(1) The Financial Group has also recorded loan loss reserves in accordance with SFAS No. 5. related to items such as guarantees and other off-balance sheet liabilities.  Such balances, which are not included in the total balance of outstanding loans amounted to $ 2,249, $ 2,288 and $ 2,523 in 2006, 2005 and 2004 respectively.

*Government Sponsored Programs*

Mexican banks have participated in a number of debtor relief programs that began in 1995, which caused the Mexican banks to reduce their claims to the outstanding balances of loans meeting certain criterion in accordance with program guidelines. In connection with government sponsored restructurings, Mexican banks 

F-148

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had the option of accounting for the full amounts of the loss on the date of the refinancing or deferring the loss and amortizing this loss on the statement of income in subsequent periods. For individual loan restructurings, the Financial Group generally charges off any difference in the carrying amount of the original loan and the restructured loan.

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For U.S. GAAP purposes, discounts available for clients as stated in these programs were written-off as the Financial Group estimated that would be the estimated reduction on the future cash flows.

**B)****        Loan origination fees andcosts**

Under Mexican Banking GAAP, loan origination fees are recognized on a cash basis and loan origination costs are expensed as incurred. Under U.S. GAAP, as required by SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases - an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17”, loan origination fees are deferred and recognized over the life of the loan as an adjustment of yield (interest income). Likewise, direct loan origination costs defined in the following paragraph are deferred and recognized as a reduction in the yield of the loan.  Loan origination fees and related direct loan origination costs for a given loan are offset and only the net amount is deferred and amortized.

Direct loan origination costs of a completed loan include (a) incremental direct costs of loan origination incurred in transactions with independent third parties for that loan and (b) certain costs directly related to specified activities performed by the lender for that loan.  Those activities include evaluating the prospective borrower’s financial condition; evaluating and recording guarantees, collateral, and other security arrangements; negotiating loan terms; preparing and processing loan documents; and closing the transaction.

Credit card fees and costs are recognized on a straight-line basis over the period the cardholder is entitled to use the card.

**C)****        Purchased loan portfolio**

As discussed below, prior to December 31, 2004 Mexican Banking GAAP had no specific rules covering the accounting treatment of loan portfolios purchases. As collections on the purchased loan portfolios are received, the Financial Group recognized the amounts recovered as investment income. In addition, the Financial Group amortized the cost of the investment based on the percentage of amounts recovered to the acquisition cost of the portfolio acquired, as adjusted by financial projections. Unamortized amounts, if any, were written off when the collection process had ceased.

In 2005, the Financial Group adopted the U.S. GAAP standard SOP 03-3 for its Mexican Banking GAAP financial statements and applied it prospectively to all existing portfolios held. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment (the amount paid to the seller plus any fees paid or less any fees received) in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.  For U.S. GAAP purposes, in 2004 the Financial Group early adopted this SOP and began to apply its guidance for all portfolios purchased after December 31, 2003.

Under U.S. GAAP, Accounting Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, addressed the accounting and reporting by purchasers of loans in fiscal years beginning on or before December 15, 2004. This accounting was utilized for all portfolios purchased prior to December 31, 2003.  At the time of acquisition, the sum of the acquisition amount of the loan and the discount to be amortized should not exceed the undiscounted future cash collections that are both reasonably estimable and probable. If these criteria are not satisfied, the loan should be accounted for using the cost-recovery method.

The purchased loan portfolios (generally consisting of troubled loans), purchased at a discount, would represent a purchase of a loan portfolio where it is not probable that the undiscounted future cash collections will be sufficient to recover the face amount of the loan and contractual interest. Consequently, under U.S. GAAP, at the time of acquisition, the sum of the acquisition amount of the loan and the discount to be amortized should not exceed the undiscounted future cash collections that are both reasonably estimable and probable. The discount on an acquired loan should be amortized over the period in which the payments are probable of collection only if the amounts and timing of collections, whether characterized as interest or principal, are reasonably estimable and the ultimate collectibility of the acquisition amount of the loan and the discount is 

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probable. If these criteria are not satisfied, the loan should be accounted for using the costrecovery method. Application of the cost-recovery method requires that any amounts received be applied first against the recorded amount of the loan; when that amount has been reduced to zero, any additional amounts received are recognized as income.

Under Mexican Banking GAAP, origination costs and other fees are capitalized as part of the original investment, while for U.S. GAAP purposes those costs are expensed as incurred.

The Financial Group’s portfolio disclosures and U.S. GAAP methodology applied are disclosed in the following table:
|                     | ** ** | **Stockholders’ equity** | ** ** | **Net income**                        | ** ** | ** **                         | ** ** |
|---------------------|------------|------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **          | ** ** | **December 31,**              | ** ** | **Year ended December 31,** | ** ** | **Methodology applied ** | ** ** |
| **Portfolio**       | ** ** | **2006**                           | ** ** | **2005**                                   | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** | **under U.S. GAAP** | ** ** |
|                |       |                               |       |                                       |       |                               |       |   |   |   |   |   |   |
| Bancrecer I         |       | $                                  | (134       | )                                          | $          | (146                               | )          | $ | 12 |   | $ | (7 | ) | $ | (8 | ) | Cost  recovery method |   |
| Sfn Santander       |       | (88                                | )          | (116                                       | )          | 28                                 |       | 289 |   | (90 | ) | Cost  recovery method |   |
| Meseta              |       | (70                                | )          | (104                                       | )          | 34                                 |       | 38 |   | 35 |   | Cost  recovery method |   |
| Bancrecer II        |       | (7                                 | )          | (12                                        | )          | 5                                  |       | 3 |   | 8 |   | Cost  recovery method |   |
| Goldman Sachs       |       | (297                               | )          | (346                                       | )          | 49                                 |       | 26 |   | (92 | ) | Cost  recovery method |   |
| Cremi               |       | (58                                | )          | (61                                        | )          | 3                                  |       | (20 | ) | (25 | ) | Cost  recovery method |   |
| Banorte Sólida |       | (201                               | )          | (231                                       | )          | 30                                 |       | 5 |   | (88 | ) | Cost  recovery method |   |
| Bancrecer III       |       | (8                                 | )          | (18                                        | )          | 10                                 |       | (15 | ) | (6 | ) | Cost  recovery method |   |
| Banco Industrial    |       | —                             |       | (19                                        | )          | 19                                 |       | 21 |   | 6 |   | Cost  recovery method |   |
| Bancomer I          |       | (73                                | )          | (53                                        | )          | (20                                | )          | (32 | ) | (21 | ) | Cost  recovery method |   |
| Bancomer II         |       | 13                                 |       | 12                                         |       | 1                                  |       | 8 |   | 4 |   | Interest  Method |   |
| Banco Unión    |       | 13                                 |       | 70                                         |       | (57                                | )          | 35 |   | 35 |   | Interest  Method |   |
| Bital I             |       | (57                                | )          | 121                                        |       | (178                               | )          | 49 |   | 72 |   | Interest  Method |   |
| Serfin              |       | —                             |       | 38                                         |       | (38                                | )          | 143 |   | 69 |   | Interest  Method |   |
|                |       |                               |       |                                       |       |                               |       |   |   |   |   |   |   |
|                |       | $                                  | (967       | )                                          | $          | (865                               | )          | $ | (102 | ) | $ | 543 |   | $ | (101 | ) |   |   |

 

**D)****        Derivatives**

Under MexicanBanking GAAP, changes in the fair value of forward and futures contracts thatqualify as hedges for accounting purposes are recorded if the underlying itembeing hedged is recorded at its fair market value. The initial discount orpremium on forward and futures contracts is included in results of operationsover the life of the contract, on a straight-line basis. For swap contracts thatqualify as hedges, the Financial Group recognizes an asset (cash flowreceivable) and a liability (cash flow payable) which are recorded and valuedon the same basis as the underlying item being hedged, and which are presentedas a net figure on the balance sheet.

Under U.S. GAAP,SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”provides that:

·                  Derivative financial instrumentsconsidered to be an effective hedge from an economic perspective that have notbeen designated as a hedge for accounting purposes are recognized in thebalance sheet at fair value with changes in the fair value recognized inearnings concurrently with the change in fair value of the underlying assetsand liabilities.

·                  For all derivative instruments thatqualify as fair value hedges for accounting purposes, of existing assets,liabilities or firm commitments, the change in fair value of the derivativeshould be accounted for in the statement of income and be fully or partiallyoffset in the statement of income by the change in fair value of the underlyinghedged item; and

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·                  For all derivative contracts thatqualify as hedges of future cash flows for accounting purposes, the change inthe fair value of the derivative should be initially recorded in other comprehensiveincome (“OCI”) in stockholders’ equity. Once the effects of the underlyinghedged transaction are recognized in earnings, the corresponding amount in OCIis reclassified to the statement of income to offset the effect of the hedgedtransaction.  All derivative instrumentsthat qualify as hedges are subject to periodic effectiveness testing.Effectiveness is the derivative instrument’s ability to generate offsettingchanges in the fair value or cash flows of the underlying hedged item. Theineffective portion of the change in fair value for a hedged derivative isimmediately recognized in earnings, regardless of whether the hedged derivativeis designated as a cash flow or fair value hedge.

Under MexicanBanking GAAP, the designation of a derivative instrument as a hedge of a netposition (“macro hedging”) is allowed. However, macro hedging is not permittedunder U.S. GAAP.

Under U.S. GAAP, certain implicit or explicit termsincluded in host contracts that affect some or all of the cash flows or thevalue of other exchanges required by the contract in a manner similar to aderivative instrument must be separated from the host contract and accountedfor at fair value.

Under U.S. GAAP, the Financial Group’s derivativecontracts are not accounted for as hedges for accounting purposes and arerecognized in the balance sheet at fair value with changes in the fair valuerecognized in earnings concurrently with the change in fair value of theunderlying assets and liabilities.

**E)****            ****Foreclosed assets**

Under Mexican Banking GAAP, assets repossessed or received as payment in kind are recorded at the value at which they were judicially repossessed by order of the courts. If the book value of the loan to be foreclosed on the date of foreclosure is lower than the value of the repossessed asset as judicially determined, the value of the asset is adjusted to the book value of the loan. Foreclosed assets are subsequently valued based on standard provisions established by the Commission depending on the nature of the foreclosed asset and the number of months outstanding.

Under U.S. GAAP, as required by SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings”, assets repossessed or received as payment in kind are reported at the time of foreclosure or physical possession at their fair value less estimated costs to sell. Subsequent impairment adjustments should be recognized if the fair value of these assets decreases below the value measured when repossessed or received, determined on an asset by asset basis. Those assets not eligible for being considered as ‘available-for-sale’ are depreciated based on their useful life and are subject to impairment tests.

·

·                  F)                                   Insurance andpostretirement activities

According to the accounting practices prescribed by the Mexican National Insurance and Surety Commission (Mexican Insurance GAAP), commissions and costs at the origination of each policy are charged to income as incurred. In addition, for life insurance policies, any amount received from individuals is considered as premium income. As required by U.S. GAAP, commissions and costs at origination are capitalized and amortized over the life of the policy using the effective interest method (deferred acquisition costs). Furthermore, premiums received in excess for life insurance policies are recorded as premium income.

Accumulated deferred acquisition costs (DAC) as of December 31, 2006, 2005 and 2004 under U.S. GAAP are as follows

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|                                               | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                  |       |   |   |   |   |
| Life                                          |       | $                     | 17         |   | $ | 15 |   | $ | 12 |   |
| P&C                                       |       | 214                   |       | 180 |   | 221 |   |
| Health                                        |       | 20                    |       | 10 |   | 9 |   |
| Afore                                         |       | 782                   |       | 720 |   | 672 |   |
| Surety                                        |       | 80                    |       | 55 |   | 28 |   |
| Total  accumulated DAC                        |       | $                     | 1,113      |   | $ | 980 |   | $ | 942 |   |
| DAC - net amount  charged to income statement |       | $                     | 133        |   | $ | 38 |   | $ | 122 |   |

 

For the years ended December 31, 2006, 2005 and 2004, the net income effect for the DAC amounted to $133, $38 and $122, respectively.

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Under Mexican Insurance GAAP, certain reserves(disaster) are calculated using internal models previously approved by theMexican National Insurance and Surety Commission. Generally pension reservesare based on the present value of benefits to be paid together with feessuggested by this commission. U.S. GAAP establishes the use of a fee thatallows policy benefits to be covered through premiums collected for pensionreserves. For disaster reserves under U.S. GAAP provisions are based onactuarial calculations for losses incurred using the experience of theFinancial Group.

We record a reserve for catastrophic events underMexican GAAP as a liability which is not allowed by U.S. GAAP.

**Loss reserves and unearned premiums**:
|                         | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                    |       |                  |       |   |   |
| Life                    |       | $                     | 45         |   | $ | 16 |   |
| Prevision life          |       | —                |       | — |   |
| P&C                 |       | (241                  | )          | 124 |   |
| Health                  |       | (25                   | )          | (14 | ) |
| LAE                     |       | (68                   | )          | (54 | ) |
| Afore                   |       | (172                  | )          | (242 | ) |
| Surety                  |       | (83                   | )          | (62 | ) |
| Pensions                |       | 506                   |       | 893 |   |
| Total                   |       | (38                   | )          | 661 |   |
|                    |       |                  |       |   |   |
| Catastrophic  reserve:  |       |                  |       |   |   |
| P&C                 |       | 126                   |       | 130 |   |
| Surety                  |       | 82                    |       | 65 |   |
|                    |       | 208                   |       | 195 |   |
|                    |       |                  |       |   |   |
| Reinsurance  activities |       | 62                    |       | (206 | ) |
|                    |       |                  |       |   |   |
| Total reserves          |       | $                     | 232        |   | $ | 650 |   |

 

**Summary:**
|                   | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**              | ** ** | **2005** | ** ** |
|              |       |                  |       |   |   |
| DAC               |       | $                     | 1,113      |   | $ | 980 |   |
| Total reserves    |       | 232                   |       | 650 |   |
| Total adjustments |       | $                     | 1,345      |   | $ | 1,630 |   |

 

·                  G)    Business combinations

Through December 31, 2004, under Mexican Banking GAAP the excess of the purchase price over the adjusted book value of net assets acquired was recorded as goodwill (negative goodwill if book value exceeded the purchase price). Effective January 1, 2005, Bulletin B-7, which substantially conforms to the accounting established by U.S. GAAP, requires the excess of the purchase price over the book value of assets and liabilities acquired to be allocated to the fair value of separately identifiable assets and liabilities acquired.

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Under U.S. GAAP, SFAS No. 141, “Business Combinations”, requires the excess purchase price over the book value of assets and liabilities acquired to be allocated to the fair value of separately identifiable assets and liabilities acquired. Retail depositor relationships associated with an acquisition of a financial institution by a bank, termed the core deposit intangible, are identified and valued separately. In addition, any negative goodwill (excess of fair value over cost) is first allocated to reduce long-lived assets acquired and if any negative goodwill remains that amount is recognized as an extraordinary gain.  The Financial Group’s U.S. GAAP stockholders’ equity and net income balances have been adjusted for differences generated by the balances of both intangible and fixed assets resulting from the Bancrecer acquisition in 2001.

As disclosed in Note 2, the Company through its wholly-owned subsidiary Banorte USA acquired 70% of the outstanding common stock of INB on November 16, 2006.  The primary purpose of the acquisition was to expand the Financial Group’s market share into the United States in areas with close proximity to Mexico.  The total purchase price including acquisition costs, exceeded the estimated fair value of tangible net assets acquired by approximately US $170 million, of which approximately US $15 million was preliminarily assigned to an identifiable intangible asset with the balance recorded by the Financial Group as goodwill.  The identifiable intangible asset represents the future benefit associated with the acquisition of the core deposits and is being amortized over a period that approximates the expected attribution of the deposits.  Factors that contributed to a purchase price resulting in goodwill include INB’s historical record of earnings, capable management, and the Financial Group’s ability to enter the US market, which will complement and create synergies with the Financial Group’s existing service locations.  Consolidated intangible assets at the acquisition date include amounts previously recorded at INB since the balance sheet of INB was not adjusted to reflect the purchase. The results of operations of INB are included in the consolidated earnings of the Financial Group as of the effective date of the acquisition. Certain differences related to Banorte USA, which prepares its financial information in accordance with U.S. GAAP are included in the reconciliation within the corresponding U.S. GAAP adjustments. The preliminary goodwill recorded in the acquisition of INB will be accounted for in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. Accordingly, goodwill will not be amortized; rather it will be tested for impairment annually. In addition, goodwill is not deductible for tax purposes.  Cash flow information relative to the acquisition of INB is as follows:
| Fair value of assets  acquired          |   | $      | 1,431  |   |
|-----------------------------------------|--------|--------|--------|--------|
| Minority  interests                     |   | (21    | )      |
| Cash paid for  the capital stock of INB |   | (260   | )      |
|                                    |   |   |   |
| Liabilities assumed                     |   | $      | 1,150  |   |

 

In conjunction with the acquisition of 70% of the outstanding shares of INB, Banorte entered into a stock option agreement with INB.  The agreement grants Banorte, or its assignees, an irrevocable option to purchase the remaining 30% of the outstanding shares of INB (hereinafter referred to as the “Call Option”).  In addition, the agreement grants INB shareholders the option to require Banorte, or its assignees to purchase the remaining 30% of the outstanding shares of INB (hereinafter referred to as the “Put Right”).  If Banorte or the INB shareholders exercise the Call Option or the Put Right, each party must purchase or sell the entire 30% of the remaining share of INB.  In conformity with recommendations made by the Commission, the Financial Group recognized a liability for the obligation represented by the Put Right at the acquisition date. Under U.S. GAAP, the Put Right is recognized as a free standing financial instrument under the premises of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and was recorded at the acquisition date at its estimated fair market value, with corresponding changes in fair value recognized in current earnings.  The Call Option is not within the scope of SFAS No. 133 or SFAS No. 150 as it does not meet the definition of a derivative financial instrument or represent an unconditional obligation for the Financial Group to repurchase its subsidiaries’ shares.

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·                  

·                  H)    Employee retirementobligations

Under Mexican Banking GAAP Bulletin D-3 requires the recognition of aseverance indemnity liability calculated based on actuarial computations.Similar recognition criteria under U.S. GAAP are established in SFAS No. 112, “Employers’Accounting for Postemployment Benefits”, which requires that a liability forcertain termination benefits provided under an ongoing benefit arrangement suchas these statutorily mandated severance indemnities, be recognized when thelikelihood of future settlement is probable and the liability can be reasonablyestimated. Mexican Banking GAAP allows for the Financial Group to amortize thetransition obligation related to the adoption of Bulletin D-3 over the expected service lifeof the employees.  However, U.S. GAAPrequired the Financial Group to recognize such effect upon initial adoption anddoes not permit an entity to reduce the accrued liability by any unrecognizeditems, which results in a difference in the amount recorded under the twoaccounting principles.

Under MexicanBanking GAAP, pension and seniority premium obligations are determined inaccordance with Bulletin D-3. For U.S. GAAP, such costs are accounted for in accordancewith SFAS No. 87, “Employers’ Accounting for Pensions*”*,whereby the liability is measured, similar to Mexican Banking GAAP, using theprojected unit credit method at net discount rates.  SFAS No. 87 became effective on January 1,1989 whereas BulletinD-3 became effective on January 1, 1993. Therefore, a difference betweenMexican Banking GAAP and U.S. GAAP exists due to the accounting for thetransition obligation at different implementation dates.

Postretirementbenefits are accounted for under U.S. GAAP in accordance with SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pension*s*”,  which applies to all post-retirementbenefits, such as life insurance provided outside a pension plan or otherpostretirement health care and welfare benefits expectedto be provided by an employer tocurrent and former employees. The cost of postretirement benefits is recognizedover the employees’ service periods and actuarial assumptions are used toproject the cost of health care benefits and the present value of thosebenefits. For Mexican Banking GAAP purposes as required by Bulletin D-3, the Financial Group accountsfor such benefits in a manner similar to U.S. GAAP.  SFAS No. 106 became effective on January 1,1993 whereas BulletinD-3 became effective on January 1, 2003. Therefore, a difference betweenMexican Banking GAAP and U.S. GAAP exists due to the accounting for thetransition obligation at different implementation dates.

The FinancialGroup adopted the provisions of SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans — an amendment of FASBStatements No. 87, 88, 106, and 132(R)”, in 2006.  This statement requires companies to (1)fully recognize, as an asset or liability, the overfunded or underfunded statusof defined pension and other postretirement benefit plans; (2) recognizechanges in the funded status through other comprehensive income in the year inwhich the changes occur; (3) measure the funded status of defined pension andother postretirement benefit plans as of the date of the company’s fiscalyear-end; and (4) provide enhanced disclosures. The provisions of thisstatement are effective for an employer with publicly traded equity securities,or controlled subsidiaries of such companies, in fiscal years ending afterDecember 15, 2006. In addition, a company must now measure the fair value ofits plan assets and benefit obligations as of the date of its year-end balancesheet. A company is no longer permitted to measure the funded status of itsplan(s) by being able to choose a measurement date up to three months prior toyear end.  This provision within thestandard is effective for all companies in fiscal years ending after December15, 2008, however this provision does not impact the Financial Group as itsmeasurement date is the same as its fiscal year end. Retrospective applicationof this standard is not permitted.  Thereis no impact on the Financial Group’s consolidated US GAAP results ofoperations or cash flows. The impact on the Financial Group’s consolidated USGAAP stockholders’ equity as a result of adopting the provisions of SFAS No.158 was due to the reclassification of the unrecognized items related to itsemployee retirement obligations to other comprehensive income.

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**I)****                        ****Capitalized costs**

Under MexicanBanking GAAP, prior to the issuance of Bulletin C-8, “Intangible Assets”, allexpenses incurred in the preoperating or development stages were capitalized.Upon adoption of BulletinC-8, research costs and preoperating costs should be expensed as a period cost,unless they can be classified as development costs to be amortized on astraight-line basis after operations commence for a period not exceeding 20years. Under U.S. GAAP, in accordance with SFAS No. 2, “Accounting for Researchand Development Costs,” and SOP 98-5, “Reporting on the Costs of Start-UpActivities”, such research and preoperating expenses are expensed as incurred.

Under MexicanBanking GAAP, the Financial Group has capitalized certain significant costsrelated to implementation projects.  ForU.S. GAAP purposes, the Financial Group follows the guidance established by SOP98-1, “Accounting for the Costs of Computer Software Developed or Obtained forInternal Use”.  This standard establishesthat computer software costs incurred in the preliminary project stage shouldbe expensed as incurred. Once the capitalization criteria of the SOP have beenmet, external direct costs of materials and services consumed in developing orobtaining internal-use computer software; payroll and payroll-related costs foremployees who are directly associated with and who devote time to theinternal-use computer software project (to the extent of the time spentdirectly on the project); and interest costs incurred when developing computersoftware for internal use should be capitalized. Generally, training costs anddata conversion costs should be expensed as incurred.  As the U.S. GAAP standard is more stringent,the reconciling item represents an adjustment for items that have beencapitalized for Mexican Banking GAAP purposes that do not qualify forcapitalization under U.S. GAAP.

·                  

·                  J)             Securitizations

**IPAB Notes Securitization**

As disclosed in Note 13, on December 22, 2004 the Financial Group securitized a group of IPAB-Bancrecer notes for a total amount of $ 45,940 (nominal value). Only $ 1,533 (nominal value) of the Securitization Certificates were sold to third party investors and the remainder of the Securitization Certificates were retained by the Financial Group.

Immediately subsequent to the sale, the Financial Group entered into repurchase agreements of Securitization Certificates with qualified institutional investors. Under these agreements, Securitization Certificates are sold and repurchased in a short period of time (less than 30 days) and renewed at maturity.

As of December 31, 2004 the amount of Securitization Certificates sold under repurchase agreements amounted to $ 44,297 (nominal value). The remaining $ 90 (nominal value) remaining of the Securitization Certificates received was recorded as trading securities.

Under Mexican Banking GAAP, based on instructions from the Commission in their letter DGSIF “A”-601-II-52006 dated on February 11, 2005, the Financial Group recorded these transactions as a sale and repurchase agreement.

For U.S. GAAP purposes, neither the securitization nor the repurchase agreement qualify for sale accounting under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, and therefore, both sales transactions have been reversed in the reconciliation.

The amount outstanding as of December 31, 2006 and 2005 amounted to $ 0 and $ 25,524 respectively.

All income earned on the Securitization Certificates is credited to the purchaser’s account.

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**UMS Bonds Securitization (See Note 2d)**

During the firstquarter of 2006, the Financial Group securitized UMS bonds in the amount of $4,910. The Financial Group retained approximately 99% of the SecuritizationCertificates issued by the trust and immediately subsequent to thesecuritization, sold them under repurchase agreements. The Financial Grouprecorded this transaction as a sale for purposes of its Mexican Banking GAAPfinancial statements.

For U.S. GAAPpurposes, neither the securitization nor the repurchase agreement qualifies forsale accounting under SFAS No. 140, and therefore, both salestransactions have been reversed in the reconciliation.

As disclosed inNote 2d), the Financial Group’s subsidiary Banorte transferred its UMS bondsfrom the held-to-maturity category to available-for-sale.  For US GAAP purposes, such reclassificationtainted Banorte’s portfolio and therefore all held-to-maturity securities havebeen reclassified to available-for-sale at fair value in accordance with thecriteria established by SFAS No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities”.

**Mortgage Loans Securitization (See Note 2e)**

During December 2006, the Financial Group securitizedmortgage loans in the amount of $ 2,068, by transferring such loans to aqualifying special purpose entity (the “Trust”) created specifically forpurposes of this transaction. The Trust issued certificates that trade on theMexican Stock Exchange and guarantees its holders with a specific rate ofreturn.  The Financial Group received asubordinated certificate from the Trust, which entitles the Financial Group toretain the excess cash flows in the Trust, after reimbursing the holders of thecertificates, which has was recorded at its nominal value and classified as anavailable-for-sale security.  UnderMexican Banking GAAP, this securitization was accounted for as a sale and as aresult of recognizing the retained interest represented by the subordinatedcertificate at nominal value no gain or loss on the sale was recognized.

UnderUS GAAP, the securitization met the criteria established by SFAS No. 140 forsale accounting and the securitized loans were derecognized by the FinancialGroup as of the date of sale.  TheFinancial Group allocated the previous book carrying amount between the loanssold and the subordinated certificate (the retained interest) in proportion totheir relative fair values on the date of transfer.  The Financial Group recognized a gain on thesale of $ 345 by comparing the net sale proceeds (after transaction costs) tothe allocated book value of the loans sold. The subordinated certificate was recorded at its relative book value atthe date of sale and has been classified as an available-for-sale securityunder SFAS No. 115.  Subsequent increasesor decreases in the fair value of the subordinated certificate will bereflected by an adjustment, net of taxes, being charged or credited to theother comprehensive income portion of stockholders’ equity.

·                  

·                  K)            Sharebased payment

Under Mexican Banking GAAP the Financial Group recordsits stock-based compensation plans as prepaid expenses, based on instructionsreceived from the Commission in its letter 601-II-9477.

UnderU.S. GAAP, prior to January 1, 2006, the Financial Group applied AccountingPrinciples Board Opinion (APB) No. 25, “Accounting for Stock Issued toEmployees”, which requires an entity to use an intrinsic value method todetermine the value of equity instruments.

UnderU.S. GAAP, the Financial Group adopted SFAS No. 123(R), “Share Based Payment”,effective January 1, 2006, using the modified prospective applicationmethod. The modified prospective application method applies to new awards, toany outstanding liability awards, and to awards modified, repurchased, orcancelled after January 1, 2006. For all awards granted prior to January 1,2006, compensation cost has been recognized on the portion of awards for whichservice has been rendered. SFAS No. 123(R) requires all stock-basedcompensation awards, including stock options, to be accounted for at fair valueand to be recognized as 

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compensationexpense over the requisite service period. At December 31, 2006, theFinancial Group had certain stock-based compensation plans that are describedbelow

TheFinancial Group provides a stock option plan to key employees approved by theBoard of Directors’ Compensation Committee in order to acquire the FinancialGroup’s shares. Compensation cost according to the grant-date fair value ofthese award is recognized over the vesting period (requisite service period)established in each employees’ option agreement.

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The following table presents the status of all optionplans as of December 31, 2006 and changes during 2006:
|                                           | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price  (Pesos)** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------------------------------|------------|
|                                      |       |       |       |                                                    |       |
| Outstanding at January 1, 2006            |       | 3,595,444  |       | $                                                       | 5.93       |   |
| Options granted                           |       | —     |       | —                                                  |       |
| Options  exercised                        |       | 2,711,956  |       | $                                                       | 5.93       |   |
| Options forfeited                         |       | 13,200     |       | $                                                       | 5.93       |   |
| **Outstanding at December 31,  2006**     |       | 870,288    |       | $                                                       | 5.93       |   |
| Options  exercisable at December 31, 2006 |       | 870,288    |       | $                                                       | 5.93       |   |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model. The Black-Scholes model was developed to estimate the fair valueof employee stock options, changes to the subjective assumptions used in themodel can result in materially different fair value estimates. The weightedaverage grant date fair values of the options granted were based on theassumptions below:
|             | ** ** | **Share**      | ** ** | **Risk free** | ** ** | **Expected life** | ** ** | **Dividend** | ** ** |
|-------------|------------|----------------|------------|--------------------|------------|------------------------|------------|--------------|------------|
| ** **  | ** ** | **volatility** | ** ** | **rate**           | ** ** | **of options**    | ** ** | **yield**    | ** ** |
|        |       |           |       |               |       |                   |       |         |       |
| Option Plan |       | 38.87          | %          | 9.37               | %          | 4 years                |       | —       |       |

 

The Financial Group provides an equity incentive planto certain key employees approved by the Board of Directors’ CompensationCommittee in order to acquire the Financial Groups’ shares. Due to theparticular characteristics of the plan, the Financial Group applied internalvaluation methods to calculate the fair value of the equity awards. As ofDecember 31, 2006, approximately 3,738,336 equity awards were outstanding underthis plan.

The Financial Group provides an equity incentive planto certain key executives approved by the Board of Directors’ CompensationCommittee by means of a nonvested share plan, which is recognized in accordancewith the provisions established by SFAS No. 123(R). The number of nonvestedshares outstanding as of December 31, 2006 was 845,343.

**L)****                     Otheradjustments**

These include the following:
|                             | ** ** | **Stockholders’ equity** | ** ** | **Net income**                        | ** ** |
|-----------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **December 31,**              | ** ** | **Year ended December 31,** | ** ** |
| ** **                  | ** ** | **2006**                           | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                        |       |                               |       |                                       |       |   |   |   |   |   |   |
| 1) Non-accrual loans        |       | $                                  | (37        | )                                          | $          | (71 | ) | $ | 34 |   | $ | 11 |   | $ | (51 | ) |
| 2) Guarantees               |       | (15                                | )          | (11                                        | )          | (4 | ) | (8 | ) | (2 | ) |
| 3) Repurchase  agreements   |       | (47                                | )          | (46                                        | )          | (1 | ) | (21 | ) | (7 | ) |
| 4) Investment valuation     |       | 40                                 |       | (134                                       | )          | (226 | ) | (62 | ) | (20 | ) |
| 5) Equity method  investees |       | (70                                | )          | (52                                        | )          | 1 |   | 5 |   | 100 |   |
|                        |       |                               |       |                                       |       |   |   |   |   |   |   |
|                        |       | $                                  | (129       | )                                          | $          | (314 | ) | $ | (196 | ) | $ | (75 | ) | $ | 20 |   |

 

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These otheradjustments are related to the following differences between Mexican BankingGAAP and U.S. GAAP:

1)                        Under Mexican Banking GAAP, the recognition of interest income is suspended when certain of the Financial Group’s loans become past due based on criteria established by the Commission. Under U.S. GAAP, the accrual of interest is generally discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. As a general practice, this occurs when loans are 90 days or more overdue. Any accrued but uncollected interest is reversed against interest income at that time.

2)                        For U.S. GAAP purposes, guarantees are accounted for under FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB interpretation No. 34”, which requires that an entity recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  For Mexican Banking GAAP purposes, the Financial Group does not record the fair value of such guarantees in its consolidated financial statements.

3)                        Repurchase and resale agreements represent the temporary purchase or sale of certain financial instruments in exchange for a specified premium to be paid or received and with the obligation to resell or repurchase the underlying securities.  Under Mexican Banking GAAP, repurchase and reverse repurchase agreements are recorded as sales and purchases of securities, respectively.  A net asset or liability is recorded at the fair value of the forward commitment to repurchase or resell the securities, respectively. Under U.S. GAAP, repurchase and reverse repurchase agreements are transfer transactions subject to specific provisions and conditions that must be met in order for a transaction to qualify as a sale rather than a secured borrowing,  In most cases, banks in the US enter into repurchase and reverse repurchase transactions that qualify as secured borrowings.  Accordingly, the Financial Group’s assets subject to a repurchase agreement would not be derecognized.

4)                          The investment valuation adjustment is related to a difference in the income recognition for available-for-sale and held-to-maturity securities.  For U.S. GAAP purposes, the premiums and discounts of such securities are accounted for based on the interest method.  Under Mexican Banking GAAP, the Financial Group recognizes income based on the straight line method.

As disclosed in Note 40J), as a result of tainting its portfolio all of Banorte’s held-to-maturity securities under Mexican Banking GAAP have been reclassified as available-for-sale under U.S. GAAP.

5)                          Under Mexican Banking GAAP, investments in associated companies in which the Financial Group has more than a 10% ownership, are accounted for by the equity method.  For U.S. GAAP purposes, investments in associated companies in which the Financial Group has a 20 to 50% ownership, but not a controlling interest, are accounted for by the equity method. Investments in which the Financial Group has less than a 20% ownership are generally accounted for under the cost method.

**M)       Deferredtaxes**

 

Under Mexican BankingGAAP as required by Bulletin D-4, “Accounting for Income Tax, Tax on Assets andEmployee Statutory Profit Sharing,” income tax and employee statutory profitsharing (PTU) are charged to results as they are incurred and the FinancialGroup recognizes deferred income tax assets and liabilities for the futureconsequences of temporary differences between the financial statement carryingamounts of assets and liabilities and their respective income tax bases,measured using enacted rates.  Theeffects of changes in the statutory rates are accounted for in the period thatincludes the enactment date.  ****The Financial Group recognizes****

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****the benefits related to tax losscarryforwards and asset tax credit carryforwards when such amounts are realized******.**  Deferred tax assetsare recognized only when it is highly probable that sufficient future taxableincome will be generated to recover such deferred tax assets.

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PTU is derived from temporary differences between the accounting result and income for PTU purposes and is recognized only when it can be reasonably assumed that such difference will generate a liability or benefit, and there is no indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be realized.

Under U.S. GAAP, as required by SFAS No. 109, “Accounting for Income Taxes”, the Financial Group recognizes deferred income tax and PTU assets and liabilities for the future consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective income tax or PTU bases, measured using enacted rates.  The effects of changes in the statutory rates are accounted for in the period that includes the enactment date.  Deferred income tax assets are also recognized for the estimated future effects of tax loss carryforwards and asset tax credit carryforwards.  Deferred income tax assets are reduced by any benefits that, in the opinion of management, more likely than not that the tax assets will be realized.

U.S. GAAP differences as described above, to the extent taxable are reflected in the U.S. GAAP deferred tax balances.

**N)****                      ****Minorityinterest**

Under Mexican Banking GAAP, minority interest in consolidated subsidiaries is presented as a separate component within the stockholders’ equity section of the consolidated balance sheet. For U.S. GAAP purposes, minority interest is not included in stockholders’ equity and is presented below total liabilities and above the stockholder’ equity section of the balance sheet.

***II******                          Significantdisclosures***

Consolidation

Under Mexican Banking GAAP, the Financial Group’s consolidated financial statements include all of its subsidiaries within the financial sector, as well as those providing complementary services, and exclude those that are not contained in the financial sector. The determination of which companies are deemed to be within the financial sector is not based solely on the application of a conceptual framework. The SHCP has the right to determine if a Financial Group is or is not within the financial sector, and therefore is required to be consolidated. Companies that may seem to fall within the financial sector based on their operations may not be consolidated due to decisions of the SHCP.

Under U.S. GAAP, the basic rule is that when a Financial Group has a controlling financial interest (either through a majority voting interest or through the existence of other control factors) in an entity, such entity’s financial statements should be consolidated, irrespective of whether the activities of the subsidiary are nonhomogeneous with those of the parent.

No adjustments to net income or stockholders’ equity result due to the consolidation differences disclosed above.

***III******                     AdditionalDisclosures***

##### **A)****                      ****Earnings per common share (“EPS”) in accordance with U.S. GAAP**

In accordance with U.S. GAAP, EPS is based on the provisions of SFAS No. 128, “Earnings per Share”, and is calculated using the weighted-average number of common shares outstanding during each period.  Basic and diluted earnings per share are based upon, 2,019,019,115; 2,018,237,486 and 2,018,107,676 weighted-average shares outstanding for 2006, 2005 and 2004, respectively.  Potentially dilutive common shares for all periods 

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presented are not significant.  Basic and diluted net income per common share computed in accordance with U.S. GAAP is presented below:

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|                                       | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                       |       |   |   |   |   |
| Basic and diluted earnings  per share |       | $                                          | 2.78       |   | $ | 2.97 |   | $ | 0.94 |   |
|                                       |            |                                            |            |  |  |  |  |  |  |  |

 

##### **B)****                      ****Cash flow information**

Mexican Banking GAAP establishes presentationrequirements related to the statement of changes in financial position.  This statement presents the sources and usesof funds during the period measured as the differences, in constant pesos,between the beginning and ending balances of balance sheet items adjusted bythe excess (shortfall) in restatement of capital.  The monetary effect and the effect of changesin exchange rates are considered cash items in the determination of resourcesgenerated from operations due to the fact they affect the purchasing power ofthe entity.  The following price-leveladjusted consolidated statement of cash flows presented for the years endedDecember 31, 2006, 2005 and 2004, includes the impact of U.S. GAAP adjustmentsin conformity with recommendations established by the American Institute ofCertified Public Accountants SEC Regulations Committees’ InternationalPractices Task Force.

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**GRUPOFINANCIERO BANORTE, S.A. DE C.V. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006(Expressed in thousands of Mexican pesos of constant purchasing power as of December 31, 2006)**
| ** **                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                |       |     |       |     |       |     |       |
| Net income under  U.S. GAAP                                           |       | $        | 5,607      |     | $          | 6,003    |       | $ | 1,891 |   |
|                                                                  |       |     |       |     |       |     |       |
| Unrealized  investment loss (income)                                  |       | 316      |       | (208     | )          | (238     | )          |
| Allowance for  loan losses                                            |       | 1,337    |       | 1,226    |       | 1,835    |       |
| Depreciation and  amortization                                        |       | 673      |       | 755      |       | 979      |       |
| Deferred income  taxes and employee profit sharing                    |       | 781      |       | 1,185    |       | 1,113    |       |
| Provision for  miscellaneous obligations                              |       | (41      | )          | 1,942    |       | 290      |       |
| Minority  interest                                                    |       | 466      |       | 606      |       | 270      |       |
| Equity in losses  (earnings) of subsidiaries and associated companies |       | (149     | )          | (55      | )          | (29      | )          |
| Allowance for  doubtful accounts                                      |       | 19       |       | 21       |       | 33       |       |
| Periodic pension  cost                                                |       | 337      |       | 343      |       | 120      |       |
| Loss (gain) on  sale of property                                      |       | (14      | )          | (109     | )          | (79      | )          |
| Loss (gain) on  sale of foreclosed assets                             |       | 79       |       | 166      |       | (17      | )          |
| Loss on sale of  trading securities                                   |       | 748      |       | 490      |       | 950      |       |
| Loss on sale of  available for sale securities                        |       | 51       |       | 329      |       | —   |       |
| Amortization of  purchased portfolios                                 |       | 1,540    |       | 413      |       | 323      |       |
| Loss from  monetary position                                          |       | 1,087    |       | 636      |       | 834      |       |
| Insurance and  postretirement reserves                                |       | 285      |       | (201     | )          | (77      | )          |
| Amortization of  debt issuance fees and costs                         |       | (123     | )          | 72       |       | 89       |       |
| Income  recognition of purchased portfolios                           |       | 102      |       | (543     | )          | 101      |       |
| Other non-cash  items                                                 |       | 20       |       | (3       | )          | 53       |       |
| Changes in operating  assets and liabilities:                         |       |     |       |     |       |     |       |
| Trading  securities                                                   |       | (11,299  | )          | 1,372    |       | (2,282   | )          |
| Trading  derivative financial instruments                             |       | 5        |       | (27      | )          | (5       | )          |
| Deferred income  taxes and employee profit sharing                    |       | —   |       | 318      |       | 82       |       |
| (Decrease)  increase in settlement accounts payable                   |       | (1,043   | )          | (272     | )          | 914      |       |
| Decrease in  settlement accounts receivable                           |       | 2,827    |       | 152      |       | 330      |       |
| Decrease  (increase) in other accounts receivable                     |       | (5,902   | )          | 12       |       | (1,313   | )          |
| Increase  (decrease) in other accounts payable                        |       | 5,016    |       | 1,876    |       | (1       | )          |
| Decrease  (increase) in deferred charges                              |       | (504     | )          | 59       |       | (354     | )          |
| Decrease in  deferred credits                                         |       | (375     | )          | (256     | )          | (219     | )          |
| Net cash  generated by operating activities                           |       | 1,846    |       | 16,302   |       | 5,593    |       |
| Cash flows from  investing activities:                                |       |     |       |     |       |     |       |
| Proceeds from  sale of property, furniture and equipment              |       | 30       |       | 172      |       | 104      |       |
| Acquisitions of  property, furniture and equipment                    |       | (874     | )          | (266     | )          | (715     | )          |
| Investments in  shares                                                |       | (103     | )          | (64      | )          | (81      | )          |
| Cash paid for  stock of INB Financial Corp, net of cash acquired      |       | (2,521   | )          | —   |       | —   |       |
| Proceeds from  sale of foreclosed assets                              |       | 131      |       | 748      |       | 2,012    |       |
| Treasury  transactions - held to maturity securities                  |       | 18,704   |       | (5,617   | )          | (1,958   | )          |
| Treasury  transactions - available for sale securities                |       | (2,405   | )          | (222     | )          | (351     | )          |
| (Issuance of)  proceeds from loans                                    |       | (20,835  | )          | (14,704  | )          | 47,859   |       |
| Purchased credit  portfolios                                          |       | (2,697   | )          | (2,151   | )          | (1,166   | )          |
| Repurchase  agreements - purchases                                    |       | (12,811  | )          | (1,723   | )          | (161     | )          |
| Net cash (used in) generated by investing activities                  |       | (23,381  | )          | (23,827  | )          | 45,543   |       |
|                                                                       |            |          |            |          |            |          |            |  |  |  |

 

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| ** **                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  financing activities:                                                     |       |     |       |     |       |     |       |
| Proceeds from  (repayments of) subordinated liabilities                                    |       | $        | 6,682      |     | $          | (61      | )          | $ | 2,115 |   |
| Issuance  (repurchase) of shares                                                           |       | 30       |       | (17      | )          | 5        |       |
| Dividends paid                                                                             |       | (763     | )          | (664     | )          | (283     | )          |
| Merger with  Seguros Generali México, S.A. de C.V.                                    |       | —   |       | —   |       | 18       |       |
| Deposits                                                                                   |       | 20,661   |       | 9,336    |       | (36,876  | )          |
| Repayments of  bank debt and other loans                                                   |       | (2,565   | )          | (3,650   | )          | (6,842   | )          |
| Repurchase  agreements – sales                                                        |       | 2,191    |       | 1,878    |       | 5        |       |
| Debt issue costs  of subordinated liabilities                                              |       | (29      | )          | —   |       | (22      | )          |
| Net cash  generated by (used in) financing activities                                      |       | 26,207   |       | 6,822    |       | (41,880  | )          |
|                                                                                       |       |     |       |     |       |     |       |
| Effect of inflation  accounting                                                            |       | (1,660   | )          | (1,097   | )          | (1,750   | )          |
|                                                                                       |       |     |       |     |       |     |       |
| Net increase (decrease)  in cash and cash equivalents                                      |       | 3,012    |       | (1,800   | )          | 7,506    |       |
|                                                                                       |       |     |       |     |       |     |       |
| Cash and cash  equivalents at beginning of year                                            |       | 40,615   |       | 42,415   |       | 34,909   |       |
|                                                                                       |       |     |       |     |       |     |       |
| Cash and cash  equivalents at end of year                                                  |       | $        | 43,627     |     | $          | 40,615   |       | $ | 42,415 |   |
|                                                                                       |       |     |       |     |       |     |       |
| Supplemental disclosure  of cash flow information:                                         |       |     |       |     |       |     |       |
| Cash paid during the  year for:                                                            |       |     |       |     |       |     |       |
| Income taxes                                                                               |       | 2,776    |       | 398      |       | 287      |       |
| Interest                                                                                   |       | 25,741   |       | 26,228   |       | 17,760   |       |
|                                                                                       |       |     |       |     |       |     |       |
| Supplemental schedule  of non-cash investing activities:                                   |       |     |       |     |       |     |       |
| Transfers from  loans to foreclosed assets                                                 |       | 105      |       | 703      |       | 1,234    |       |
| Transfers from  (to) purchased credit portfolio to (from) foreclosed assets                |       | (120     | )          | 223      |       | —   |       |
| Transfers to (from)  foreclosed assets from (to) loans and purchased credit portfolio, net |       | $        | (15        | )        | $          | 926      |       | $ | 1,234 |   |

 

During 2006, theFinancial Group determined that the consolidated statements of cash flows forthe years ended December 31, 2005 and 2004 had not properly been prepared for(i) arithmetic application of certain manual balance sheet adjustments and (ii)the determination of the effects of inflation on cash and cashequivalents.  Accordingly, the FinancialGroup has restated its 2005 and 2004 consolidated statements of cash flows. Theeffect of the restated presentation of cash flows from operating, investing andfinancing activities is presented below (in millions of Mexican pesos ofpurchasing power of December 31, 2006).
| ** **                                           | ** ** | **2005**             | ** ** | **2005**              | ** ** | **2004**             | ** ** | **2004**              | ** ** |
|------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **As Restated** | ** ** | **As Presented** | ** ** | **As Restated** | ** ** | **As Presented** | ** ** |
|                                                 |       |                 |       |                  |       |                 |       |                  |       |
| Cash flows from  operating activities                |       | $                    | 16,302     |                  | $          | 15,523               |       | $                     | 5,593      |   | $ | 2,898 |   |
| Cash flows from investing  activities                |       | (23,827              | )          | (12,698               | )          | 45,543               |       | 64,733                |       |
| Cash flows from  financing activities                |       | 6,822                |       | (5,566                | )          | (41,880              | )          | (63,779               | )          |
| Effect of inflation  accounting                      |       | (1,097               | )          | 1,183                 |       | (1,750               | )          | 1,815                 |       |
| Net (decrease) increase in cash and cash equivalents |       | $                    | (1,800     | )                     | $          | (1,558               | )          | $                     | 7,506      |   | $ | 5,667 |   |

 

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***Cashand cash equivalents*** - Cash and cash equivalents includeall cash balances and highly liquid instruments purchased with an originalmaturity of three months or less.  Inaddition, the Financial Group maintains a minimum capital requirement asrequired by the Commission (regulatory monetary fund), which is included as acash equivalent.

##### **C)****                        Newaccounting pronouncements**

SFAS No.155 “Accounting for certain hybrid financialinstruments-and amendment of FASB Statements No. 133 and 140” was issued inFebruary 2006. This statement amends SFAS No. 133 and 140. This statementresolves issues addressed in SFAS 133 Implementation Issue No. D1, “Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets.” Thisstatement permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation,clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives andamends SFAS No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. This statement is effective for all financial instruments acquiredor issued after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006. The Financial Group’s management is in the process ofdetermining the potential impact of adopting this statement on its consolidatedfinancial position and results of operations.

SFAS No. 156 “Accounting for servicing of financialassets-an amendment of FASB Statement No.140” was issued in March 2006. Thisstatement amends SFAS No. 140, with respect to the accounting for separatelyrecognized servicing assets and servicing liabilities. This Statement requiresthat all separately recognized servicing assets and servicing liabilities beinitially measured at fair value, if practicable. This statement permits, butdoes not require, the subsequent measurement of servicing assets and servicingliabilities at fair value. This statement permits an entity to reclassifycertain available-for-sale securities to trading securities, regardless of therestriction in paragraph 15 of SFAS No. 115, provided that thoseavailable-for-sale securities are identified in some manner as offsetting theentity’s exposure to changes in fair value of servicing assets or servicingliabilities that a servicer elects to subsequently measure at fair value. Thisoption is available only once, as of the beginning of the fiscal year in whichthe entity adopts this statement. An entity should adopt this statement as ofthe beginning of its first fiscal year that begins after September 15, 2006.Earlier adoption is permitted as of the beginning of an entity’s fiscal year,provided the entity has not yet issued financial statements, including interimfinancial statements, for any period of that fiscal year. The effective date ofthis statement is the date an entity adopts the requirements of this statement.An entity should apply the requirements for recognition and initial measurementof servicing assets and servicing liabilities prospectively to all transactionsafter the effective date of this statement. The Financial Group’s management isin the process of determining the potential impact of adopting this statementon its consolidated financial position and results of operations.

SFAS No. 157 “Fair Value Measurements” was issued inSeptember 2006. This statement defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. This statement is applicable toother accounting pronouncements that require or permit fair value measurementsas established by the FASB. Accordingly, this statement does not require anynew fair value measurements. However, for some entities, the application ofthis statement will change current practice. The definition of fair valueretains the exchange price notion in earlier definitions of fair value. Thisstatement clarifies that the exchange price is the price in an orderlytransaction between market participants to sell the asset or transfer theliability in the market in which the reporting entity would transact for theasset or liability, that is, the principal or most advantageous market for the assetor liability. The transaction to sell the asset or transfer the liability is ahypothetical transaction at the measurement date, considered from theperspective of a market participant that holds the asset or owes the liability.Therefore, the definition focuses on the price that would be received to sellthe asset or paid to transfer the liability (an exit price), not the price thatwould be paid to acquire the asset or received to assume the liability (anentry price). This statement also 

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emphasizes that fair value is a market-basedmeasurement, not an entity-specific measurement. This statement shall beeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. Earlier application is encouraged.  The Financial Group’s management is in theprocess of determining the potential impact of adopting this Standard on itsconsolidated financial position and results of operations.

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SFAS No. 159 “The Fair Value Option for FinancialAssets and Financial Liabilities - Including an Amendment of FASB Statement No.115”, was issued in February 2007, and provides a fair value option to measuremany financial instruments and certain other assets and liabilities at fairvalue on an instrument-by-instrument basis. SFAS No. 159 is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007. Early adoption is permitted asof the beginning of a fiscal year that begins on or before November 15, 2007,provided the entity also elects to apply the provisions of SFAS No. 157. Thisstatement is not expected to impact the Financial Group’s consolidatedfinancial operations in future periods.

FASB Interpretation (FIN) No. 48, “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109”,was issued in July 2006. FIN No. 48 clarifies the accounting and reporting forincome taxes where interpretation of the tax law may be uncertain. FIN No. 48prescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of income tax uncertainties withrespect to positions taken or expected to be taken in income tax returns. FINNo. 48 is effective for fiscal years beginning after December 15, 2006.  The Financial Group’s management is in theprocess of determining the potential impact of adopting this interpretation onits consolidated financial position and results of operations.

Staff Accounting Bulletin (SAB) No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” was issued in September 2006.  SAB No. 108 establishes a dual approach thatrequires quantification of financial statement misstatements based on theeffects of the misstatements on an entity’s balance sheet and income statement(the iron curtain and roll-over methods) and the related financial statementdisclosures.   SAB No. 108 permitsexisting public companies to initially apply its provisions either by (i)restating prior financial statements as if the “dual approach” had always beenapplied or (ii) recording the cumulative effect of initially applying the “dualapproach” as adjustments to the carrying values of assets and liabilities as ofJanuary 1, 2006 with an offsetting adjustment recorded to the opening balanceof retained earnings.  The FinancialGroup determined that a cumulative adjustment of prior period misstatements wasnot required for its fiscal year ending December 2006, since the identifiedmisstatements of prior periods were neither quantitatively nor qualitativelymaterial to prior periods or the current period and thus did not require aprior period or cumulative adjustment.

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